The anchor of Europe for 20 years -The European Central Bank is celebrating its 20th anniversary- from Thomas Seidel

The headquarter of the European Central Bank at Frankfurt am Main
(Source: ECB)

It all started on 1st June 1998. The rules agreed in the Maastricht Treaties for the establishment of a European central bank and the introduction of a common currency, the EURO, came into force. For the past twenty years, the common central bank of many European Union countries has at the same time been a rescuer in times of need and a goal, of ongoing sharp criticism. We went out in search for what constitutes this globally unique supranational institution at its core.

Robert Heyes a travel experienced British works in the
payment department. A core function
(Source: Thomas Seidel)

The 1990s brought the world the hitherto most comprehensive reorganization of the post-war world. With the reunification of Germany disappeared the old line of confrontation of the Cold War. Above all, the communication technology made unimaginable rapid progress. Everyone is virtually connected to everyone thanks to the Internet. Today, worldwide logistics quickly deliver any demanded goods to all desired locations. A liberalized finance industry provided almost infinite funding for investment and consumption.

Akuvie Edzave the family is from Togo. Organizing travels
for her colleagues in a polyglot way
(Source: Thomas Seidel)

An economically fragmented nationalist Europe would not have been competitive in the rush of global trade. Reason enough for Europe to unite ever deeper and closer. It started with a monetary and banking union. It should be followed by a tax and social union. At least in economic terms, a kind of United States of Europe. So far only the EURO and the European Central Bank (ECB) have been realized.

Patricia Kern-Endres from Ireland is the
49th employee. Today she is working at
the president office
(Source: Thomas Seidel)

More than just a central bank

This largely unfinished European Union project has imposed a responsibility on the ECB that was not intended for the purpose of a central bank. But of all the European institutions, the ECB is the only one that has the impression to the European people that it really works. You may or may not agree with the decisions of the ECB committees. But if a decision has been made, it will be implemented immediately and effectively. The ECB is not just moving billions of euros. It promotes or slows down the economy, it creates a global competitive framework for the European economy and sometimes also saves its own currency or the dilapidated national budgets of entire member countries. But all this only in the context of their original mission (original Mario Draghi: "within our mandate").

Beverley Standon left Great-Britain 20 years ago
to work at the ECB. Today she is a compliance- officer
(Source: Thomas Seidel)

The ECB was usually taken by surprise by politics a few years ago with the additional task of being the supreme banking regulator in Europe alongside monetary policy. Nobody in the ECB wanted that at the time. Many outside the ECB had and still have doubts as to whether the ECB is thus permanently in a depleting conflict of interest. But the policy had no choice. Very quickly, a competent and effective European banking supervisory authority had to be established from the scratch. To do that at all could only be trusted by the ECB. It is therefore fair to say that the choice of this decision is the largest vote of confidence in the ability of the central bank to date. But ultimately, the project of a European central bank and years later of European banking supervision was successful only because all the staff of the ECB had the competence, the skills and the will to successfully implement both powerful projects.

Conception Alonso is of Portoguese origin, but
grew up in France. She takes care of investments
of the ECB in foreign currencies
(Source: Thomas Seidel)

Only Europe is true

It must have been at the time of the first President of the ECB, Wim Duisenberg, that the employees developed that awareness of being part of this supranational institution, and that, at least for their work, their national origin occasionally takes a back seat. What is the current central bank policy, decide the overall interests of all member countries of the EURO-Community, but indirectly also all countries of the EU. This overall interest must be kept in mind by the ECB, never only by the interests of individual states or smaller groups of states. This is a balancing act, which is not always easy to understand for some large but also small member countries. 

Eva Finkernagel-Eid is one of the longest serving
employees within the ECB. She studied banking
business and multilingual secretary and keeps
contact to the media

Despite severe elemental crises, the ECB has still succeeded in maintaining its share of the European project. Meanwhile, some go so far as to say that should the EURO and the ECB collapse, Europe will fall apart too. That may sound a bit drastic. For the future, however, one should wish the European Central Bank to concentrate only on its very own tasks. Sooner or later, a central bank would be overwhelmed to be the sole anchor for a drifting community of states.

