Berlin, Brussels, Frankfurt It was one of the central principles after the global financial crisis: governments and supervisors wanted to avoid having to support ailing banks again because they were “too big to fail” – too important to let them go bankrupt. But the recent bailouts for Silicon Valley Bank (SVB) in the US and Credit Suisse in Switzerland make it clear that this problem is still not solved.
“Cases like the SVB are an indication that the right conclusions were not drawn from the financial crisis,” says Clemens Fuest, President of the Ifo Institute. One could also speak of a “complete failure”. Steffen Saebisch, State Secretary in the Federal Ministry of Finance, admitted at a discussion event that the need for these rescue operations was “a bad signal”.
In addition, only customer deposits are guaranteed, shareholders and creditors have to accept losses. And at Credit Suisse, the central bank is the first to provide liquidity.
Nevertheless, the most recent turbulence has brought the question back onto the agenda: have politicians done enough so that they no longer have to bail out banks with state money?
“A large number of reforms have been initiated since the financial crisis in order to counteract the too-big-to-fail problem,” says Michael Schrodi, spokesman on finance for the SPD parliamentary group. “Banks have become more resilient and resolvable.”
“Now vulnerabilities in the financial system are being revealed”
However, European banks are also under pressure due to the turnaround in interest rates. Bonds owned by many institutes are worth significantly less. “Vulnerabilities in the financial system are now being disclosed,” says Andreas Audretsch, deputy leader of the Greens. For him it is clear: “We must now push even harder for the completion of the banking union, in which measures such as maximum debt ratios and a common European deposit insurance system stabilize the financial system.”
In fact, banking regulation in Brussels has suddenly regained its urgency. Finance Commissioner Mairead McGuinness told the European Parliament this week that there are lessons to be learned from the SVB crisis. ECB President Christine Lagarde will answer questions from parliamentarians on Monday, and Andrea Enria, head of the European Banking Authority, will come on Tuesday.
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McGuinness is now expected to swiftly present three bills to deepen the banking union. She had previously delayed this because of objections from some member states, including Germany. “I hope the draft laws will come soon,” says the spokesman for financial policy for the European People’s Party, Markus Ferber (CSU). “The Commission has to hurry because this also sends a signal of stability to the markets.”
This Monday, the President of the ECB will answer questions from parliamentarians,
(Photo: IMAGO/Panama Pictures)
The reform is intended to strengthen the second and third pillars of the banking union, i.e. bank processing and deposit insurance. Among other things, the resolution regime, which previously only applied to the largest banks, is to be extended to medium-sized banks. The EU supervisors should play a stronger role in resolution. In addition, the rules for national deposit insurance are to be standardized after a common European deposit insurance failed last year.
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But even against this relatively small increase in power for Brussels, the national supervisors are fighting back. “The member states see this as a question of national sovereignty,” says financial expert Sebastian Mack from the Jacques Delors Centre. “Then no longer every government can trick as it wants.”
Criticism of exceptions to Basel rules
On top of that, negotiations between the European Parliament, member states and the Commission on the implementation of the Basel Agreement on internationally agreed capital requirements for banks are ongoing.
The negotiators had agreed on numerous exceptions. There should be long transition periods before the new rules take effect. Smaller institutes are also excluded. The simplifications are expressly for banks with a simple business model that do not operate cross-border, says Ferber. “We have not released them from oversight duties, only from reporting duties.”
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Banking expert Mack sees this critically. “What is being discussed in Brussels is full of new exceptions. We should fully implement the Basel agreement,” he says. “The financial system is still very fragile.” Mack hopes that after the bankruptcy of the SVB the calls for more relaxed rules will fall silent. “In recent years, European banks have always complained that they are at a disadvantage compared to US banks because of the strict capital requirements,” he says. “Hopefully you won’t hear that argument anymore.”
The Social Democrats and Greens do not want to know anything about loosening the rules for the time being. “We currently see no need for broad-based deregulation of the banking sector,” says SPD finance expert Schrodi. The current turmoil in the financial markets has shown how important sound capital buffers and appropriate risk management are to ensure financial stability. Green politician Audretsch agrees: “Demands for less strict regulation are currently out of place.”
Banking lobbyists are preparing for tough times
Banking lobbyists have privately admitted that it is now becoming harder to promote easing of capital requirements. Position papers are already being adjusted by some associations. In a small circle, however, the lobbyists warn against going too far. SVB and Credit Suisse are special cases. The Swiss bank has not been able to get its problems under control for years, the SVB had a concentration of risk in the tech sector.
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The case of the Silicon Valley Bank has also shown that there are significant regulatory differences between the USA and Europe, explained the German banking industry (DK), which represents the interests of all banking associations. “This particularly affects the capital and liquidity requirements, which are significantly lower in the US for banks of this size.”
The discussion in the USA also revolves around these two points. After three smaller US banks collapsed within a few days, Democratic Senator Elizabeth Warren is calling for an official investigation. Among other things, she blames a change in the law from 2018 that exempted banks with total assets of up to $250 billion from some of the conditions imposed after the financial crisis. Previously, the limit was $50 billion.
According to a US banker, regulation for these smaller institutes urgently needs to be tightened again. They play a central role in the supply of credit in the US, so they must be adequately controlled and capitalized.
FDP: “A general increase in requirements and controls is wrong”
The financial policy spokesman for the FDP parliamentary group, Markus Herbrand, acknowledges the progress made in Germany and at the same time warns against regulatory exaggerations. The banks would meet the increased capital requirements. And in the event of an emergency, the rules developed after the financial crisis for the resolution of banks ensured rapid intervention.
“I therefore think that a general increase in requirements and controls is wrong,” says Herbrand. “In all discussions, we must not forget that the plan to remove all risk from the financial markets and to regulate every conceivable case in advance would be expensive if economic growth stagnated.”
Many in the German financial sector hope that the crisis will remain limited to individual cases. After a grace period, the tide could turn for the better, hope some lobbyists. Because then, from their point of view, it would have been shown that the existing capital regulations are sufficient.
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