On 19 April, Theodor Weimer, Board Spokesman of the HypoVereinsbank, and Jan Pieter Krahnen, Director of the Center for Financial Studies and the Center of Excellence SAFE, discussed the implications of new banking regulations on systemic stability and competition. The talk was part of the SAFE Policy Center series on structural reforms in the European banking sector.
Weimer admitted that the banking sector had made mistakes before the financial crisis. Banks had taken too much risk while having only a low capital endowment and thus infected each other during the crisis. Therefore, a better regulation of the banking sector is necessary. At the same time, Weimer warned that too many new regulations would strongly increase the costs for banks. This could especially threaten the existence of smaller banks. Customers would also suffer because banks would pass the costs of regulations on to them. As an example, Weimer pointed to the Liikanen Group´s recommendation to separate commercial banking and market making activities from customer-related business. This would make banking automatically more expensive, he said. According to Weimer, there is also no reason for the introduction of such a separation because the universal banking system had proved robust so far.
Krahnen, who was in fact a member of the Liikanen Group, replied that the objective of the Commission was not to decide which banking system was better. It rather tried to find a possibility to reform the financial sector in a way that protects taxpayers if banks get problems. To achieve this, it is important to reduce the dependences between institutes, the systemic risk, and make a bank resolution possible even if banks are linked to each other.
Krahnen also questioned Weimer's reservations. Prices would change through more regulation but the new regulatory situation would affect all banks equally so that a new balance in the banking sector would be regained.
Both discussants rejected the "Liikanen light" proposal of the German government that plans to cut off proprietary trading, but not trading on behalf of customers and market making. Splitting up these activities is nearly impossible. If this proposal were to be implemented, disproportionate costs would arise in relation to the increase in stability.
Apart from the separation of commercial banking and customer business, Krahnen suggested the emission of a new type of debt, bail-in debt, to stabilize the financial market and discipline banks. Bail-in debt would always and without warning incur liability when a bank gets in trouble. This kind of debt should not be hold by banks in order to reduce the danger that other banks would become liable as debt holders, when one bank gets into trouble, which could result in a collapse.
For Weimer it doesn't make any sense to introduce bail-in debt. Debt holders always have to reckon on being liable during a crisis. But according to Krahnen this is exactly what did not happen during the crisis in 2007 because politicians had been afraid that when banks as debt holders were made liable, this could provoke an even greater crisis.
Press reports:
- Frankfurter Allgemeine Zeitung: "HVB-Chef Weimer warnt vor 'Bombe der Zinswende'"
- Handelsblatt: "Deutschland schießt sich selber ins Knie"
- ntv: "'Ich vernichte Aktionärsvermögen' – HVB-Chef spricht Klartext"
