What is at the heart of the current European financial crisis: deficiencies in the banking sector or excessive government debt and political mismanagement? This question was discussed by Josef Ackermann, Peer Steinbrück and Otmar Issing together with academic scholars in Berlin on December 15th. A major point at issue was whether the banking sector shall incur liability for credit defaults or not. The legitimacy of political decisions is being confronted by urgent re-financing needs. Representatives of the event’s organizers, European School of Management and Technology (ESMT), Hertie School of Governance and the House of Finance/Goethe University Frankfurt, enriched the discussion with well-founded and original explanatory approaches.
Differences in the speakers’ opinions became obvious from the outset, in the first keynotes of the first panel. Josef Ackermann made a case for central demands of the financial sector: no further haircut on government bonds and no restrictions on banks’ scope of action. The Chairman of the management board of Deutsche Bank also voiced harsh criticism against the recent stress-test conducted by the European Banking Authority (EBA): “The tightening of capital requirements was an arbitrary change of rules during the process – in times of extremely fragile markets – and is not suited to re-establish confidence.” According to Ackermann, the principal problem is the government debt crisis, whereas the level of equity ratio in a stress-test is less relevant. The most pressing issue, in his opinion, is the need to re-finance 500 billion Euros of bank liabilities and 700 billion Euros of government debt in the PIIGS countries.
In the eyes of Peer Steinbrück the explanations of Josef Ackermann do not go far enough. The SPD politician referred to the deregulated system and the banks’ hunger for returns. He brought to mind the mistrust within the financial system and the current collapse of the interbank market. Liquidity is being hoarded only at the European Central Bank (ECB). In his view, those responsible for the crisis were not held liable, rather state governments were forced to stand in. “When the creditor does not incur liability, when risk and liability are no longer connected, we face a situation that contradicts all market principles.” Steinbrück also made the point that volumes of high-risk transactions without real basis are increasing exponentially which is politically unacceptable and highly risky for the stability of the economy and society as a whole. Politics needs to impose the principle that every market, every market participant and every product must be subjected to oversight and regulation.
Otmar Issing demanded to enforce that the financial sector incur liability – not in hindsight but at the latest when the ESM is introduced. “We must rule out that tax payers have to take on losses again. When the principle of responsibility is undermined, the legitimacy of the market economy is at stake and democracy is in danger.” The ECB’s previous Chief Economist approves of a higher equity ratio for credit institutions – “well above nine per cent” – but, as opposed to the EBA’s claims, he pleads for anti-cyclical requirements and an appropriate time frame. Further critical issues in Issing’s mind are higher capital requirements for systemically important banks, regulation of shadow banking and more market transparency.
Strengthening the Rights of Control
In the second panel, Helmut Siekmann, House of Finance/Goethe University Frankfurt, attributed current problems mainly to irresponsible borrowing as well as irresponsible lending. With respect to risk and liability he defended the banking sector: “It is established in a number of regulatory directives, national provisions and laws that government bonds from the EWR are indiscriminately risk free. When banks act accordingly it may be irresponsible but, in doing so, they follow the legislator’s fixing.” According to the Professor of Money, Currency and Central Bank Law, reasons for the current instabilities lie, among other things, in the extremely increased money supply, in the aggregated balance-sheet total as well as in the growing connection of default risk between financial institutions and transactions. Siekmann pleaded for a future re-connection of liability, risk and control. A central point for him in this respect is parliamentary control, control by audit courts as well as a strengthening of the banking supervisory law. “It has to be avoided that public banks and constructions like the EFSF can pile up risks that are capable of ruining a national budget.”
Henrik Enderlein, Hertie School of Governance, drew attention to the connection between state and banks. The correlation between the balance sheets of banks and states has been underestimated, he said. “To keep banks alive, a bail-out package of nearly 500 billion Euros was tied together. This should help banks to buy government bonds, whereas the state in turn uses these to implicitly guarantee bank balance sheets.” This construction was caused by the fact that German law does not provide for bank insolvencies. Protected by implicit state guarantees big banks have broadened their investment banking activities since the end of 1990s.
According to Enderlein, the relationship between politics and banks needs to be reformed to end the current state of implicit public liability. The Professor for Political Economy mentioned as one possibility a separation of commercial and investment banking, but granted that implementation of this would be difficult.
ECB as the only Provider of Liquidity
In the last keynote, Jörg Rocholl, European School of Management and Technology, pointed out that the ECB’s deposit facility is being used extensively. As especially banks in countries with debt problems hold many unsecure bonds, the provision of liquidity by the European banking system came to a halt. Therefore banks were forced to approach the ECB to receive urgently needed money – a further reason for the collapse of confidence in the interbank market. Rocholl pleaded for a restructuring of banks on an appropriate scale, even if this measure would be expensive, rather than to continue on the present path.
Whereas participants agreed in the judgment that banks should be held liable and state guarantees should be conditional, opinions about the ways forward turned out to be diverse in the following discussion between panelists and audience. Participants did not put much hope on the decisions of the recent EU summit. These were said to neglect current pressing needs – in the words of Henrik Enderlein: “The house is burning and we decide to prohibit playing with fire.”