The ECB announces the end of its purchase program -Report from today's ECB pressconference- by Thomas Seidel

Today's press conference took place in the Latvian capital of Riga
(Source: ECB-Webcast Thomas Seidel)

After more than 12 months of a de facto deadlock on monetary policy decisions, the European Central Bank announced today the long-awaited move to phase out the extraordinary buying program by the end of December 2018. Although this step was long expected by the professional public, this decision will lead to some significant changes in the medium term.

To anticipate, the decision to end the extraordinary purchase program comes with a handbrake therefore. As ECB President Mario Draghi told journalists at the press conference, a purchase program has become a standard monetary policy instrument of a central bank and can be re-used at any time. Specifically, after September 2018, the volume of purchases is to be reduced to € 15bn per month and then suspended for the time being from January 2019. All key interest rates remain unchanged until further notice.

ECB-President announces the stop of the purchase program
(Source: ECB-Webcast Thomas Seidel)

However, stopping the purchase program does not mean that the promissory note issuers now have to repay their debts when due. Most issuers would not be able to do that either. Therefore, the ECB in its current resolution formulates, that it will reinvest in the maturing bonds! That's important, because that means issuers pay for a bond that matures by placing a new one. Thus, the stock of purchased bonds at the ECB and thus its balance sheet total from these transactions remains initially unchanged. This applies without further time limit. In any case, one wants to prevent a narrowing of liquidity. In other words, the ECB has just decided not to continue to grow the mountain of purchased bonds!

The reason given by the ECB for its decision is, its essential goal of an inflation rate just under two percent has been achieved. It is currently estimated at 1.9 percent inflation and expects this level to more or less continue until 2020. The economy is recovering, general wage levels are rising and lending to companies and households is showing growth of around three percent.

The new ECB-Vicepresident Luis de Guindos talks about details
(Source: ECB-Webcast Thomas Seidel)

Mario Draghi encounters all sceptic. One would not see a denomination risk with government bonds. The parliamentary election in only one out of 19 countries should not be dramatized. The economic progress made in recent years must not be talked down. The EURO is an irrevocable institution, very strong and is demanded. On discussions that are led against the EURO by some and the view of the German economist Clemens Fuest, there should also be an exit option from the EURO, Mario Draghi is charmingly not replying to even one.

The criticism that the ECB's persistently low interest rates would help to reduce the assets of savers is not being accepted by Draghi. For an investment there would be good profitable alternatives and pension funds would show that even in times of very low interest rates still good alternative returns can be achieved.

The press-conference is being enriched by the questions from journalists
(Source: ECB-Webcast Thomas Seidel)

Effects of changing conditions to the global economy, for example due to customs duties, can not yet be determined at the moment, because some of these measures are not yet in force. Criticism from Italy, in the month of May, the ECB had bought less Italian bond as usual, is being refused by Draghi. In addition to Italy, the purchasing volume of France, Belgium and Austria was also lower than in other months before. Draghi makes it clear, that a conspiracy against Italy would not take place.

The ECB has taken a lot of time with its decision to end the extraordinary purchase program, at least in terms of the timetable compared to the US Federal Reserve System, the local central bank for the US dollar. Ten years after Lehman and in its twentieth year, the ECB's signal is important that in the meantime a certain normality has re-emerged in Europe and the EURO area. How long this normality will last, nobody can foresee. Despite all economic recovery, European politics has not used time or done any of their homework. Instead, the national protectionist forces are increasing. In less than nine months, Brexit is just around the corner. No one knows until today how the English bet will turn out. Likewise, we do not know what the consequences are for the European economy and thus for the decision-making basis of the ECB.

Competition for the future of European capital markets -British simulation games about Brexit- by Thomas Seidel

Discussion at the Frankfurt Finance Summit
(Source: Thomas Seidel)

At the edge of this week Frankfurt Finance Summit, which gathers senior financial industry representatives each year, we took the opportunity to meet British government representative Katherine Braddick for an exclusive and very brief background information on the state of ubiquitous Brexit.

The director of the British Ministry of Finance describes the extent of the work because of Brexit in the British government. For example, her area is over 50 percent burdened with Brexit tasks. Of course one is in the face of such a unique situation in a governmental state of exception. This also applies to the working level at the regulators and central banks between Great Britain and the EU. For example, it is already apparent that there could be problems with contracts with very long cycles (terms of 5 years and longer). At present it is impossible to see how regulators will handle such transactions in the future.

