15 Nov 2018

Gerhard Schick: Central Problems in the Financial Sector Are Still Unsolved

SAFE Policy Lecture: Gerhard Schick, Member of Parliament for the Green Party, presents the goals of the "Finanzwende" civil movement

"Someone who leaves the Bundestag must be frustrated – this is what many newspapers wrote. But that is definitely not the case!" At a SAFE Policy Lecture on 12 November, Gerhard Schick, Member of the Parliament for the Green Party, talked about his motivation to give up his mandate at the end of the year and to focus on working with the "Bürgerbewegung Finanzwende". Further, he spoke about the goals of the organization founded this year. It is an independent part of the international network of the non-governmental organization "Finance Watch" in Brussels.

Schick has been a member of Bundestag since 2005 and was until 2017 fiscal speaker for the Green Party. "You can accomplish a lot as a politician in the Bundestag," said Schick and named exemplary the investigation committees for the government rescue of Hypo Real Estate and for the Cum-Ex transactions where he was involved. Many failures were thus revealed, said Schick. However, now is the time to do something else - not alone but with like-minded people above party lines in the "Bürgerbewegung Finanzwende". According to Schick, it is going to be a counterbalance to the lobby of the financial sector and will advocate for the interests of consumers in the financial market. The aim is to put fiscal policy topics on the agenda again and again and to make the financial sector more sustainable and stable. "We need a functioning finance sector that solves our problems - not the other way around," said Schick. In the group, Schick pointed out, more can be achieved than an individual Member of the Bundestag can.

From Schick´s view, central problems in the financial sector are still unsolved. He named four key problems in his presentation: First, the too-big-too-fail problem persists despite the fact that Germany had out of necessity spent 68 billion euros on bailout during the crisis. Today, bank merges are already discussed again without sufficiently addressing the risks. "Obviously, many things have already been forgotten," Schick said. Taxpayers would still bear the risks and not the shareholders.

Against high-frequency trading and commission-driven advice

From Schick´s perspective, another problem is high frequency trading, which consumes enormous resources and from which only a few benefit. "High frequency trading brings something to some investors, but it harms the long-term oriented ones" said Schick. There is no point to fight a possible abuse within the high frequency trade by law. Rather, it must lead to a real "speed limit" in the financial markets which makes very short-term trades unprofitable. Schick commented similarly critical on money market funds and their repayment pledge. In the crisis, these are not maintainable, said Schick. If money would be withdrawn quickly from such funds, this could cause a new crisis.

Fourth, for Schick, commission-driven customer service is problematic because it leads to poor results. Although there have been various attempts by the legislator for better regulation in the past, it failed because of "immense resistance" from the industry. From the point of view of Schick, the basic problem still is the discrepancy between the customer and the company's interests. "Financial advisers should act like tax consultants exclusively in the interest of the customer," said Schick.

He does not believe that the system can change positively on its own. At the latest, in Schick´s view the new revelations about Cum-Ex transactions have nullified this hope. "There is a high level of crime in the financial industry," Schick said, referring to examples of flawed advice for clients and various price manipulations in recent years. There was a culture in the industry that allowed everything, Schick said. At the same time, the financial sector is generating huge risks, warned Schick: in the past, world economic crises were almost exclusively triggered by the financial sector. Alarming for him is the growth in debt levels worldwide.

As Schick pointed out, legislative regulation has done a poor job: "We have changed the parameters, but the system as a whole has not become safer." Central promises for better regulation after the last financial crisis have not been fulfilled, said Schick. This crisis is also not over yet, said Schick with a view to bad boat loans in the balance sheet of the Nord LB and on the current, ultra-loose monetary policy in the euro area. "Monetary policy covers a lot. But a real clean-up of the financial sector is still pending," said Schick.