Lessons from the financial crisis
Keynote address by Jean-Claude Trichet,
President of the European Central Bank,
at the “Wirtschaftstag 2009”
organised by the Volksbanken and Raiffeisenbanken,
Frankfurt am Main, 15 October 2009
Sehr geehrter Herr Präsident Weinkauf,
sehr geehrte Damen und Herren,
herzlichen Dank für Ihre Einladung. Ich freue mich sehr, heute hier zu sein.
Der Wirtschaftstag mit über 2.500 hier im Saal anwesenden Unternehmern ist eine wichtige Veranstaltung. Er versammelt den deutschen Mittelstand, der zu Recht als das Rückgrat der Wirtschaft bezeichnet wird. Die zentrale Rolle des Mittelstands ist ein Wesensmerkmal der deutschen Wirtschaft und der europäischen Wirtschaft. Dessen sind wir uns bei der Europäischen Zentralbank sehr bewusst. Wir wissen, dass vor allem der Mittelstand auf die Kreditversorgung durch Banken angewiesen ist, und unsere Maßnahmen im letzten Jahr zielen nicht zuletzt darauf ab, den Banken auch in der Krise die Kreditvergabe zu ermöglichen.
Dem Mittelstand wohnt eine Eigenschaft inne, die ich besonders schätze: die Orientierung an der langen Frist.
Innovationsfreude gepaart mit der Geduld, auf die Früchte der Investition zu warten, bildet die Quelle unseres Wohlstands. Die Finanzkrise hat gezeigt, dass diese langfristige Sicht leider nicht in allen Sektoren und Ländern gleich gut verankert war.
Die Krise hat sich – einem starken Erdbeben gleich – in der ganzen Welt verbreitet und vor keinem Sektor halt gemacht. Das Epizentrum lag weit entfernt, aber die Schockwellen waren stark genug, um die Menschen im Eurogebiet zu erreichen. Hier und anderswo sank die Wirtschaftsleistung so stark wie nie seit dem 2. Weltkrieg.
Meine Rede möchte ich drei Themen widmen: erstens, den aktuellen Kreditbedingungen im Euroraum, zweitens den Maßnahmen der EZB zur Unterstützung der Kreditvergabe und drittens den internationalen Bemühungen, die Krise einzudämmen und das Finanzsystem robuster zu machen. Erlauben Sie mir dazu bitte, auf Englisch fortzufahren.
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Let me start with an issue that is sure to be close to your hearts – namely access to finance for small and medium-sized enterprises so as to allow them develop their businesses. To gain a deeper understanding of what is going on in this key part of the economy, we recently launched a new survey, in conjunction with the European Commission. In June and July this year, more than 6,000 firms in the euro area were interviewed about what has been happening in their businesses. Perhaps some of you here today took part.
The results of the survey paint a picture that I think you will recognise. The firms reported that they were having difficulties in finding customers, that their turnover and profits were falling and that bank loans were harder to come by. The survey also indicates that the crisis has been at least as severe for small and medium sized firms as for larger ones.
The results of the survey seem to be in line with our general assessment of credit conditions in the euro area. Most notably, around three out of five small and medium-sized firms that had applied for a bank loan in the first half of 2009 received the requested amount in full. Around one in five received the requested amount in part. And only about one in ten had the loan application rejected. 
Such results do not point to a severe rationing of credit, although both this survey and surveys of banks indicate that credit standards have been tightened.
We are closely monitoring the access to finance of small and medium-sized enterprises. We will also repeat the survey every six months so as to ensure that the business conditions you face are monitored continuously.
Let me now first turn to the ECB’s response to the crisis.
II. The ECB’s response to the crisis
Emergencies – such as the financial “earthquake” we all experienced last autumn following the collapse of a major bank in the United States – call for swift and forceful action by the responsible authorities. The ECB demonstrated its alertness from the very first day. In fact, when the problems in financial markets first became apparent on 9 August 2007, we were the first central bank to respond, acting within hours.