But Brexit has by far not only effects on the financial industry. For many companies affected by the withdrawal decision, this is an essential issue. Above all, British banks are relocating to Europe, where they want to ensure a qualitative continuation of their customer service. Above all, the historical advantage of the British financial industry was the availability of real talents in this industry.

Katherine Braddick (very left)
(Source: Thomas Seidel)

Competition in capital market business

So far, London is the only major capital marketplace in Europe. With Brexit, this market will in future be outside the European Union. We spoke to Mrs. Braddick about the efforts to establish a new European capital market exchange in Luxembourg (we had already reported on it in detail). Obviously such aspirations in the British government are very sporty. One is prepared to compete in the capital market in the future. However, problems arise when business in Luxembourg begins to industrialize, in other words, to approach the UK capital market in terms of volume and transaction numbers.

Getting business contacts at the Frankfurt Finance Summit
(Source: Thomas Seidel)

Shift of focus

With the withdrawal from the European Union, the focus of the whole British economy will certainly shift. During Britain's over forty-year membership of the EU, relations with the formerly colonial Commonwealth of Nations may have been neglected. That will definitely change. In particular, trade with Canada and Australia, and not least the United States, will become increasingly important for Great Britain in the future. It seems that the British Government is willing to turn away from Europe in the future.

Hauck & Aufhäuser on the direct way -Report from the 39 th regular event for asset manager- by Thomas Seidel

Michael Bentlage
(Source: Thomas Seidel)

We met the CEO Michael Bentlage at a regular event of the Frankfurt private bank in Chinese possession. We talked with the CEO about the current developments in Luxembourg, after Hauck & Aufhäuser had acquired the activities of the former private bank Sal. Oppenheim there in the past few months.

At the event in Frankfurt's Marriot Hotel, attended by about 160 asset managers in particular, Michael Bentlage was very optimistic for his house. The year 2017 will end up with top results. The equity ratio was increased to over 15 percent and the Chinese owner Fosun continues to invest. There will be a new online platform for the private customer business.

The integration of the Luxembourg activities of the former Sal. Oppenheim is proceeding in a straight line. Additional renting of office space focuses the Luxembourg activities on one location. Hauck & Aufhäuser's service is well acknowledged by customers, with a technological focus on the existing Hauck & Aufhäuser platform.

Bernd Heynemann
(Source: Thomas Seidel)

The keynote speaker was Bernd Heynemann, a former FIFA referee and German politician. His lecture revolved around the theme of "decision-making", which is such a difficult exercise for Germans. After all, a person would make an average of 10,000 decisions in everydays life. The sheer number then astonishes and one wonders, does that affect every breath? How many of these decisions may be wrong decisions, especially in the higher cognitive area? Personalities that you perceive as decision-makers, would have to decide quickly anyway. A funny situation arose when Heynemann addressed the audience and asked who considered himself as a personality. There was no statement at all, either by hand or by word.

Frank Engel
(Source: Thomas Seidel)

Because it is an asset management event, always a representative of the Association of Independent Asset Managers Germany e.V. (VuV) leaves an update, this time Frank Engel.

In 2017, the new rules from MiFID II were implemented in particular. In the same year it came to 40 new admissions of member companies, for the future one strives to 300 federation members. Meanwhile, there is a new organization manual for all members containing 168 pages and 67 attachments. The VuV Academy would open on 4 October 2018.

Traditionally, Chief Investment Officer Burkhard Allgeier makes statements on economic developments at these events. Allgeier does not see the great commercial war between the US and China. It might be, that at the end it comes to negotiations with the result of an even better free trade treaty. With a buy-up stop of US Treasury bonds, China would be more likely to hurt itself, as well as a devaluation of the Yuan.

Burkhard Allgeier
(Source: Thomas Seidel)

Although the US Federal Reserve has already changed its direction with regard to central bank policy, Allgeier believes that its assumptions regarding the development of inflation are unrealistic. Inflation will probably settle down to two percent. The European Central Bank carries the concept of inflation control like a monstrance. Other concepts, such as monetary control, have been wrongly rejected. Interest rate increases by the ECB may well come in spring 2019. Allgeier sees a fair interest rate level of the ECB between 1.5 and 2.5 percent, with the upper limit not reached before 2025. However, that alone could be rough for the bond markets. The interest is not per se the enemy of the stock markets. Extremely long-term analyzes, over approximately 150 years, would have shown that stocks with an expected yield of 3 percent can be expected.

