ZEW President Wolfgang Franz on the “Financial Markets Crisis”Opinion
The economic expectations of financial market experts, which are surveyed by ZEW on a monthly basis, has not worsened since mid-October and are thus below the historical average. Based on the information currently available, it seems that the downward adjustments in the expectations regarding the economic development have come to an end. Whether this means that we have left the financial market behind us, is, however, questionable, since not all cards are on the table, and the implications for economics policy are still unclear.
The majority, if not all, culprits of the financial market crisis can be found in the United States, where an expansive monetary policy and regulatory benefits allowed prospective buyers on real estate markets to obtain low-interest loans which exceeded their financial capabilities. This was made possible due to the criminal neglect of financial institutions to carry out credit assessments. In addition to the housing prices, which have been dropping for months, many of these mortgages were issued with floating rates and involved, at least in the beginning of the crisis, very low interest rates. These developments have – in view of the numerous interest rates adjustments carried out in the past weeks – resulted in an increasing risk of default for these credits. This is putting an even greater strain on banks – which includes German credit institutes – who hold and will now have to re-evaluate such dubious credit claims. There is no telling what the future will bring for us or for the individual banks. In the face of these imminent risks, it would be ill-advised to give an all-clear and say that we have overcome the financial crisis. The other reason why the financial crisis will continue to occupy us is that it is important to learn from the crisis so as to prevent – or at least prepare for – such negative developments. Among other things, this means addressing the rules of banking supervision, an issue which has been highlighted in the annual report of the German Council of Economic Experts. In this context, it would be necessary to integrate banking supervision into the European System of Central Banks. Due to political resistance, however, implementing this measure will most likely remain difficult for the foreseeable future. It is therefore crucial that reform efforts are undertaken in the Member States, including Germany. In the cases of the Industriebank and the Landesbank Sachsen, regulators were well aware of the problematic banking practices. While they expressed their criticism, it appears that they saw no reasons or legal grounds for intervention. As these cases show, it is hardly efficient to assign the responsibility of the ongoing supervision to the Deutsche Bundesbank, while the Federal Financial Supervisory Authority deals with particularly problematic cases. There are several reasons in favour of transferring all supervisory competencies to the Deutsche Bundesbank, which would, for instance, allow for the sharing of information between monetary policy and banking supervision authorities. This holds particularly for those cases which require the central bank to assume the role of the lender of last resort and provide liquidity support to illiquid, but solvent banks. A further benefit is the Bundesbank’s high degree of political independence compared to the Federal Financial Supervisory Authority, which is subject to both legal and technical supervision by the Federal Ministry of Finance. The independence of Deutsche Bundesbank should, as far as possible, also apply to the functions entrusted to the Bundesbank within the framework of the common banking supervision. Policymakers must keep this in mind, since a situation may arise in which taxpayers will have to bear to costs of solving the problems in the banking sector, through, for instance, lower profit margins for the Bundesbank.