At this point, I think it is useful to remind you of the ECB’s responsibilities. Our primary mandate is the maintenance of price stability over the medium term. This was laid down in the Treaty on European Union, signed by Europe’s leaders in Maastricht back in 1992. The Governing Council aims to keep inflation rates below, but close to, 2% over the medium term.
All our monetary policy decisions during the last eleven years have been aiming at delivering price stability in the medium term.
After the intensification of the crisis mid September 2008, as inflationary pressures receded, in full consistency with our mandate, we decided to reduce our policy interest rate rapidly between October 2008 and May 2009. We are currently refinancing banks at 1%, an interest rate level that has not been experienced in the countries of the euro area at any time in recent history.
And we have gone beyond the standard monetary policy approach of changing interest rates. We have adopted several “non-standard” measures that I have previously described as our policy of “enhanced credit support”. The measures were designed to ensure that our interest rate reductions were transmitted to the broader economy, despite the problems in the financial sector. In particular, the aim has been to enable banks to continue their lending to households and firms.
To this end, we have supplied as much liquidity since October last year as banks have asked for, at fixed rates. We have also expanded the already long list of collateral that we accept in these market operations. And we have provided liquidity for longer periods than we have done in the past.
In June this year, we conducted the first one-year operation, providing banks with credit against securities at 1% for one year. We had a record allotment of €442 billion in this operation. In the second such operation, a few weeks ago in late September, we supplied banks with €75 billion, again at an interest rate of 1% for one year.
In cooperation with other central banks, we have moreover provided liquidity in foreign currencies, most notably US dollars. This was because euro area banks were experiencing difficulties in obtaining the foreign currency they needed.
These measures can all be seen as an expansion of our normal market operations with banks. In addition, since July this year, we have intervened directly in the longer-maturity segments of financial markets by buying covered bonds. The purpose of the purchases has been to reactivate a market that had been an important source of funding for banks.
The measures we have implemented have been concentrated on banks. You may ask why we are undertaking such efforts to support banks.
In the euro area, banks play a crucial role in maintaining and extending credit to all other sectors of the economy. Indeed, the survey I have just mentioned told us that smaller firms in the euro area are even more dependent on banks for financing than larger firms.
So, it has been essential for us to supply liquidity in an appropriate way to the euro area banks.
On the whole, we are satisfied with the results of the non-standard measures we have taken. Our decisions on interest rates and liquidity have been transmitted reasonably well to the rest of the economy, despite the crisis.
Developments in lending have recently been subdued. In comparison with credit conditions during past downturns, however, the recent developments do not appear to have been unusual. It should not be surprising that firms and households may ask for fewer new loans during an economic downturn. Indeed, recent developments in lending are to a major extent explained by weak demand. However, supply side factors have also played a role.
For a sustained recovery in credit to set in, banks will need to repair their balance sheets. On behalf of the Governing Council, I have therefore stressed continuously that banks should take appropriate measures to strengthen their capital bases. Where still necessary, banks should also take full advantage of government measures to support the financial sector.
One year after the dramatic deepening of the financial crisis in September 2008, we can observe more and more signs of economic stabilisation in the euro area. We have halted the freefall in economic activity that we witnessed around the turn of the year. There are reasons to believe that a gradual recovery lies ahead. But the uncertainty surrounding this outlook remains high.
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Exceptional times have called for exceptional measures. As the situation normalises, the non-standard measures need to be phased out, and the substantial policy stimulus must be withdrawn.
We at the ECB have designed our non-standard measures with an exit strategy in mind. It is still premature to declare the financial crisis to be over. But when the appropriate time comes, there should not be any concern about the ECB’s ability to exit. Indeed, most of our non-standard measures will be phased out naturally. Furthermore, we have a clearly defined mandate and complete independence, which ensure that we can act when we believe it to be appropriate.
Over the past decade, we have established a strong track record for acting in a way that is independent, timely and fully in line with our mandate to maintain price stability.
