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FSC Report 2018 – Preface from the organiser

The FSC Report 2018 contains summaries of all speeches and discussions. In the preface Martin Aehling illustrated the background and reasoning of the events. He gives an assessment on the course of the conference and some thoughts behind as well as making a short remark on the outlook.

Financial Stability Conference 2018
31 October 2018
FSC Report 2018


Dear Conference Participants, dear All,

The Financial Stability Conference 2018 was a great success as regards its aim and motivation. An excellent line-up of speakers and panelists represented an exceptional mixture of different views and perspectives, while a large audience of about 200 participants actively and controversial debated the agenda topics. In outlining first conceptual thoughts to this conference beginning 2018 we were not yet sure if the drafted agenda will stay topical by the date of the event. But we were right in setting the discussion subjects and finalising a convincing, consistent program. This has been shown at the conference itself, by the intense and enriching debates, and by the appreciation from many participants. Indeed, the discussions gave important, informed insights and revealed very clear the different views and positions, especially from policy makers, on controversial and pending issues in the EU as well as on significant, crucial financial stability concerns. Furthermore, the event presented a perfect venue to bridge academic and policymaking expertise, including as well various stakeholders, institutions and civil society.

This inclusive concept and committed serious approch to foster policy-dialogue with a focus on advancing reforms and solving problems stands at risk. We did by far not succeed in raising sufficient funding for the conference and the reserach activities with our first research workshop. All doors are closed, that is my experience after hundreds of talks and emails, and writing lots of proposals, presentations and applications in last years. As it stands at present, we will probably not be in the situation to carry on with these formats. Our non-profit organisation is running out of money, and the prospects of getting financial support are very poor at the moment. Personally, I am very sad after all the attraction we received as a unique, independent and credible organiser as well as all the overwhelmingly positive feedback and encouragement. Anyway, we succeeded as a a very lean and small non-estabilished organisation to attract oustanding speakers, to develop thoughtful and topical agendas, to enter in cooperations with big institutions and to build up reach and attraction in the European Union throughout the political, institutional and academic landscape.

But let‘s have a look on this year‘s event. In my view there probably couldn’t be a better timing: the rejection of the Italian budget proposal by the European Commission – a novum for the Euro area – , market reactions and the ongoing controversy at the time writing this preface once more revealed the fragility of the current state in the Euro area. And it has all to do with risk sharing and risk reduction. This lies at the heart of necessary reforms in the Euro area, and it is an essential point of contention, causing the political stalemate at European levels at present. This is what has been lively debated at this year‘s conference. Already in preparing this conference, one of the moderators alluded to the point that it is like the question of chicken and egg: what shall come first and what shall be tackled with priority to remedy some of the unsolved businesses lying ahead, risk reduction or risk sharing? When I asked this question – who favours risk reduction, and who favours risk sharing – to the audience at the beginning of the conference, the result with hands raised up was quite balanced, including my question on who favours that both have to be addressed equally. So, at least not the German position, but more European.

On this, let me give also a personal answer by making a clear statement: I am convinced that the European Union is not the problem, and the project of the Euro is not to blame for all woes and misery. I rather think that the EU is the future. We need some sort of transfer mechanism in the EU/Euro area. Solidity without solidarity cannot work in the long run. Looking at the challenges ahead I cannot see how we can address global problems at national levels in a progressive and positive way. This relates inter alia to the financial system, its centrality to the economies and societes, its global interconnectedness and its interdependencies with national states and policy making.

Looking at the shape of the European Union today there are striking concerns and issues on its future. The discussions at the conference revealed this as well, albeit the optimism shown by policy makers. To some extent they are rooted in the negative impacts and consequences of the financial crisis. The resurgence of nationalism is in part due to the crisis management and the related massive redistribution effects in past years: from taxpayers and citizens to the financial industry, shareholders and bondholders. I do not say that these are the most driving forces behind the populist movements, but they have a big share in the massive lost of trust in policy making and political elites. The populist right wing party in Germany has been formed as a direct consequence to the management of the financial and sovereign debt crisis in Europe.