Reasonable investment thus needs a long and a steady hand in any case. The banking house Hauck & Aufhäuser emerges strengthened from the activities of the last eighteen months for the future. Quite different than at Deutsche Bank, for example, it can be based on a stable and reliable owner from China.

Cash is the money of the citizens! Report from the 4th Cash Symposium of the Deutsche Bundesbank - by Thomas Seidel

The Hilton Hotel at Frankfurt am Main
(Source: Thomas Seidel)

This year's Deutsche Bundesbank's cash symposium at Frankfurt's Hilton Hotel became a passionate constitutional appeal for keeping cash. A whole series of top-class speakers from various social areas provided fundamental insights into the topic. Nevertheless, strong opponents of classical cash are forming, partly for unfair political motives, partly for pure profit-oriented opportunism.

It seems strange that just on an Ash Wednesday, a cash Symposium of the German Federal Bank takes place. True cash ist the king and in German language also being called „ash“ or „cole“, as Karl Ludwig Thiele, on the board of the Deutsche Bundesbank, responsible for the cash, expressed it very appropriately. At the same time, this February 14 was also a Valentine's Day. Is this calendrical coincidence, the last time in 1945, so just on the day when Dresden was unfairly reduced to rubble, first come about again, a hint to the love of the Germans for cash? While Ash Wednesday in Germany is traditionally used for vigorously and sometimes indecent public political statements adressed to political opponents, the participants of the cash symposium make clear what freedom and democracy are in reality.

Jens Weismann President of the Deutsche Bundesbank
(Source: Thomas Seidel)

In contrary to the crypo tokens

The first challenge was made immediately by the President of the German Bundesbank Jens Weidmann. He opposes the application of the concept of money on any crypto currency, such as the Bitcoin, and speaks from now on only pejoratively but true of crypto tokens. A term consistently used by every speaker in the event. Weidmann rejects the crypto token, completely rightly, every typical feature and function of the money. First and foremost, there would be confidence in a currency behind which ultimately stands a central bank. The volatility of crypto token is currently six times higher than that of equities and thirteen times higher than of gold. Weidmann sees the reason for this in the missing value basis. Crypto token would have no intrinsic value, such as gold or by the reputation of a guarantor. Weidmann does not see crypo token as a suitable alternative to state money. Therefore, he advocates strong regulatory intervention. There should be no link between the financial sector and crypto tokens. Cash is the only way for individuals to hold central bank money. Weidmann also expresses concerns about the introduction of digital central bank money. Such would even be interest-bearing, albeit with negative interest rates. But if anyone could convert his bank deposits at any time into digital central bank money, the biggest risk would be a bankruptcy in case of imminent bank failure. This could then lead to the collapse of a whole banking system. For cash to continue to be attractive, central banks should strive to keep payments up to date. In the future, immediate payments with central bank money should be possible.

Karl-Ludwig Thiele executive director of Deutsche Bundesbank
(Source: Thomas Seidel)

Practical cash handling

Karl Ludwig Thiele certifies the Germans already a certain love for the cash. In their use, they are not the world champion. Amounts up to 5 €uro are still paid for 96 per cent in cash. Only with amounts of about 50 €uro and above one go in this country more about electronic payment methods. Cash is easy and quick to handle. It allows every social group access to business and eludes digital control. Cash is defined freedom and it serves the informational self-determination. Thiele rejects criticism of coins, even with small denominations. The German federal government has earned recently 250 million €uro with the disbursal of coins and a large part of the citizens wanted to retain even the smallest coins. As is well known, the experiment to abolish coins in the city of Kleve has failed. Not least because consumers felt constantly ripped of by merchants.

Fritz Zurgrügg vice-president Swiss National Bank
(Source: Thomas Seidel)