Central banks are not the only authorities that need a credible exit strategy. The governments, too, need such a strategy. Their response was instrumental in avoiding a collapse of the financial system and in halting the sharp decline in economic activity. But that response also entailed significant costs. The debt and budget deficits of a number of euro area governments have reached worrying levels. That is why there is an increasingly pressing need for ambitious and realistic fiscal exit strategies and for fiscal consolidation.
III. The global community’s response to the financial crisis
Let me now turn to the global response to the crisis. In my view, there are three main lessons to be learnt:
first, the need to build a more resilient financial sector;
second, the need to implement solutions at the global level; and
third, the need for all policy-makers to contribute to financial, macroeconomic and price stability over the medium and longer term.
At the outset, it is worth acknowledging the fundamental role that the financial sector plays in the functioning of our economies. It is a key part of the services sector, the infrastructure that makes it possible for us to do our jobs and run our businesses efficiently and effectively.
The basic role of the financial sector is to channel funds from savers to investors, from lenders to borrowers. This facilitates the efficient allocation of resources and the efficient diversification of risk both within an economy and across borders.
But looking back on the years before the crisis erupted, we can see that there was a dramatic shift in focus in large parts of the financial sector – away from facilitating business, trade and real investment towards unfettered speculation and financial gambling.
Financial liberalisation, deregulation and innovation all have the potential to make our economies more productive and resilient. But if financial innovation is ill-designed and opaque, it can be used to conceal the true risk of financial products and instruments.
The current crisis developed because individual risks in the financial sector were underpriced and systemic risk was underestimated. Several authorities, including some central banks, had warned about the possibility of abrupt repricing in the financial sector. These warnings date back to 2006. However, while it was perceived that a storm was brewing, it was not known exactly what would trigger it.
Looking forward, the financial sector will have to return to its traditional role of providing a service to the real economy. This, above all, requires a change in mentality within the financial industry itself.
More specifically, the financial industry has to increase transparency, strengthen its management of liquidity and risk, and make its business models more robust. It will also need to align the incentives of its employees to longer-term success rather than short-term profits. Our fellow citizens will not tolerate a relapse into excessive risk-taking at the expense of taxpayers.
Financial regulation and supervision will be significantly enhanced. Financial regulation will have to focus on strengthening banks’ capital buffers, making compensation more consistent with long-term success and improving the transparency of financial instruments. Financial supervision will have to focus on detecting developments in the financial sector that could eventually lead to systemic crisis.
This brings me to my second point, namely that there is an overwhelming need to implement reform simultaneously and homogeneously at the global level. The crisis has shown that no country can escape the shock waves of a financial meltdown. Accordingly, any reform effort that stops at national borders will prove futile.
For us in Europe, international cooperation on financial reform has two dimensions: first, cooperation within the European Union and, second, cooperation across the globe.
Institutional reform within the European Union follows a two-pronged approach: first, there is the creation of the European System of Financial Supervisors. This is aimed at achieving better coordination among national authorities responsible for financial regulation, in particular with respect to how they coordinate the monitoring of activities of European financial institutions that cross national borders.
Second, there is the creation of the European Systemic Risk Board. This new body will endeavour to provide early-warnings and issue recommendations that will help to prevent a renewed build-up of excessive risk in the financial system as a whole.
The ECB and the National Central Banks in the EU will play a key role in this new institutional framework. But close cooperation must not halt at Europe’s borders either. Given the strong interlinks between financial centres, a global approach is essential.
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Governance in the global economy has evolved substantially over the past few decades. At the time of the first oil crisis in the mid-1970s, the major industrialised countries saw the need for an international body to allow a regular exchange of information between major economies. This paved the way for the creation of the G‑7. The G‑7 assembled the seven economies that were most important at the time for world output and international trade. Today, the ECB together with three national central banks represents the Eurosystem in the G‑7.
While the G-7 still have an important role to play, the financial crisis has confirmed the need to reinforce global governance at the level of a more inclusive international informal entity, bringing together the major countries and global institutions. Three weeks ago, at the Pittsburgh summit, it was decided to make the G‑20 the premier forum for international economic cooperation.
I personally have been involved in the G‑7 discussions in various functions for 22 years. The G‑7 remain a useful forum for exchange among the major industrialised economies which, after all, share a major responsibility in the origin of the recent crisis.