What is at the heart of the current European financial crisis: deficiencies in the banking sector or excessive government debt and political mismanagement? This question was discussed by Josef Ackermann, Peer Steinbrück and Otmar Issing together with academic scholars in Berlin on December 15th. A major point at issue was whether the banking sector shall incur liability for credit defaults or not. The legitimacy of political decisions is being confronted by urgent re-financing needs. Representatives of the event’s organizers, European School of Management and Technology (ESMT), Hertie School of Governance and the House of Finance/Goethe University Frankfurt, enriched the discussion with well-founded and original explanatory approaches.
Differences in the speakers’ opinions became obvious from the outset, in the first keynotes of the first panel. Josef Ackermann made a case for central demands of the financial sector: no further haircut on government bonds and no restrictions on banks’ scope of action. The Chairman of the management board of Deutsche Bank also voiced harsh criticism against the recent stress-test conducted by the European Banking Authority (EBA): “The tightening of capital requirements was an arbitrary change of rules during the process – in times of extremely fragile markets – and is not suited to re-establish confidence.” According to Ackermann, the principal problem is the government debt crisis, whereas the level of equity ratio in a stress-test is less relevant. The most pressing issue, in his opinion, is the need to re-finance 500 billion Euros of bank liabilities and 700 billion Euros of government debt in the PIIGS countries.
Undermining the principle of liability: A Threat to Democracy and Market Economy
In the eyes of Peer Steinbrück the explanations of Josef Ackermann do not go far enough. The SPD politician referred to the deregulated system and the banks’ hunger for returns. He brought to mind the mistrust within the financial system and the current collapse of the interbank market. Liquidity is being hoarded only at the European Central Bank (ECB). In his view, those responsible for the crisis were not held liable, rather state governments were forced to stand in. “When the creditor does not incur liability, when risk and liability are no longer connected, we face a situation that contradicts all market principles.” Steinbrück also made the point that volumes of high-risk transactions without real basis are increasing exponentially which is politically unacceptable and highly risky for the stability of the economy and society as a whole. Politics needs to impose the principle that every market, every market participant and every product must be subjected to oversight and regulation.
Otmar Issing demanded to enforce that the financial sector incur liability – not in hindsight but at the latest when the ESM is introduced. “We must rule out that tax payers have to take on losses again. When the principle of responsibility is undermined, the legitimacy of the market economy is at stake and democracy is in danger.” The ECB’s previous Chief Economist approves of a higher equity ratio for credit institutions – “well above nine per cent” – but, as opposed to the EBA’s claims, he pleads for anti-cyclical requirements and an appropriate time frame. Further critical issues in Issing’s mind are higher capital requirements for systemically important banks, regulation of shadow banking and more market transparency.
Strengthening the Rights of Control
In the second panel, Helmut Siekmann, House of Finance/Goethe University Frankfurt, attributed current problems mainly to irresponsible borrowing as well as irresponsible lending. With respect to risk and liability he defended the banking sector: “It is established in a number of regulatory directives, national provisions and laws that government bonds from the EWR are indiscriminately risk free. When banks act accordingly it may be irresponsible but, in doing so, they follow the legislator’s fixing.” According to the Professor of Money, Currency and Central Bank Law, reasons for the current instabilities lie, among other things, in the extremely increased money supply, in the aggregated balance-sheet total as well as in the growing connection of default risk between financial institutions and transactions. Siekmann pleaded for a future re-connection of liability, risk and control. A central point for him in this respect is parliamentary control, control by audit courts as well as a strengthening of the banking supervisory law. “It has to be avoided that public banks and constructions like the EFSF can pile up risks that are capable of ruining a national budget.”
Henrik Enderlein, Hertie School of Governance, drew attention to the connection between state and banks. The correlation between the balance sheets of banks and states has been underestimated, he said.
“To keep banks alive, a bail-out package of nearly 500 billion Euros was tied together. This should help banks to buy government bonds, whereas the state in turn uses these to implicitly guarantee bank balance sheets.” This construction was caused by the fact that German law does not provide for bank insolvencies. Protected by implicit state guarantees big banks have broadened their investment banking activities since the end of 1990s.
According to Enderlein, the relationship between politics and banks needs to be reformed to end the current state of implicit public liability. The Professor for Political Economy mentioned as one possibility a separation of commercial and investment banking, but granted that implementation of this would be difficult.
Enderlein demanded that states should call in conditions for public credits and guarantees to banks – analogous to states – as well as strengthen control mechanisms. The lack of controls contributed considerably to the financial crisis.
ECB as the only Provider of Liquidity
In the last keynote, Jörg Rocholl, European School of Management and Technology, pointed out that the ECB’s deposit facility is being used extensively. As especially banks in countries with debt problems hold many unsecure bonds, the provision of liquidity by the European banking system came to a halt. Therefore banks were forced to approach the ECB to receive urgently needed money – a further reason for the collapse of confidence in the interbank market. Rocholl pleaded for a restructuring of banks on an appropriate scale, even if this measure would be expensive, rather than to continue on the present path.
Whereas participants agreed in the judgment that banks should be held liable and state guarantees should be conditional, opinions about the ways forward turned out to be diverse in the following discussion between panelists and audience. Participants did not put much hope on the decisions of the recent EU summit. These were said to neglect current pressing needs – in the words of Henrik Enderlein: “The house is burning and we decide to prohibit playing with fire.”
Mindfully Resisting the Bandwagon – IT Implementation and Its Consequences in the Financial Crisis 
