FRANKFURT (MNI) – Financial markets remain fragile and nervous and
much work remains to be done in the sphere of regulatory reform,
Bundesbank Vice President Franz-Christoph Zeitler said Wednesday.
“Despite the recovery of the real economy, the situation on
financial markets is still fragile,” the central banker observed in a
speech text for delivery in Duesseldorf.
“Small tensions and even rumors lead to considerable nervousness
and have, for example, in recent days and weeks triggered a significant
widening of spreads vs Germany of some European countries and of CDS
premia for banks,” he noted.
Zeitler cited a number of reforms already in place to correct the
problems that led to the financial crisis. However, “numerous
weaknesses, misorientations and holes in the regulatory system need
attention” — preferably in an internationally coordinated way, he said.
Of particular concern for stability is the risk that regulation
will be circumvented through the shadow banking system — hedge funds,
private equity, alternative investment, he noted.
“The principle of ‘same risk, same rules’ must be applied,” he
proposed, noting that promising solutions have been seen only at the EU
level, while the US wants to limit control to the mere “registration” of
Zeitler also argued for “change in thinking” away from short-term
returns toward long-term sustainability. Management should aim to
survive the fluctuations of business cycles.
“This means that financial innovations should be introduced on a
wide scale only after their solidity has been tested over at least one
business cycle and under difficult conditions,” he said.
This principle should also apply to regulators, who should eschew
impromptu intervention and focus instead on rules that promise
effectiveness over the longer term, he added.