When Germany’s IKB Industriebank got into difficulties in the summer of 2007, many underestimated the risk. In early August, the Bundesbank’s then-president, Axel Weber, asserted: “There is no reason to fear a banking crisis in Germany at all.” A week later, though, the financial world was in turmoil. The European Central Bank pumped more than €150 billion ($177 billion) into money markets, and trillions have been injected into the financial markets since then. Let’s take a look at where all of this has taken us.
Our diagnosis: The crisis was never overcome but merely deflected. In Hamburg and Kiel, the owners of HSH Nordbank, which is heavily burdened by shipping loans, are still desperately seeking a buyer today. If the bank ends up being liquidated, private investors holding more than €9 billion in deposits could suffer a total loss. However, banks are no longer the only ones affected by the crisis, with pension funds and life insurance companies now slashing their customers’ claims. Home-loan banks are also increasingly in distress.
Prognosis: The next crash is looming, because the causes of the last crisis have not been mitigated yet.
It is high time we imposed simple but tough rules.
Some 34,000 pages of regulations have been issued since the outbreak of the crisis. It has done little more than paper over the fact that the financial system is still more of a threat than a benefit to the real economy. Take, for example, the “too big to fail” theory: Investors know that the government will have to bail out a major bank with taxpayer money, meaning that such banks enjoy an implicit state guarantee and are thus able to refinance at more favorable rates.
Unfortunately, no one ever really considered reducing the size of these lenders. Instead, regulators focused on capital increases and procedures to liquidate ailing banks. As a result, the total assets of many large banks have continued to grow. Our federal government ensured that large banks were able to use internal models to understate their risks and capital requirements, thus increasing the risk to society.
Treatment: It is high time we imposed simple but tough rules. This includes a debt limit for banks and shadow banks, and a stringent equity-to-assets ratio of 10 percent, so that banks are held accountable for losses, rather than the taxpayers. Furthermore, the government should stop implicitly guaranteeing major banks, thus giving them an unfair competitive advantage.
Finally, we need rules to ensure that longer-term risks are also taken into account. Banks are still investing billions in companies that burn coal to generate electricity, thereby heating up the climate crisis. Meanwhile, the financial sector should not fund new speculative bubbles and dangerous, undesirable real-estate developments, but instead should be making sustainable investments in the environmentally friendly modernization of our economy.
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