Criticism of digital central bank money

The vice-president of the Swiss National Bank (SNB) Fritz Zurbrügg also immediately appropriates the term crypo token. He confirms a still large demand for cash in Switzerland. Since the popularity for cash in Austria is even greater, could one speak here of a German-cultural phenomenon? Rather not. The more southern and eastern countries in Europe, have even a greater love for cash. Despite the broader access of the population to bank accounts and electronic payments, cash use has for many years remained at a stable level of between 5 and 10 per cent, in relation to gross domestic product. That applies, according to investigations by the SNB, for most countries with a liberal economic character. An exception, however, is Japan, where the cash share with 15 to 20 percent is significantly higher. It is known that the use of cash enables more effective budget control, especially for private individuals. Cash is visible and tangible and thus offers a greater sensual experience than book money. Cash is reliable. You can pay at any time and be independent of any technical infrastructure. Cash protects against data misuse and thus possesses a property as a data protection instrument. Of course, the existence of the cash depends on the credibility of the issuer. Therefore, the quality of banknotes should always be at a high technical level. Not least because of the security against counterfeiting. Zurbrügg sees no further benefit in digital central bank money. Instead, there could be undesirable effects during use. For example, the functions of liquidity and maturity transformation could be in trouble, especially in times of crisis, when people shift their bank deposits into digital central bank money. Digital means of payment are at most incomplete substitutes of cash.

Yves Mersch ececutive director of European Central Bank
(Source: Thomas Seidel)

A plea for freedom through cash

Not only the Deutsche Bundesbank is responsible for cash in Germany. As is well known, there is a higher authority in the Eurosystem with the European Central Bank (ECB). Represented here by central bank director Yves Mersch from Luxembourg, where he is responsible, among other things in the ECB for cash. Five European countries, which Mersch classifies politically as the "law & order camp", have in the past approached the ECB and argued against cash. Mersch counters that: A protected legal tender is money only if there is an obligation to accept; it has debt-discharging effect; must be accepted at face value and no further fees may be charged. Individual Member States could restrict the use of €uro but not the currency as such. Banknotes exists for constitutional reasons. They only granted the real implementation of fundamental rights in the first place. Only with cash could the citizen exercise his fundamental rights in a way that is not immediately comprehensible to the state. Cash protects against a surveillance state and ultimately against a dictatorship. Cash enables equality and the participation for social underpriviledged and children. There are no hurdles to its use and make one independent of electronic infrastructures. This applies especially in critical phases. Restrictive measures may serve only comprehensible purposes, such as the fight against terrorism or money laundering. There would be no full alternative to cash. Even if its physical form may change, it still remains cash.

Udo Di Fabio German constitutional judge
(Source: Thomas Seidel)

Cash means concrete freedom

After so much cash enthusiasm of the occupational central bankers, comes with Udo Di Fabio a former German constitutional judge to speak. He goes even further. Cash and freedom legally formed an indissoluble bond. Cash has an intrinsic value that can be replaced on paper by a guarantee power. The legislature has a task to protect the cash. There must be a stable currency, at least in a world structured by private law. A current negative example is Venezuela. The anonymity guaranteed by cash is part of what we understand by privacy. The retention function of cash in its importance to the freedom of individuals would generally be underestimated. Here, not only the grandma is rehabilitated, who keeps the money under the mattress. Especially persecuted people can report at any time how cash helped them to get into freedom again. Freedom and security must be in a balance. The totally secure state would also be the totalitarian state. In our western world, the state is derived from the will of the citizens. Here the state is only a trustee of the economic subjects. In China, for example, this is exactly the other way around. There, the state legitimizes from within itself and the citizens played only a subordinate role. A cash abolition must not be dispossessive to property regarding to Di Fabio. Therefore, negative interest rates could be qualified as a fundamental rights intervention. The state is obliged to preserve its constitutional values ​​and that includes the right to property. In the digital domain something would emerge beyond the state, which would gladly be used for anarchic purposes. But the supporters of the cash abolition pursued only certain interests of digital companies, so not necessarily the interests of citizens.

Discussion panel of the participants
(Source: Thomas Seidel)

During a panel discussion, it has been mentioned: Cash is not the money of the central banks, it is the money of the citizens, with which the central banks would have to handle carefully!

Martin Hellwig University Bonn
(Source: Thomas Seidel)

Only cash is deleveraging

An academic view at the cash is provided by Marin Hellwig from the University of Bonn. Cash is simply the basis of the monetary system. Ultimately, a debtor would have to pay cash. Hellwig asks, what is the content of a claim if there will be no cash? Our economic system is based on the law of obligations. What could replace the cash there? Payments in cash are debt-discharging and thus final. But it must be accepted. Every normal business transaction has two participants, the supplier and the payer. But if there were digital money, one would be dependent on a third party for the whole transaction, namely the operator of the payment system. Is that what one want? The importance of cash Hellwig works out at another example. Emigrants, for example, could not take digital money with them unhindered. Claims against the state could not be enforced under private law. Book money is a legal debt, but cash is not a debt. An essential reason for trust in the central banks today is their independence. Therefore, Hellwig sees discussions about a democratization of central banks as problematic.

