Bundesbank’s Dombret on EU-US relations post-Basel III

Excerpt from speech by Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the Institute of International Bankers, Annual Washington Conference, Washington DC

It is our duty to rebalance global economic policy cooperation with the demand for national sovereignty. We should value the maturing of cross-border finance at a hopefully more sustainable level and composition; we should honour the commitment made in the context of finalizing Basel III while nevertheless accepting its limitations for non-international banks; and we should overcome our reservations about close supervisory coordination, as this will become more important in the future. The future of US-EU financial relations will be more complicated. But this complication could prove beneficial – rather than leading us into an ice age, it could help our relationship mature.

When looking at international banking regulation and supervisory cooperation across borders, we can see that rebalancing is still on the horizon. These instances of rebalancing should not take existing regimes to new “black or white” extremes but rather bring them to a mature state. This is what we can also see when it comes to the evolution of cross-border banking. We have seen tremendous shifts, but I do not believe that they are bringing about the end of global finance. Let’s briefly look at some facts – two trends stand out.

First, while flows have been receding since 2007, their build-up since 2000 had been far too extreme. From the 1990s to the 2000s, they more than doubled relative to GDP; if you look at the absolute numbers, cross-border capital flows rose more than five-fold between the early 2000s and 2007. By 2016, flows had returned to their levels at the turn of the millennium. If we remember the freezing of funds during the financial crisis, and the instability that this brought about, the decline constitutes a reasonable trend of de-risking to risk-appropriate levels.

The second major trend is that the composition of global finance has changed significantly since 2007. While all types of capital flows have declined, more than half of the drop came from cross-border lending. IMF and McKinsey analyses reveal that the decline stems mostly from a move away from overseas business and a shift away from cross-border wholesale funding by major European and some US banks. At the same time, stable capital flows, such as foreign direct investment and portfolio lending, have grown since the crisis.

Overall, we should not make too much of the drop in cross-border flows since 2007, especially in the light of the severe bubble before the crisis. Moreover, cross-border banking has become more stable in terms of not only volume but also composition since the financial crisis. That means that firms seem to have become less reliant on the idea of a fully global market. They acknowledge that crossing national borders entails risks, and they see that overreliance on short-term wholesale financing is quite problematic. These are not signs of a global financial recession, but rather of a maturing process.

Read the full speech

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