Meeting of the Board of Directors of the Association of German Banks - Press conference

24 November 2008 - Check against delivery

Klaus-Peter Müller
President of the Association of German Banks, Berlin, and Chairman
of the Supervisory Board of Commerzbank AG, Frankfurt am Main

Ladies and gentlemen,

I have been a banker since 1962 and in all this time I have never experienced such a deep global financial crisis as the one we have been witnessing for over a year. And I would never have thought such a crisis possible.

Since the summer of 2007, there has been a lot of talk about mistakes. And there is no doubt that banks, too, have made mistakes. But when we look back at the events of the past few months, 15th September 2008 stands out as the date on which the crisis escalated to a new level. This was the day on which the US government decided against rescuing one of the biggest investment banks in the world – Lehman Brothers. This exacerbated the already tense situation on the financial markets in dramatic fashion.

This decision was a mistake. It turned the subprime crisis, which had its origins in the US, into a worldwide conflagration. Fears by bankers that the collapse of Lehman Brothers could also bring down other institutions caused the already less-than-liquid markets to completely dry up. Interbank business came virtually to standstill. The global financial industry held its breath.
Since then, fighting the financial market crisis has moved to the top of the political agenda as well. With the support of the financial industry, governments have taken firm counter-measures. First, the US put together a rescue package. This was followed by an agreement among the G7 countries on how to combat the crisis and coordination of the further course of action at EU level.

In Germany, the so-called Financial Market Stabilisation Act was passed quicker than any other law before it – a legislative achievement which deserves the utmost respect. Financial institutions – as I have repeatedly said – owe the government their thanks for this. Its decisive response prevented much worse for the German banking sector and the economy as a whole. The government was up to this challenge. But it also needed to act, as there was the danger of the entire financial system being destabilised.

Through their resolute crisis management, the European Central Bank and the Bundesbank have also played a major part in preventing such a situation. They have supplied the markets with liquidity without losing sight of price stability. I am sure that the ECB will continue to use any scope there is for interest rate cuts.

The stabilisation programme is kicking in
Like similar initiatives in other countries, the German Financial Market Stabilisation Act is designed to restore confidence on the financial markets and ensure that the banking system continues to function. This is naturally very much in the interest of the private banks, and it is why we are playing a constructive role.

In the meantime, a few banks have approached the Financial Market Stabilisation Fund with a view to strengthening their equity base or seeking protection under the government’s guarantee shield. I am sure that others will follow suit.

There have been no negative market effects for the banks using the Stabilisation Fund. Those banks which are not seeking assistance have their own good reasons for not doing so. We still believe that the stabilisation measures are unfolding their desired effect and supporting the economy as a whole. This should get liquidity flowing among banks again.

Banks are not deciding quickly enough for many politicians whether or not they wish to use the Stabilisation Fund. However, it should be remembered that highly complex issues are involved and that every bank first has to think very carefully about how it intends to proceed. This takes time. What is more, the Stabilisation Fund first has to be up and running.

Under the new law, applications to the Stabilisation Fund have to be made by 31st December 2009. The government will be pulling out of banks again sometime soon after that. Market-friendly ways of doing so have to be found. It is in the private banks’ own interest in any case to leave the shield again as quickly as possible, as fund assistance is differentiated, tied to conditions and by no means “gifted”.

Setting the course for the future
While the government and the financial industry are currently focusing on on-going crisis management, action needs to be taken at the same time so that financial market crises, which we will not be spared in the future either, can be recognised earlier and their impact limited.

So how can risks be controlled better without hindering the financial markets and thus endangering their functioning and efficiency? Healthy financial markets are, after all, a key condition for macroeconomic growth.

Against this backdrop, the German government – particularly Chancellor Angela Merkel and Finance Minister Peer Steinbrück – are also working hard on the question of what lessons should be learned from the financial market crisis. While there may be differences of opinion on details, we support in principle most of the proposals that have been submitted. I will come back to this at more length later.

However, we must be careful not to throw out the baby with the bathwater. After all, despite what you may repeatedly hear and read, banks in Europe were – and are – by no means unregulated. No other business sector is regulated as tightly as banking. May I just mention here the ongoing bank and market supervision, the EU’s Financial Services Action Plan, comprising 42 individual measures, and the introduction of the new and highly detailed capital rules under Basel II. We have supported the last two projects from the start.

In its current crisis management, the government has acted resolutely and, the same time, very prudently. It should stick to this course when it comes to drawing longer-term regulatory conclusions. It is also true that – if we want to avoid distorting competition – an international financial market crisis calls for international responses. I am well aware of how difficult that is, yet it is necessary.

More transparency, better regulation
I should now like to take a closer look at four points around which the discussion is currently revolving.

Firstly: creating more transparency
Action is first required here from market participants themselves. But the general rule should be that they only conduct business they understand and whose risks they are able to gauge well enough. In the past, many products have been made too complicated and, when assessing the riskiness of such products, banks have relied too much on the opinion of credit rating agencies. This will not happen any more in future, as banks have drawn the right conclusions. The opinion of credit rating agencies is no substitute for their own assessment of the positions they enter into.

Transparency also means banks continuously improving their internal risk management systems to identify problems reliably at an early stage. Supervisors will – and must – keep an eye on this as well.

The private banks are also prepared to make external reporting more transparent. In addition to complying with the existing disclosure requirements as part of regular financial reporting, we shall be improving the way risks and management systems are presented.

More transparency is being created at EU level as well. For instance, the European financial industry associations have produced a report on the situation on the markets for structured products. In addition, investors now receive standardised information on these products and their performance. We therefore support the government’s call for the establishment of an international central register.