Hans-Walter Peters German Bankers Association
(Source: Thomas Seidel)

Watch out for the digital powers

Finally, with Hans-Walter Peters, in his role as President of the Association of German Banks, again a banker comes to speak. He opens his talk with a brief report of a visit to Silicon Valley, California, where he met representatives of leading American digital companies. There one live in another world. The digital world knows no state, only a totally networked society.

As a result, in a digital world, cash will be the loser. Money is and remains first and foremost a matter of trust. So far, this trust has been related to the question of whether one can pay with it anywhere and at any time. For digital payment systems, the question arises as to how a payment process leaves no digital traces. For all the gladness of the freedom through cash, cash supply would be increasingly expensive, especially when compared to digital systems. Although the love of Germans for cash is already legendary. But as the cost of cash continues to shift to customers, affection is likely to change.

Ongoing discussions while coffee break
(Source: Thomas Seidel)

Summary

Many institutions today have a concrete interest in monitoring citizens as comprehensive as possible. Among other things, states emphasize security and protection interests, for example because of terrorism. That the state wants to monitor every financial transaction, not least because of the tax duties, is not even mentioned. This is all the more true, for the already quasi sovereign acting guardians of social systems, the health insurance. First and foremost, digital companies have a commercial interest in spying on citizens' living and paying habits as customers. In the background, however, the omnipotence fantasies of a global, denationalized society certainly play a role. One seeks, so to speak, an „investorcracy“. There, under certain circumstances, every monitored citizen would be simultaneously, at least indirectly, a supervising investor.

Against this background, it was good and important to hear at this event from various speakers how concrete and practical the cash is being used as an direct democratic instrument every day a million of times. Yes, it even seems to be the actual flame of freedom. But like any other form of freedom, you have to fight for it every day. One can only hope that more people, than the central bankers alone, effectively counteract the abolition of cash.

Even for lunch the Hilton Hotel offers a nice atmosphere
(Source: Thomas Seidel)

Qualification becomes the key to survival - A talk with Robert S. Kaplan- Report by Thomas Seidel

Volker Wieland (l.) in discussion with Robert S. Kaplan (r.)
(Source: Thomas Seidel)

One year after the start of the new administration in the US, with Robert S. Kaplan again visited a regional president of the Federal Reserve System (FED) from Dallas Frankfurt. Here Kaplan is well known. The IMFS Institute hosted a discussion on macroeconomic trends and their impact on US monetary policy. Kaplan spoke more about future challenges for a modern economy.

The hall on the upper floor of the Old Casino of the Goethe University is crowded up to the last seat. That's an estimate of about two hundred listeners in the audience. But the discussion inevitably takes place as a radio play. The organizers of the event simply forgot to set up a stage. For the second time within four weeks, they are thus outing themselves as real "event professionals". So only the participants in the first two rows can experience the guest in persona. After all, this increases the idea of ​​exclusivity.

Yet Robert S. Kaplan wasen't spoiled in his mood from that. He made a little whistle blowing from the inside of the FED in a good temper. But he always remains very focused. This one can't say about his discussion partner Volker Wieland. Wieland did not seem well prepared and let the conversation rather floating by.

The IMFS resides in the House of Finance
(Source: Thomas Seidel)

Kaplan's core theme is change. But nothing was mentioned by him about the conditions in the federal administration of the US. No word also about the forced replacement of FED President Janet Yellen. Instead, Kaplan focuses on the economic and social changes that are already taking place.

The sign of change is technology. Hardly any industry in which no technological changes take place today. These changes, often referred to as "disruption" in English, are nothing other than the "creative destruction" known by Josef Schumpeter. But the strong driving force behind these upheavals is due to the fact that everyone has access to technology and, most importantly, that it is cheap. Much changes are fundamentally. So today's consumers are able to put pressure on prices simply by using the Internet.

In the meantime, soft factors in the economy are often more important than hard ones like capital or an organization. First, there is a passion for developing and producing something. Only then does capital join. The growth and competitiveness of a society will require more than ever before a high level of education. For example, in the US, there are 46 million people with a high school diploma or even less. These people would have to be given priority. Otherwise, they are threatened with being victims of the upheavals and losing their jobs due to underqualification, keyword: digitalization. Germany is traditionally far ahead of the USA in vocational training.

