Press conference following the meeting of the Board of Directors of the Association of German Banks
23 November 2009 - Check against delivery
Andreas Schmitz
President of the Association of German Banks, Berlin, and Chairman of the Management Board, HSBC Trinkaus & Burkhardt AG, Düsseldorf
Ladies and gentlemen,
The new CDU/CSU-FDP coalition government has been installed in office and is already hard at work. Chancellor Angela Merkel and her Cabinet face daunting challenges, particularly overcoming the worst economic and financial crisis in German history and getting the country fit for the future. The Chancellor is right when she says in a government statement that – quote – “much more is at stake than coping with the consequences of the crisis, and we are confronted with a rapidly changing global landscape”. Germany, she says, faces a severe test. The private banks expressly welcome it that the government has put the target of promoting growth high on its agenda.
There's no overlooking the fact that there has been a shift in geopolitical weight. Who talks about the G7 any more? Today, it's the G20. The international orchestra has more players. They come mainly from Asia: China, India or Indonesia are increasingly calling the tune. And no wonder – their markets have, after all, been hit much less by the crisis than US or European markets.
This shows that the current crisis won't stop globalisation – and a good job, too, as Germany profits from, and indeed depends on, globalisation.
But what it means at the same time is that if we want to keep pace economically with the international front-runners, we need a strong economy as well as big and strong banks to finance it.
The coalition partners have therefore already announced key fiscal measures: firstly, tax cuts for low- and middle-income employees and for families – this strengthens domestic demand and thus helps the economy; secondly, tax cuts for businesses. Both measures are extremely important to get the economy moving again.
But tax relief also has a drawback. It puts a further strain on public finances. This is why we shouldn't lose sight of the spending side – a lot of items still can and must be put under scrutiny here. I know that many people don't think it's right for banks to say such things at times like the present, yet it's still true all the same. Without sound public finances, the state will not be able to function properly in the long term. And what's more, national debt is a millstone around the necks of our children and grandchildren.
Tax cuts, however welcome they may be, always have to be vetted against this backdrop. Fiscal stimuli to growth are fine, but only if their aim is sustainability.
Ladies and gentlemen, the first step towards sustainability is the state and monetary policy-makers finding the right moment to exit “crisis mode” – even if the moment to do so hasn't come yet and choosing it is going to be difficult.
This means that monetary policy cannot simply continue in emergency mode. It must keep its primary target, price stability, in mind. So the virtually zero interest rate policy mustn't and won't last forever – ECB President Jean-Claude Trichet and Bundesbank President Axel Weber have already indicated that they're thinking about a change of strategy.
Government economic stimulus packages, however much these may have helped to soften the impact of the crisis, also need to be phased out in good time. Likewise, public support for the banking sector can't go on indefinitely. While the state may be a better owner at present for some banks, it isn't a better entrepreneur in the long term.
The bottom line is that the government, as the “rescuer of last resort” to which there was no alternative, must refocus its attention on its main task in our economic system: creating the conditions for growth, stability and employment, as well as setting the rules for competition and ensuring that these are complied with.
If one lesson needs to be learned from the crisis, it is this: we need a stabler financial architecture that is better able to absorb shocks to the markets. We need one worldwide because a global crisis on international markets calls for the same rules for all market participants everywhere.
But global coordination mustn't mean that proposals which are developed elsewhere should simply all be accepted. Proposals emanating from Anglo-Saxon countries usually pay little heed to the needs of the German banking sector, though this sector has an important function: financing the German economy.
But what is needed, ladies and gentlemen, so that Germany's banks can do their job or, in other words, meet their responsibility? I should like to focus on five points that are at the heart of the debate at present.
1. Ensure corporate finance
My first point, corporate finance, is a key one in my view. We don't yet have a general credit crunch in Germany. Nevertheless, we shouldn't waste any time. Together – meaning, first and foremost, banks and the business community, but also policy-makers – we must seek ways to prevent a credit crunch from kicking in after all. At the same time, the Association of German Banks believes that companies with a satisfactory credit rating will also be financed in the future.