I also witnessed the creation of the G‑20 after the Asian crisis of the late 1990s. It was an important step to involve the emerging economies more closely in the process of global economic governance. And I am therefore in the present very demanding circumstances, in full accord with this strengthened role of the G‑20.
The aspect that impresses me most about this emerging global forum is the virtually universal consensus on global economic issues that has been reached. There is a broad consensus at the level of the G‑20 on the diagnosis of the crisis. There is a broad consensus on the appropriate response to the crisis. And there is a broad consensus on the direction of financial sector reform, along with the main ideas I described a moment ago.
There is also agreement that macroeconomic policies at the domestic level need to be consistent with the objective of global financial and economic stability. Global macroeconomic imbalances were a fundamental driver of the financial crisis.
What is needed going forward is to eradicate short-termism in macroeconomic policy and to replace it with a medium-term orientation that enhances stability. This focus on the medium term, which is a core element of the ECB’s monetary policy strategy, has greatly facilitated our task of maintaining price stability in the euro area, both at times of heightened inflationary pressures and at times of deflationary risks stemming from financial distress. I am convinced that a clear commitment to a medium-term orientation will have beneficial effects in all policy areas and all regions of the world.
All these efforts will help to create an environment that is conducive to financial stability. But success hinges first and foremost on a significant change of behaviour and risk management within the financial industry itself. Policy-makers, supervisors and regulators around the world will have to ensure that the financial industry does indeed draw the appropriate lessons from the crisis.
I have spoken about the lessons to be learnt from the financial crisis, and about the progress made so far in repairing the global financial system. Central banks and governments around the world have taken bold action. This action has borne fruit and revived what seemed a very scarce resource to me only a few months ago: confidence in the future.
More needs to be done. The agenda for financial reform recently agreed at the G‑20 needs to be implemented decisively. The financial industry needs to change fundamentally. It needs to put more emphasis on robust business models, sound balance sheets and far better management of liquidity and risk.
Macroeconomic policy-makers around the globe need to renew their commitment to medium-term stability.
We should also not forget that the need for structural reforms over and beyond the financial sector is more urgent than ever. The financial and economic crisis has revealed structural weaknesses even more clearly. The financial crisis has not eliminated the need for structural reform in other areas; it has merely displaced them from the headlines. Reforms to tackle the impact of demographic ageing and to strengthen Europe’s potential for future growth in output remain clear priorities for policy-makers in the euro area.
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Erlauben Sie mir zum Schluss, einige Worte zur Rolle des Euro zu sagen. Die letzten zwei Jahre haben uns seinen Wert vor Augen geführt. Der Euro ist keineswegs nur eine Schönwetterwährung. Er hat sich als Stabilitätsanker in stürmischer See erwiesen. Das wichtigste Beschlussorgan für den Euro ist der EZB-Rat, in dem wir – die Direktoriumsmitglieder der EZB und die Präsidenten der nationalen Zentralbanken im Eurogebiet – unsere Entscheidungen kollegial treffen. Da ich hier in Deutschland spreche, möchte ich meine EZB-Ratskollegen Jürgen Stark und Axel Weber erwähnen. In der Vergangenheit haben Mitglieder wie Hans Tietmeyer und Otmar Issing entscheidende Beiträge geleistet.
Ohne den Euro wären Spannungen zwischen den Ländern im Eurogebiet nicht auszuschließen gewesen. Dies hätte unseren Unternehmen zusätzlich zu schaffen gemacht.
Im Rückblick kann man die Einführung des Euro vor knapp elf Jahren als eine weise und vorausschauende Antwort Europas auf die Herausforderungen von heute sehen.
Sie und alle 330 Millionen Bürgerinnen und Bürger des Eurogebiets können sich darauf verlassen: Die EZB wird ihre Verantwortung für eine stabile europäische Währung auch weiterhin wahrnehmen.
Ich danke Ihnen für Ihre Aufmerksamkeit.
 The remainder includes the category “don’t know”.