Demographic change is leading to less job growth. Already half of the growth of workers in recent years has come from immigration. Therefore, the immigration should be urgently regulated. Nevertheless, productivity is already suffering from underqualification, especially in middle-sized jobs. But the US budget deficit is hindering necessary investments. Such are expected by the corporate tax reform. This should give the private sector a boost in the direction of sustainable development.

The FED building in Washington D.C.
(Source: AFP Saul Loeb)

Globalization is not a threat! Rather, it must be seen as an opportunity. Unlike in the US, there is a high savings rate in China among the population. This would allow the state to go into debt internally to its own citizens. That is similar to Japan. The result is, that these two Asian countries have little or no foreign debt.

Central bankers could no longer think in isolation only within the framework of their own economy and their own currency area. They need to know what is going on in other countries and what impact decisions in other countries have on their own economy. Meanwhile, the traditional mechanisms of price and wage determination would work differently. That also has an impact on inflation. But how it works, must first be examined exactly.

Overall, Kaplan is optimistic for the future. He does not hide the weaknesses of the American system. He is concerned with the competitiveness of the United States. He sees the challenge of the future above all in the qualification of the working population. The goal is to survive in a multi-polar world. What he meant, but didn't mentioned in words, backwardness and isolation are not the means of choice.

Report on ILF conference: -Basel III Are we done now?- by Thomas Seidel

The headquarter of the Bank of International Settlement in Basel
The place of the regulations name
(Copyright: wikipedia, licence Freie Kunst)

Only last December, after nearly ten years of tough negotiations, has it come to pass the new global regulations Basel III for the financial industry. We had already reported about it. (Insert here the left). Essentially, Basel III is designed to help reduce the potential for another devastating global financial crisis. Now is the time to discuss with experts what the agreement on Basel III has brought. The Institute for Law and Finance (ILF) did it these days in Frankfurt am Main.

To cope with this complex matter, the event was divided into several discussion groups, each dealing with sub-aspects. The introductory lecture was given by Stefan Ingves from the Swedish Riksbank, who headed the Basel Committee until the end of the negotiations. Ingves immediately starts his remarks with a core problem. The long, over five-year, implementation period for Basel III. Of course, it could come in this period to new conditions, which then lead to renegotiations of Basel III. However, Ingves warns against questioning what was achieved. Ingves also gives an example, such as the accelerating cyber risks. What could not be implemented was an adequate consideration of public debt. On this and another topic, such as the Floor, which is known to have be traded down by the German representatives from 80 down to 72.5 percent, it becomes clear under what political pressure such talks take place.

A milestone achievment?

The first panel dealt with the question of whether one would have reached a milestone now? Participants were amoung others: William Coen, Secretary General of the Basel Committee, Andreas Dombret, Board of the Deutsche Bundesbank, moderated by Nicolas Veron, Senoir Fellow at Bruegel.

Panel I: f.l.t.r. William Coen, Stefan Ingves, Andreas Dombret,
Michael S. Gibson, Nicola Veron
(Copyright: Thomas Seidel)

The possibilities presented by Basel II for the first time, with which banks were able to calculate their risks according to internal risk models, have probably caused problems especially for financial supervision. But internal models would also benefit as long as the banks and a financial regulator have agreed on the approach. In addition, they would have to fit into the respective national systems. Regarding the effort of regulation under Basel III, the rules were never meant for small banks. Now is the time for a regulatory break. The rules have to be implemented first of all. It is to be regretted that the topic of public debt could not already be included in the new regulations. But the view of the US on the question of sovereign debt is clearly different from that of the Europeans.

Sence and Sensitivity

The second panel dealt with the proper handling of the rules and regulations, with participants such as Sabine Lautenschläger, Vice-President of the SSM, Olivier Guersent, Director-General of the European Commission and there, among other tasks, responsible for financial stability, Paul Hilbers, De Nederlandsche Bank; moderated by Patrick Kanadjian of Davis Polk & Wardwell London.