The first two quarters of 2010 are causing us serious concern, as companies' accounts for 2009 will then be available. And these will in many cases reflect in black and white – or, more accurately, in red and white – the impact of the crisis in 2009, in which GDP has slumped by 5%.
This directly affects companies' credit ratings, with negative repercussions for banks. As a result, their ability to provide new loans will be restricted just when the upturn needs to be financed.
A condition for preventing this is reviving the securitisation market. We believe this is absolutely essential. Hold on a minute, some may say, wasn't it securitisation products that accelerated the crisis? Haven't banks learned any lessons after all?
Yes, they have. That is why I want to make one thing quite clear: there can be no going back to a securitisation policy that spread incalculable risks across the globe due to blind faith in rating agencies and that turned regional turmoil on the US mortgage market into an international financial crisis.
At the same time, if subject to strict quality standards and high transparency requirements, securitisations are the right instrument to enable banks to ease the pressure on their regulatory capital and then provide loans.
The CDU/CSU and FDP have shown admirable foresight by including the subject of loan securitisations in their Coalition Agreement. To restore investor confidence, the Association of German Banks is currently looking at how a premium segment for securitisations in the SME business segment can be established. That would make this product attractive again to financial investors such as insurance firms and pension funds.
But let me say once again: securitisations must – this we know – be quality products. So a vital criterion for us is that the loans earmarked for this purpose already figured in banks' balance sheets before securitisation and were not provided solely for securitisation purposes. Furthermore, a risk retention amount would help to re-establish confidence among investors. The government could help here if it or the Kreditanstalt für Wiederaufbau (the state-owned Reconstruction Loan Corporation) were to purchase tranches of, or guarantee, an issue.
2. Capital adequacy: avoid competitive disadvantages
Now to my next point, which also affects corporate finance: the proposal to limit banks' borrowing by means of a general leverage ratio. That would be likely to obstruct corporate finance in Germany.
Even if the differences in accounting between Europe and the US are overcome – and this is something we expect from supervisors – the leverage ratio must nevertheless be rejected. It would cancel out the risk-sensitive Basel II rules and, in addition, create false incentives.
Banks with a low-risk profile but large loan portfolios would be put at a disadvantage. If anything, a leverage ratio can serve as an early indicator of excessive growth in the size of a bank. But otherwise it would be at odds with efforts to make the financial system stabler and more crisis-resilient.
However, to avoid any misunderstanding, let me say that we do believe that the financial system generally needs to be backed by more regulatory capital – not across the board, but only where this has proved necessary in the crisis from a risk perspective. “More is more” is an adage that isn't always true.
In addition, the structure of the new capital rules and the timeframe for their implementation are crucial. Capital contributed by “silent partners” must be recognised as core tier 1 capital. What has proved to work in Germany so far mustn't just be thrown overboard – otherwise the wrong lessons would be learned from the crisis.
3. Enable banks to be wound up in an orderly way
There's been a lot of talk in recent weeks and months about the real or perceived problem of a bank's size. This is my third point. Suggested solutions range from capital surcharges to breaking up big banks.
But ladies and gentlemen, would it really help the German or European economy if we only had banks with a local or regional focus? Wouldn't it be more likely to hinder economic growth?
Looked at rationally, the stability of the financial markets doesn't actually depend on the size of banks at all; it depends on the riskiness of their business and their degree of connectedness in the market. It's not a question of “too big to fail”, but “too connected to fail” or “too risky”.
We've known since the US savings and loan crisis in the 1980s that even very small banks can be systemically relevant in terms of risk if they are closely interconnected. And as for the present crisis: Lehman Brothers wasn't especially large by international standards at the time of its insolvency, but it was highly connected to other financial institutions. The same goes for IKB or HRE, never mind Northern Rock. If further banks had been brought down, the consequences would have been catastrophic.
The aim must therefore be to better monitor and control how, why and through what channels risks are transferred across the financial markets. So that if a fire breaks out, it doesn't immediately turn into an inferno.
