22 May 2014

Bundesbank/Weidmann: The macroeconomic importance of capital markets

Jens Weidmann, President of the Deutsche Bundesbank, argued that balanced rules to protect investors and measures to secure financial stability are necessary and in the interests of all capital market participants.

Core hypotheses regarding the role of capital markets:

Any attempt to assess the macroeconomic importance of capital markets solely on the basis of empirical studies of their growth-promoting impact would surely overstate the meaningfulness of such studies. Instead, a more comprehensive approach is necessary to address this issue. But first, let me present four core hypotheses regarding the importance of the capital market from a central bank's perspective:

• Developed capital markets are instrumental in providing investors with a broad range of investment products, enabling them to select the best risk-return mix in their particular case. Key determinants of developed capital markets are liquidity, transparency and integrity. From the point of view of corporations, developed capital markets ensure a broad range of financing sources. This makes capital market funding an important and welcome supplement to bank borrowing for firms. A stronger role for equity capital would be desirable, not least in Germany.

• Investor protection is essential. It contributes to making the capital market attractive to broader groups of investors. The best form of investor protection is a broadly based system of general financial education. However, it is also crucial to ensure that products are sufficiently transparent.

• It is not the responsibility of central banks to provide investment advice or to protect investors against losses. A monetary policy approach that was forever willing to clean up the mess after financial market bubbles have burst would create the wrong incentives. The primary objective of monetary policy is to safeguard price stability; financial stability ought to be ensured mainly through macroprudential instruments along in tandem with effective regulation and supervision.

• Capital markets have an important disciplining function, especially with regard to fiscal policy.In the run-up to the crisis in the euro area, the capital markets did not always live up to this role. The institutional framework of monetary union should be structured in such a way that capital markets can perform their disciplining role effectively.

There is no doubt that capital markets perform important macroeconomic functions. The increasingly important role of the capital markets as a source of corporate financing is a positive development, particularly as they diversify firms' funding structure and make them less vulnerable to crises.

By not participating in the capital market, retail investors are missing opportunities to share in business success. Where this is due to a lack of knowledge and understanding, financial education as provided by organisations such as Deutsches Aktieninstitut can help to gradually increase the participation rate.

Balanced rules to protect investors and measures to secure financial stability are necessary and in the interests of all capital market participants.

Full speech

© Deutsche Bundesbank