There is a lot of history in room 104 at the Frankfurt Chamber of Commerce and Industry. It’s where the father of Germany’s modern social market economy, Ludwig Erhard, first pressed ahead with currency reforms in 1948. It’s also where we had our conversation with Lutz Raettig, who some call “Mr. Financial Center.”
Mr. Raettig is a very busy man. The 71-year-old is chairman of the supervisory board that oversees the German operations of U.S. bank Morgan Stanley. He is also the spokesman for the executive committee of Frankfurt Main Finance, a lobby group on behalf of Frankfurt as a financial center, and vice president of the Frankfurt Chamber of Commerce and Industry. The lobbyists played an important role in China’s recent decision to make Frankfurt into a clearinghouse for the yuan.
Most of all, Mr. Raettig is excited by the 1,000 new jobs in Frankfurt being created by the ECB, which will take over the supervision of Europe’s largest banks in November. He backed the ECB’s efforts to improve regulation of the continent’s banks and said the ECB’s new role could prod other regulators to expand their presence. Perhaps he doesn’t want to disappoint one of Frankfurt’s biggest employers.
Handelsblatt: Mr. Raettig, the European Central Bank’s president, Mario Draghi, is in the process of flooding the banks with money. What does this mean for the institutions and for Frankfurt as a financial center?
Lutz Raettig: It’s a relief for the banks, because it guarantees almost unlimited liquidity. But hopefully it won’t be misused to sell off inconvenient assets in a fire sale of sorts before the European supervision system becomes a reality. On the other hand, it is questionable whether the liquidity injection is working, in light of widespread economic weakness. As one would imagine, there is little demand for credit among businesses.
Does the additional liquidity help the economy, or does it merely shift the risks elsewhere? How big is this threat?
It’s hard to know, but I’d say the probability is about fifty-fifty.
Warren Buffett once described asset-backed securities (ABS) as weapons of mass destruction. The European Central Bank wants to purchase these bonds from banks in order to speed up lending. Are we replacing one evil with another?
ABSs can’t be demonized across the board. However, this is a type of security that can lead to abuse, although the potential for abuse doesn’t devalue the ABS model as such. As part of the financial accounting of individual banks, it’s a reasonable tool for obtaining liquidity. That’s why I see no reason why the ECB shouldn’t buy up ABSs, as long as it handles the process conservatively enough.
I don't think more supervision is enough. It also has to be better.
Starting at the beginning of November, Frankfurt will become the regulation capital for Europe’s banks. Will Europe’s insurance regulator EIOPA, another Frankfurt resident, be next to push itself into the spotlight?
That’s possible. Insurance regulation could undergo a development similar to what’s happening with banks. Supervision will become stricter, and European comparability will play an important role. Insurance companies are still lagging behind. Once the financial supervision of banks is running smoothly, the insurance industry will have to be next.
The banks have been required to fill out about 200,000 pages of documents to comply with a “stress test” of their balance sheets being conducted by the ECB before it takes over supervision in November. Will this make the name Frankfurt synonymous with excessive bureaucracy?
It only seems that way on the surface. The many pages, whatever the number, are based on a multitude of measures. Even if portions of the test could be postponed or simplified, it has to be thorough if the supervisory system is to get off to a good start. Anything else would be negligent. We can’t afford a false start.
We are still feeling the effects of lost confidence due to the flawed stress tests. We have to push through this.
We’ve already had a test of European banks. It was done by the European Banking Authority.
Exactly. We are still feeling the effects of lost confidence due to the flawed stress tests. We have to push through this. Both the industry and regulators agree on that point.
Will more supervision really mean more security in the end?
I don’t think more supervision is enough. It also has to be better. Many steps have been taken since the financial crisis, and it’s critical that they be coordinated more effectively.
How high is the risk of overregulation?
It has declined. The first reaction to the financial crisis was – understandably – a surge of activity in the political arena, which led to a large number of measures. This has now given way to a more relaxed approach. I would say that the risk is lower than it used to be.
The Chinese have chosen Frankfurt as a clearinghouse for the yuan. Is this necessary?
Although there are other centers in London, Paris and Luxembourg, as well as Switzerland, there will be a lot left over for Frankfurt. Germany is China’s biggest trading partner in Europe. This will help us to benefit more than others from the Chinese decision to process yuan transactions. Close relationships in the real economy will encourage Chinese banks to choose Frankfurt. This is an advantage over London, the city’s strongest competitor.
Is London still superior to Frankfurt?
We will be able to build significant volume in Germany. We aren’t starting at zero!
You expect to get more than 50 percent of yuan transactions?
I can imagine that. After the financial crisis, regulators have focused more on transactions in the real economy rather than purely financial transactions. In this respect, Germany provides a natural home for yuan trading.
Christopher Cermak contributed to this story. The author is a financial correspondent for Handelsblatt, based in Frankfurt. To contact the author: email@example.com