Panel II: f.l.t.r. Olivier Guersent, Sabine Lautenschläger, Paul Hilbers,
Patrick Kanafjian
(Copyright: Thomas Seidel)

Assessing risks is very difficult. It also needs the right financial supervision capacity, which in turn needs time to qualify for the application of Basel III. Basel III provided a framework and set the right incentives for the banks. Having a global standard is more important than discussing the height of a floor. The consequences of the new capital requirements are bearable for the financial sector. The EU Commission estimates the extended capital requirements on average at 30 percent. However, this is justifiable because of the long transitional period. But the banks should not only deal with Basel III. There are also other challenges, such as the changing markets and cyber risks. Nor should one let oneself drift of the markets. The conversion period is now nine years and there would be (formal) no reason to be finished before. New risks, such as Operational risks are currently difficult to model because there simply is not enough data available.

Have we gone far enough?

Whether one went far enough with Basel III, the participants of the third panel talked about. With Isabel Schnabel from the University of Bonn, who also is a member in the German Council of Economic Experts and Charles Goodhart from the London School of Economics, two well-known critics spoke. 

Panel III: f.l.t.r. Charles Goodhart, Isabel Schnabel, Douglas Elliott
(Copyright: Thomas Seidel)

Ten years after the financial crisis, do we even know what the objection of the new rules were good for? The rules on capital adequacy are in favour of the financial industry. In this respect Basel III went not far enough. Banks are actually legal entities. They have no feelings, no intelligence, no ethics and no risk awareness. It's more about the bankers, who make up a bank. The managers have the wrong incentives to make more and more profit quarter after quarter. Big bonuses are the wrong incentives. Financial supervision would have to relate much more to the bankers than to the banks themselves. But the supervisors are still not qualified, i.e. when it comes to the complexity of a mortgage loan. Another mistake is, to focus on the capital resources of the banks, rather than to pay attention to their liquidity.

What Basel III means to Investors

In a fourth panel representatives of investors will speak and discuss what Basel III means for them. Contributions came from Laury Meyers of the rating agency Moody's Europe, Stuart Graham of Banks Strategy and Philippe Borderau of Pimco Europe. 

Panel IV: f.l.t.r. Philippe Borderau, Stuart Graham, Laury Meyers, Levin Holle
(Copyright: Thomas Seidel)

The substantive essence of the statements of these participants, however, reflects a different attitude. Ultimately, investors don't care under wich conditions banks have to make their business, and even the investors don't care about the banks themselves. They simply calculate how much profit and what profit maximization they expect from corporations and direct their capital to where they think is most profitable.

Conclusion

The disagreement in the sovereign debt issue makes it clear how politically the whole subject of banking regulation is handled. The eternal haggling over the smallest compromises happens not only in government formations. But ten years is too long a period, even to achieve anything on a global scale.

The weaknesses of financial supervision were made quite clear by this event. After a quite advanced approach to risk calculation was formulated in Basel II with the internal models, the regulators in particular have proved to be overburdened. This is partly due to the lack of economics prerequisites of the supervisors, but also because the supervisors have overseen the banks confrontational rather than cooperative for too long. It gives hope that it is the representatives of the supervisors themselves who have recognized and named these deficiencies. One can therefore expect that Basel III lead to a reorganization and qualitatively orientation by the supervisiors itself.

The audiance was part of an intensive discussion
(Copyright: Thomas Seidel)

Having focused too long on capital- and less on liquidity requirements are true words. There is a drastic need for action in the liquidity topic. This is mainly addressed to the central banks, which have the means and the ability to ask the banks for sufficient liquidity, for example, through the minimum reserve, in the short term.

Regarding the missing data base for the assessment of operational risks, the supervisor should let the internal error reports of the banks be disclosed for evaluation of the last ten years. It will be astonishing how inadequate the processes, how IT is perforatet and how unqualified the acting staff of today is, at all levels in the banks. Charles Goodhart says it as clearly as necessary: ​​Not so much the anonymous banking company, but the bankers themselves should be the focus of supervision. This is especially true for top management. Goodhart has also made an accurate statement. People do not want the banks to be closed, they want the bankers to be punished for their misconduct.

The whole system of bonuses, quarterly reporting and transparency obligations leads to completely wrong incentives. Instead of stable long-term growth and sustainable investments, only short-term profit maximization is in the foreground. No participant described the profit-driven obesity of the current system as emotionless as Stuart Graham for stock investors. Only the here and now counts. A future, for whomever, does not matter.