Bundesbank battle

German Central Bank Fights Demotion

Source Handelsblatt
Pushed into a corner: Jens Weidmann.
  • Why it matters

    Why it matters

    The Bundesbank, one of the most venerable institutions in Germany, may soon lose one of its few remaining powers – monitoring German banks – to the European Central Bank.

  • Facts

    Facts

    • In November, the ECB is due to take over responsibility for Europe’s largest banks, including 21 German institutions.
    • Many ECB policies, especially on inflation, have been based on successful Bundesbank formulas.
    • As part of the shake-up, the Bundesbank will also lose powers to the German Federal Financial Supervisory Authority (BaFin).
  • Audio

    Audio

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Andreas Dombret is traveling to Berlin on a difficult mission. The German central bank’s board member in charge of financial supervision is fighting a threat to the venerable institution’s power – a threat that boils down to just a few words on a piece of paper.

Today at 3 p.m., Mr. Dombret will take a seat in a federal committee room and hope to convince the finance committee of the Bundestag, Germany’s lower legislative branch, to change a proposed law regarding European banking regulation.

There is much riding on the few words Mr. Dombret wants to change. The central bank, based in Frankfurt, is in danger of losing much of its authority over monitoring banks in Germany – one of its few remaining responsibilities as monetary policy in the 18-nation euro zone is now set by the European Central Bank.

So it’s no surprise that Germany’s central bank and its president, Jens Weidmann, are exerting pressure. The seven-page position paper it prepared for the finance committee, obtained by Handelsblatt, reads like a formal warning. The law would “severely weaken the role of the German central bank,” it stated.

The Bundesbank has been seen as the last bastion fighting the dangers of inflation, the specter of which has haunted the German public since the 1920s.

Raising this kind of alarm could have an explosive impact in German political circles, because Mr. Weidmann’s institution still commands great respect from the general public. The Bundesbank has long been one of the most venerable institutions in Germany, its reputation second only to that of the constitutional court in Karlsruhe.

The Bundesbank has been seen as the last bastion fighting the dangers of inflation, the specter of which has haunted the German public ever since the 1920s. When the European Central Bank was first formed in the 1990s, it was located in Frankfurt with the purpose of keeping the Bundesbank’s influence strong. Many of the ECB’s main tenets – fighting inflation – were taken directly from the Bundesbank’s ideology.

During the euro crisis storm of the last few years, the Bundesbank’s president was seen by Germans as one of the few stalwart leaders. And now Mr. Weidmann, of all people, would be weakened?

“The only role left for the German central bank would be to support BaFin in this task.”

Bundesbank position paper

Up to now, the German central bank has supervised the financial world together with the Federal Financial Supervisory Authority (BaFin) in Bonn. The central bankers supervise ongoing investigations, while BaFin – which is under the finance ministry’s jurisdiction – monitors the implementation of financial regulation.

But this division of labor is being disrupted. In November, the European Central Bank will take charge of supervising Europe’s largest banks, including 21 German institutions, relegating national supervisors to a secondary role. Not only that, Wolfgang Schäuble, Germany’s finance minister, is proposing new legislation that only BaFin should work directly with the European Central Bank in the future.

“The only role left for the German central bank would be to support BaFin in this task,” the Bundesbank’s position paper argues. It would be as if the central bank was demoted to an assistant’s assistant.

 

013 Bundesbank-01

From Mr. Weidmann’s point of view, this is not acceptable. He fears being held responsible for decisions he had no hand in. In the end, it will be the board of the ECB, of which Mr. Weidmann is also a member, which will watch over Europe’s largest banks and decide, for instance, whether troubled institutions should be liquidated.

“It would be contradictory on the one hand to transfer responsibility for bank-supervisory decisions to the ECB and consequently also to the national central banks… but on the other hand to no longer directly include them on the national level in decision-making,” the central bank argues. Supervision and accountability belong together – this is one of Mr. Weidmann’s basic tenets and one he believes should apply to him personally as well.

Mr. Weidmann fears the central bank would lose its impact without “direct access to information that is important to fulfilling its role in monetary policy and financial stability.” The position paper argues this would lead to a “loss of expertise that the German central bank has accumulated” over decades. A warning could scarcely be expressed more clearly.

Officials at the Ministry of Finance seem unimpressed. In spite of lobbying by the central bank, they gave priority to BaFin when drafting the legislation. It might have something to do with an incident in 2010, when Mr. Weidmann was still an economic advisor to German Chancellor Angela Merkel.

“The central bank had its chance,” is now the line in some government circles.

Back then, the governing coalition of Ms. Merkel’s conservative CDU/CSU party and the liberal Free Democrats wanted to transfer responsibility for monitoring banks completely to the German central bank. The Bundesbank rejected the offer at the time, citing its role as an independent institution and fearing the supervisory job would subject it to political oversight.

“The central bank had its chance,” is now the line in some government circles.

Today, lawmakers in the current coalition government, made up of Ms. Merkel’s CDU/CSU and the left-leaning Social Democratic Party, seem to see things that way too. For them it’s also a matter of influence. BaFin is subject to parliamentary control; the central bank is not.

“National supervision of the banks must be under parliamentary control,” Carsten Schneider, deputy head of the SPD parliamentary delegation, told Handelsblatt. “I don’t have the impression that the central bank is open to that.”

The choice has fallen to BaFin, echoed Ralph Brinkhaus, deputy head of the CDU/CSU delegation in the German parliament.

It comes down to this: If lawmakers complied with the wishes of the central bank, they would reduce their own influence. And so, it seems, Mr. Dombret’s mission to Berlin could be fairly hopeless.

 

Jan Hildebrand has been the Handelsblatt Finance and Politics editor in the Berlin office since 2013, and since last month, deputy bureau chief. To contact the author: hildebrand@handelsblatt.com.

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