Prof. Dr. Hannes Rehm, Head of Germany’s Bank Resolution Funds, Speaks at ZEWPublic Events
On 31 May 2011, Prof. Dr. Hannes Rehm, spokesman of the German Federal Agency for Financial Market Stabilisation, gave a speech on the causes and consequences of the financial crisis within the Mannheim Economics and Currency Dialogues series at ZEW. ZEW President Prof. Dr. Dr. h.c. mult. Wolfgang Franz welcomed around 150 guests to the event. The Mannheim Economics and Currency Dialogues series focuses on topics regarding the banking industry and is supported by the association of banks Rhein-Neckar Mannheim (Bankenvereinigung Rhein-Neckar Mannheim).
“A crisis is a productive state. You simply have to get rid of its aftertaste of catastrophe.” By quoting the Swiss author Max Frisch, Rehm started off his speech. This insight was particularly true for the financial market crisis, he said. To overcome this crisis, the banking industry, the international banking regulatory agencies as well as fiscal policy had to look ahead as well as draw their lessons from the crisis. To do so, a thorough cause study was necessary, Rehm added. In particular, the expansive monetary policy of the US-American Federal Reserve System (Fed), the deregulation of international financial centres and the financial market players’ excessive pursuit of profits had lead to the financial market crisis. Due to these factors, a financial market sector that separated from the real economy was created. The consequence was the subprime crisis which reached its peak in the collapse of the American bank Lehman Brothers.
The ffirst lesson drawn from this maldevelopment had to be a rethink in the banking sector, Rehm said. Banks had to open up new long-term business models which, once again, coincided with the real economy. They had to concentrate on their key competencies and again become aware that business is based on responsibility and trust whereas the banking model of the global players had partly lost its legitimacy since international banking activities and international locations were difficult to supervise.
Basel III – Regulatory answer to the crisis
Furthermore, new regulatory rules were necessary. According to Hannes Rehm, Basel III was the right approach as this new regulatory framework aimed first and foremost at introducing stricter equity capital requirements in order to reinforce the banks’ capacity to bear losses. He therefore approved the plan to bring the total equity requirements to seven per cent during the coming years. He also considered narrowing the definition of core capital as an important step in order to improve stability in the banking sector. Additionally, the introduction of a leverage ratio, which indicated the debt ratios of banks, increased transparency in the financial markets.
Lastly, the international banking regulation policy had to learn its lessons from the crisis. The state should not give in to blackmail by the banks based on their systemic relevance. The “too big to fail” argument was socio-politically unacceptable in the long term. On the contrary, the state had to be able to intervene in financial markets earlier and to liquidate banks safely. In order to achieve these goals, the cooperation of the community of states was of great importance, Rehm pointed out. The implementation of Basel III was a first step towards this direction. Another proposal aimed at separating retail banking from investment banking as is already the case in the United States. The United Kingdom is expected to follow this course. A closer and more institutionalised cooperation between banking supervisory authorities was necessary in order to prevent banks from relocating risky banking operations to unsupervised areas. Moreover, it was appropriate that financial institutions bore a share of the costs of systemic risks within the framework of an international banking protection system.
Additionally, financial policy also had to draw its lessons from the financial market crisis. Rehm stressed that the financial market crisis should not be regarded independently from the government debt crisis. The Unites States but also countries from the European Union, such as Greece, Portugal and Ireland had to consolidate their public finances and introduce reforms necessary to improve their long-term competitiveness.
You can only lose trust in the markets once
Of course, the implementation of global regulations for the banking sector and a coordination of national policy was not an easy task, said Rehm. Although progress had been made in the European Union, for example with regard to the regulations for hedge funds or the compensation system for bank managers, aligning financial regulations on a global scale would take a long time. Therefore, it was of great importance that Germany set a good example by implementing different measures, such as a levy on banks, which would increase the banks’ share of the costs of future financial crises or the German bank restructuring law (Restrukturierungsgesetz), which enables an orderly liquidation of financial institutions.
At the closing of the presentation, Hannes Rehm highlighted that a return to values such as trust, decency and honesty was also an important conclusion drawn from the crisis. This was especially true for the world of business. Toemphasisethis aspect, he quoted the banker Gerson Bleichröder, who said that money could be lost any time, the trust in markets and business partners only once.