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'Wise man' warns bank levy could spark crisis

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'Wise man' warns bank levy could spark crisis
Photo: DPA
08:10 CET+01:00
One of Germany's “wise men” of economics has cast doubt on the government's plan to charge banks a levy that would be used to bail out troubled financial institutions, warning on Tuesday it could spark a credit crisis.

Peter Bofinger, one of the five top economists on the German Council of Economic Experts, told daily Passauer Neue Presse that too heavy an imposition on banks at this delicate point in the recovery could hamper their ability to provide credit.

“There exists the danger that with a bank levy, a credit crunch could result,” he said.

The government announced at the weekend it wanted to use the levy to build up a “crisis fund” that would be used to save troubled banks in future, saving taxpayers the expense.

Bofinger did not oppose wholesale the idea of a levy but rather stressed that the charge should not be too burdensome.

“Therefore it depends essentially on the amount of the levy: I regard more than 0.1 percent of total assets as counterproductive.”

The influential German Council of Economic Experts - often known as the 'five wise men' of economics - directly advises the government on the economy.

The government was forced to dip into its own coffers in recent years to rescue failing banks such as Hypo Real Estate.

Under the current plan, which is similar to a scheme being considered by the United States, bigger banks and those with riskier business would be charged a higher levy.

Estimates vary on the total amount of money pouring into the fund from €1.2 billion a year to nearly €10 billion. It would be expected to continue for some years until the fund was big enough to comfortably bail out major banks in a crisis.

The centre-right coalition government has stressed it wanted to avoid overburdening banks in order to prevent the credit crunch Bofinger spoke of.

Right now the “most important thing” was that “credit institutions build up more of their own capital,” Bofinger said. Banks needed capital reserves to buffer themselves against future turbulence.

As an alternative, he suggested that the government safeguard against the “domino effect” whereby a single bank failure rippled through the system. This could be done by banning banks from lending more than 10 percent of their capital to other banks.

“A crash of the borrower would indeed mean losses but it would not spark a domino effect for the creditor bank and other institutions,” he said.

The state was only vulnerable as long as the crash of one bank resulted in the crash other banks, he said.

“You have to drastically reduce inter-bank borrowing,” he said.

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