Looking back, the financial system has been stabilised somehow, but it is not stable. And we heard about this at the conference as well. Private and public debt have risen to historically unprecedented levels – inter alia as a late effect of the financial crisis –, and the room for manouevre at fiscal and monetary policy levels today is much more limited than before the crisis. Putting it in a picture: there is little left in the medicine chest to nurse the patient back to health. Moreover, there has been not so much progress with regard to the state-bank nexus and implicit guarantees for systemically important financial institutions. Limited liability remains a big issue, and taxpayers are still on the hook. The controversy in the afternoon as well as other panels touched upon this issue. The perception and sometimes pretended certainty about financial stability in quiet times seems fatal, because problems still remain unsolved. The issue of complexity and interconnectedness, which presents a major risk to financial stability, has in my view not been addressed adequately. Resolution is still in its infancy stage surrounded by many impediments. And problems in the EU financial sector such as non-performing loans and non-viable business models are on the agenda and addressed, but not yet solved.

In my view, there is no reason for relaxation and complacency. A consistent common policy vision for an integrated, diverse and resilient financial system serving real needs is not yet reached. This has been shown at the conference by opposed positions on inter alia EDIS, home/host issue, liquidity, ring fencing, integration, safe assets and other issues on the panels. In general one can say that the financial reform paradigm has lost its significance to policymakers and in public attention – apart from the experts who are professionally occupied with these subject matters. Critical questions are hardly asked anymore almost ten years after the onset of the crisis. However, in view of the cyclical history of regulation and deregulation, they are legitimate as ever. The debate is also relevant in view of the increasing (mis-)use of regulation as competition policy, and massive deregulation efforts in the US as illustrated by Dennis Kelleher.

What worries me, and what cannot be set aside by the kindness and optimism shown, is that the current national one-dimensionality on own interests contains immense potential for conflict for and within the European and Monetary Union.

We have to get back to common understandings in the EU, and this is where some motivation of this conference and the organiser lies. The subtitle of the conference already showed the intention and ambition behind the agenda setting: ‚disentangling ambiguous policies, national dynamics and regulatory biases‘. The debates actually showed that we could dig a bit deeper. Balancing the positions is in my view crucial, and this was addressed by the conference as well. I also think that courage, tranparency and responsability are necessary ingredients for forward-looking policy making, especially in a monetary union. What in my view has been missed out on the last panel was to hear some clear visions about the shape of a financial architecture in let’s say 10 or 15 years, comprising institutional designs and the future role of financial institutions. Where are we heading, and what is a financial system we would like to have, rather than repairing the existing one, would have interested me.

As to the organiser and his motivation, the idea is to present a critical and independent platform for serious debate on regulatory reform and financial stability issues. I am convinced that we do need an open, public discussion format on crucial issues of financial regulation frameworks at such a level on an ongoing basis, integrating civil society as a often neglected voice. We shall not leave the debate only to the industry and to closed shops of expert circles in authorities and central banks. In this respect, the conference is indeed unique. Looking back, this is well appreciated. We did set comprehensive agendas and filled controversial discussions. The event appears to be considerably interesting and attractive also from a scientific perspective – our first relating research workshop discussing and deepening relevant aspects of the conference topics clearly confirmed it. A wide range of suggestions and points of reference for policy-oriented, at the same time scientifically based analysis were identified. This year I brought together researchers from different institutions and with different backgrounds to draft policy papers and present them at the workshop. Some results can be found at the end of this report and on the webpage.

I am very greatful to the members of the organising committee to support this idea, and for their valuable input when preparing the conference. At this point, let me thank those who made the events possible. First, I’m grateful to the „Stiftung Geld und Währung“ for their most valuable support since the beginning. And I want to thank Linklaters for their support as a sponsor from the first conference on. Let me thank the second sponsor as well, which is Moody’s, this year for the first time. Last but not least I am greatful to ESMT Berlin and Jörg Rocholl for having been the host of the conference in the fourth year.

I am convinced that bringing together different groups and stakeholders in an open, public discussion on financial reform and stability horizons is a very sensible thing to do. Generating this debate on critical issues is also necessary to continue building a more resilient financial system which fulfils its vital functions in serving the economy and society. I would very much appreciate your feedback on the conference and the accompanying activities so far.

Martin Aehling

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