13 May 2019

"The European banking regime has shown that it has teeth"

At the Federal Ministry of Finance, representatives from politics, the financial industry and academia discussed the reforms of financial market regulation

Is the German financial system more stable today than it was ten years ago? Were the post-crisis reforms successful, and what problems should the legislator tackle in financial market regulation now? These and other questions were at the center of a discussion at the Federal Ministry of Finance (Bundesministerium für Finanzen, BMF) in Berlin at the beginning of May. There, Rainer Haselmann and Mark Wahrenburg (both SAFE & Goethe University) presented a study on the evaluation of the macroeconomic and financial effects of the reforms of European financial market regulation in the German financial sector since the financial crisis. Together with Professor Jan Krahnen (SAFE & Goethe University), Haselmann and Wahrenburg are responsible for the SAFE study, which was commissioned by the BMF and published in mid-March.

First, Rainer Haselmann presented the results of the evaluation in a compact form to around 100 listeners. According to him, overall, the reforms of financial market regulation have achieved the objectives pursued. As an example, he referred to the Bank Recovery and Resolution Directive (BRRD), which would have had a positive effect on market discipline. "Especially for weakly capitalized banks, lenders demand a ´bail-in` premium," said Haselmann. Regulation in some areas, though, would be too complex and causes high costs. "Especially small banks and very large credit institutions are affected disproportionately", said Haselmann. Medium-sized banks such as the Sparkassen- and Genossenschaftsbanken, on the other hand, would benefit from their association structures. The financial system as a whole would have become more resilient: In the event of a moderate crisis, Haselmann expects costs to be around 50 percent lower than before the reforms; in the event of another severe financial crisis, the figure would be around 30 percent.

Practical test for large institutes still pending

In the subsequent panel discussion, Mark Wahrenburg attested that the legislator had taken the right steps after the Lehman crisis. Compared to the period after the Great Depression of 1929, when hardly anything happened in regulation in Europe, the legislator had pursued an intensive program.

However, it would be still too early to rule out involving taxpayers at a new banking crisis, said Jörg Kukies, State Secretary at the BMF. "The European banking resolution regime has shown that it has teeth – but in a good economic situation," said Kukies. The bail-in concept could work, but the practical test for large credit institutions is still pending, he said.

Bettina Stark-Watzinger (Free Democratic Party, FDP), member of the Bundestag and Chairwoman of the Financial Committee, argued for more adequacy in banking regulation. "Simple rules are advantageous, but not always possible," said Stark-Watzinger. Problems such as the state-bank nexus about government bonds or non-performing loans in the balance sheets of many credit institutions would be still unsolved. It is important to create a genuine capital market union. Matthias Bergner of the German Savings Banks Association (Deutscher Sparkassen- und Giroverband, DSGV) criticized the abundance of rules with high information costs also for medium-sized banks. "We are slowly reaching the limits where regulation is changing the supply of credit," said Bergner. Kukies, on the other hand, was optimistic that there could be soon reliefs for smaller institutions without increasing the systemic risk.

Mark Wahrenburg pleaded for regulation appropriate to the specific bank. "At present, banks that are beyond all doubt in terms of equity are also subject to the same procedure as weaker banks. In these cases, there is room for reliefs. According to him, the number of supervisory contacts for banks needs to be reduced, especially with a looking at the European market. "We urgently need to become more European," Kukies said. Despite the Banking Union, there would be still too many special rules that would make the cash flow more difficult. The aim should be to make the banking industry even more European, Kukies said.

The Policy Report No.1 can be found here.