Tough Love

Investigation of Ex-BaFin Chief Should Focus on What He Did Right

frankfurt skyline bloomberg
BaFin is in charge of regulating banks, most of whom have their headquarters in Frankfurt.
  • Why it matters

    Why it matters

    The next financial crisis will be different from the last and will require hands-on regulators to go beyond perceived limits and take needed action.

  • Facts

    Facts

    • Deutsche Bank acquired Sal. Oppenheim in 2010 for €1 billion ($1.34 billion) preventing its collapse.
    • Lehman Brothers was the fourth largest U.S. investment bank when it filed for bankruptcy in 2008 and helped trigger the global financial crisis.
    • Under the U.S. Dodd-Frank financial reform law, banks are supposed to submit “living wills” – plans to meet financial contracts in case they fail.
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    Audio

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Helmut Schmidt can look back on many shining moments as a politician. One of his brightest was as crisis manager in Hamburg during the catastrophic North Sea flood of 1962.

At the time, the future chancellor used German armed forces to save victims. Whether the constitution allowed the Bundeswehr to be used in times of domestic emergency was of little concern to Mr. Schmidt in those dramatic hours. He acted pragmatically to save human lives.

When the great financial crisis rocked national economies around the globe after 2008, human lives weren’t at stake but imminent catastrophe called for pragmatism as well. The stability of the world’s financial system hung in the balance.

Politicians and regulators – like Jochen Sanio, then head of the German Financial Supervisory Authority (BaFin) – were forced to make critical decisions under enormous time pressure. The entire German economy hinged on quick action.

This was also true in the case of the troubled private bank, Sal. Oppenheim, and the controversial loan by its Frankfurt subsidiary, BHF Bank, intended to ensure Oppenheim’s liquidity.

We need pragmatic and courageous regulators who are always ready to act in emergencies.

If one were to believe state prosecutors, BHF Bank didn’t want to make the loan and only did so under undue pressure by Mr. Sanio. Prosecutors even accused the former regulator of extortion. But had Sal. Oppenheim collapsed back then, the bank probably would have dragged BHF along with it into the abyss. On a legal basis, it doesn’t matter how Mr. Sanios’ action is judged. Economically it was correct.

Certainly, the regulator was notorious at the time for his ruthless methods. But whoever believes Mr. Sanio was too tough should ask around the financial world if a government regulator had ever before been taken so seriously.

In the run-up to the 2008 financial crisis, many European regulators mostly let banks do as they pleased. Authorities everywhere only seldom bothered the banks they were in charge of, and financial institutions showed little respect for them in return. Because of this, the government-appointed inspectors had to listen to bitter accusations after the Lehman Brothers collapse. And rightly so. Why didn’t they intervene on time?

That changed radically as the crisis unfolded. BaFin gained new authority and used it to step on the banks’ toes, with force, when necessary. The fact is we need pragmatic and courageous regulators who are always ready to act in emergencies. We need financial regulators who are willing to counter the ingenuity of banks that exploit gray areas and loopholes.

Because the next financial crisis is sure to come and it will look a lot different than the last. All the new regulations for precautionary provisions and liquidation of ailing banks will hopefully limit the damage. But whoever believes a bank crisis can ever be wrapped up nice and tidy according to the rule book is deluding himself. It calls for hands-on regulators to step forward and take action.

Michael Maisch is deputy financial editor at Handelsblatt. He can be reached at maisch@handelsblatt.com

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