Particular attention needs to be paid to the interbank money market, the currency market and the derivatives market. We've already made some progress in the latter field. There are now special clearing facilities for credit derivatives, for instance, which isolate and thus limit risk.
As a basic principle: we have to put measures in place to prevent banks which get into difficulties from dragging others down with them. What we want to see on Domino Day – namely the first domino falling and a lot of others following – cannot be allowed to occur in the financial markets.
What policy-makers in Berlin are planning in this context makes good sense: a restructuring plan which will be triggered before a bank goes bankrupt. It will be important to ensure that, if the worst comes to the worst, key functions such as payments processing will continue to operate. The legislative proposals put forward by the outgoing German government, which have not yet been debated in parliament, offer an initial basis – even if the discussion has now moved on. This is shown by the proposals issued for consultation by the Basel Committee and the European Commission, for example.
Essentially, the task is to mesh together banking supervision law, which is already largely harmonised across the EU, and insolvency law, which remains essentially national.
Today, admittedly, there are still more questions than answers surrounding this issue. This makes it more important than ever to avoid shooting from the hip.
A word, finally, about the oft-cited “living wills” and “funeral plans” for banks. These are striking expressions, and not everybody understands them to mean the same thing. What is beyond doubt is that banking supervisors should be in a position to draw up restructuring or liquidation strategies without delay. They must be able to act swiftly in a crisis – not infrequently in consultation with other national supervisors.
But it would be a mistake to force banks to concentrate first and foremost on organising themselves in such a way as to make it easy to wind them up in the event of a crisis. This would make no economic sense, not least because group-wide capital, liquidity and risk management would be rendered impossible.
4. Financial transactions tax: avoid burdening customers
Another highly popular proposal at present is to make banks pay more for the crisis clean-up.
The idea under discussion – and advocated most recently by UK Prime Minister Gordon Brown – is a tax on financial transactions. A tax of this kind may seem plausible at first sight. But not on closer inspection.
The problem isn't just that the levy would only be effective if it were introduced all over the world at the same time. Even worse, a financial transactions tax would make corporate finance more expensive, so it would hamper investment and growth. And it would also hit retail investors and savers – not the best way of encouraging people to make provision for old age.
5. Make the debate on remuneration more objective
Ladies and gentlemen, this brings me to my fifth and final point: the debate about remuneration. My urgent appeal is for this issue to be discussed less emotionally. The banks have long been working hard to gear their remuneration schemes even more towards sustainable performance. It is in their own interest to do so: banks don't have money to give away and don't want to set perverse incentives.
The objective is clear: short-term or artificial success should not be rewarded.
This means that incentives for staff – including senior executives – should not encourage irresponsible risk-taking. Legislative measures or guidelines such as those issued by the German regulator BaFin in its Minimum Requirements for Risk Management (MaRisk) can help to achieve this objective. But banks must continue to be free to decide themselves how much they pay and to whom.
But let me be clear on this too: should we see any more excessive bonuses, should some banks, wherever they may be in the world, fail to take note of the lessons to be learned, then policy-makers will most certainly move to regulate – and perhaps even over-regulate – all banks. And no one will have the right to be surprised.
Ladies and gentlemen, the shock of the global financial and economic crisis is still reverberating, not least through the banking industry. But we've taken the lessons on board. We're holding more capital and liquidity, have analysed our risk management practices and, where necessary, revised our remuneration schemes. One or two banks will also need to take a good look at their business model. So we are assuming responsibility and want to move this process forward.
It would therefore be wrong to demonise the financial system and, what's more, it wouldn't help anyone. It would just be damaging because no major economy can function without strong banks. We must not only make the financial sector stabler, but also – as in other areas of the economy – ensure that we have a global level playing field and that we can compete globally.
In a nutshell, ladies and gentlemen – and this is no empty phrase – the crisis offers opportunities. It is up to us – policy-makers, the business community and the banks – to seize them.