The rating agencies also need to refocus. The International Organization of Securities Commissions (IOSCO) renewed its code of conduct in May 2008. This code is designed to, among other things, help prevent conflicts of interest. When issuing their ratings, the rating agencies will also be required in future to make allowance for market trends and economic developments. In short, their methodologies must be state of the art. The rating agencies need to quickly remove the shortcomings that have been identified, and legislators and supervisors should stick as closely as possible to the IOSCO standards.

Secondly: establishing sustainable incentive systems
Banks and bankers are currently under fire, facing accusations that their greed helped fuel the financial crisis. It is worth taking a closer look here. The incentive structures at all banks are naturally under scrutiny. They must – and will – be corrected. All banks are working on appropriate remuneration models. We need a medium to long-term basis for fixing bonuses. The benchmark for managers’ pay must be a lasting contribution to a bank’s earnings and performance.

Banks’ profits in general are also repeatedly criticised in this connection. Let me make one thing clear: banks will also need reasonable returns in the future, too. Any other approach would be wrong and would ultimately only set back our economic system internationally. Like all other businesses, banks rely on making adequate earnings. This has got nothing to do with greed, but safeguards competitiveness and jobs – not only at banks.

Thirdly: improving supervision
The quality of supervision is a crucial feature of any financial centre. We have always pointed out that effective supervision is a “quality seal” for banks and the financial marketplace. What we therefore need is modern supervisory structures everywhere, like the successful BaFin-Bundesbank set-up in Germany.

In the European financial market, it is no longer enough, however, for supervisors to operate solely nationally and cooperate more or less well across borders. The current crisis has demonstrated this once again. This is why we have been calling for a number of years now for a European system of supervision to oversee cross-border banks. This is a difficult route, as ultimately it means that national sovereign powers will have to be transferred to an international body. Yet we see no alternative.

We have to tread a new path in regulation as well. The aim is no longer regulation, but better regulation. Regulation that does not culminate in a flood of new rules but gives banks clear-cut principles and monitors their application instead of trying to regulate every single case, which produces no more than superficial security. But this also means that supervisors will have to devote more attention in future to the question of how viable business models are.

This can only be achieved through an internationally coordinated approach, which takes me to my fourth point. The global financial summit, in which there were great expectations, is now behind us. Even if answers to some of the questions addressed have still to be found, the results of the meeting are, generally speaking, a step in the right direction.

The Washington summit also made clear how important it is to set up an international early-warning system to identify real estate bubbles in particular. It is now vital that the International Monetary Fund (IMF) is given sufficient resources and powers and that the Financial Stability Forum (FSF) obtains the required acceptance through an enlargement of its membership.

The heads of state and government have set up various working groups to deal with the pressing problems and presented an ambitious timetable for further action. It would be helpful if market participants were closely involved in the ongoing consultations.

That goes for accounting, for instance: In October, the International Accounting Standards Board (IASB) adopted changes to the accounting rules. In addition to this, we need further guidance on how fair value of financial instruments can be measured in dried-up markets.

It is not a question here of softening standards but of making sure that accounts reflect reality properly. This is the only way to prevent depreciation pressure on assets that is quite undesirable economically and – what is more – may actually aggravate potential problems.

It must, in addition, be ensured that rules are designed in such a way that risks – of special-purpose vehicles, for example – are captured fully in the accounts. Here, too, we need a uniform international approach.

Impact on the economy as a whole
But let me come back to the situation in Germany: What happens in the financial sector also affects the real economy – industry, the manufacturing sector and services. An economic slowdown – both internationally and in Germany – was actually on the cards, however, even before the onset of the financial crisis. Both trends are now reinforcing each other. We should therefore resist the temptation to immediately treat every problem at present as a consequence of the financial market crisis, causing us to lose sight here and there of the real reasons for them.

And we should avoid jumping to conclusions. Let me say once again: there is no credit crunch in Germany. In the third quarter of this year, lending to businesses and self-employed individuals actually grew. The private banks, which recorded a 13.5% increase in lending, made an over-proportionate contribution to this positive trend. While lending terms were tightened in the third quarter, this does not apply across the board, but mainly to large loans, syndicated loans and real estate financing.

There is no way round risk-sensitive pricing, however. And we should not forget one thing: German businesses are in much better shape than they were only a few years ago. They have more equity and better domestic financing facilities – even if this naturally does not go for every single business.

Investment and consumption in German have also received an additional boost from the package of measures put together by the government to safeguard jobs and encourage growth. The package must be seen realistically, however. A global recession calls for a swift and decisive response. The sharp drop in prices on many markets is already sparking fears of deflation. In this situation, concentration on providing quick stimulus to demand is vital. Tax cuts, particularly the withdrawal of the so-called “cold progression”, are needed to effectively address this weakness.

Criticism of the social market economy
The financial market crisis is having not only a macroeconomic but also a macrosocial impact. A few days ago, the Association of German Banks made the loss of trust caused by the crisis the theme of its “Schönhauser Forum” in Berlin, discussing it with numerous representatives from the political and academic sectors, the media and industry. It was repeatedly stressed that the stage should not be left to populists trying to discredit our economic system – the social market economy – in the wake of recent events.

Those who openly call the social market economy into question are not only shaking the cornerstones of our prosperity but also rocking the foundations of our welfare state and thus endangering social peace and stability in Germany. Those who seek to undermine our tried and tested economic system are ultimately jeopardising the prospects of future generations. Nobody can want this.

The private banks are firmly against any attempts to create the false impression that Germany is a hotbed of market radicalism and turbo-capitalism. Superficial finger-pointing, demagoguery and disparaging the social market economy are certainly not going to help us master the challenges. If, on the other hand, we act with the required degree of self-criticism, circumspection and determination, we have a good chance of emerging stronger from the crisis.