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'Wise man' warns bank levy could spark crisis

DDP/DPA/The Local · 23 Mar 2010, 08:10

Published: 23 Mar 2010 08:10 GMT+01:00

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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.

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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.

DDP/DPA/The Local (news@thelocal.de)

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Your comments about this article

16:51 March 23, 2010 by peschvogel
"Spark" a credit crisis? I think Germn banks are in one now. This does not at all suprise me. There are over 2500 banks in Germany. More than UK & France COMBINED. You will see half of this amount when the crisis is over in some years. Oh, wait, I forgot, germany is doing great because of exports. ; ) Not!

The German banking system is highly over leveraged. Along with this new mechanism, Basel 3 regulations of leverge ratios will kil/ what we know as the German bank. Because they are all over leveraged. I believe 1 or 2 Landesbanks are about to go under in the next few months. German banks lended beyond their borders because their rates of return at home are miserable. ~1% - 2%. So they invested in coubtries and industries they new nothing about. All balance sheet lenders where they are trembeling now do to market forces. The German govt cant save them. This crisis will be worse than any "Amercian" or "UK" or any bad banking crisis the world has ever seen.

When German govt tells you their banks are fine, hit the sell button fast. They are not lending. they are more screwed up than any other banking system. They cant raise capital. They always look to the German Govt for help in times of trouble for a life line. Not this time. They are toast...Schade...
18:15 March 23, 2010 by vjörn
As I'm reading all the comments here, you are talking always the destructions for Germany.Is there something wrong?
19:03 March 23, 2010 by peschvogel
I think the article and author is just trying to elude to Germany's banking problems which have not been resolved. The author is unbiased in his findings however, the "wise man" of Germany is ponting to a gloomier scenario. I hope things work out for the best "solution".
11:35 March 24, 2010 by Prufrock2010
Heaven forfend that any pressure be exerted on the almighty banks, lest they decide to stop lending. What the hell does anyone think the banks have been doing for the past 18 months, other than to hoard the wealthy they extorted from taxpayers after their greed nearly destroyed the global economy? And where were these "wise men" while the banks were committing the greatest bank robbery in the history of the world?

The banks will always figure out a way to lend to each other to redistribute the wealth. It's the rest of us who will be excluded.
11:44 March 24, 2010 by Deutschguy
Well, cry me a river!

The reserve requirements were whittled away by high paid lobbyists, putting bank portfolios and the public at risk for failure. Those tighter reserve requirements need to be put back into place, simply to make banking a "boring" business again. Enough of this high-flying, so-called "creative" financing.

Cap pay and bonuses of these greedy pigs, and they will not have the incentive to take such huge risks with other people's money. Their 'moral hazard' needs to be removed and heavily regulated. Their shareholders should be outraged and fire them all.
18:18 March 24, 2010 by peschvogel
Regulation is correct. Happening in the US now due to banking crisis (e.g. Lehman, Bear Stearns). However, you are still going to witness a banking crisis in Europe since nobody can agree on anything...
08:39 March 25, 2010 by mixxim
Wise men looking after their own interests. Time for governments to ensure there is not another bubble.
02:42 March 26, 2010 by peschvogel
Gov'ts wont do that because the reality is that the crisis is now "double-deipping" with recent economic data. Also, banks will remain unable to lend and will be hoarding cash because their is another banking crisis coming this summer. Govts dont want to be held liable for something which might get them in trouble. Look at what Berlin did by guaranteeing pensions a few years ago. They cant even do that now.

German banks are mostly balance sheet banks who lend mortgages, loans, corporate debt. No banks are lending because values are dropping, top line economics are still weakining, and Basel 3 regulations will put them all in the toilet.

Nobody is going to provide equity capital to banks now with this new crisis. Not even governments. They will go down and it will be the Govts way of clearing the dead wood out without negotiating with unions.
13:56 March 28, 2010 by Prufrock2010
"Regulation is correct. Happening in the US now due to banking crisis (e.g. Lehman, Bear Stearns)..." quoth peschvogel.

Ummm....would you care to back that assertion up with fact? There is no banking regulation happening in the US now. The situation remains unchanged from 18 months ago, except that the banks are reaping more profits than ever and paying their employees larger bonuses. The banking lobby has invested over $250 million dollars to prevent this Congress from enacting regulatory legislation.

Never let the facts stand in the way of a preposterous theory, blackbird.
19:08 March 28, 2010 by peschvogel
1. US Bank Tax Levy

2. And on the floor is a bill for financial services regulation.

I doubt you know how to read nor write policy, so i wouldnt expect you to understand such higher knowledge. Yes, its happening...The attack on bonuses are relevant in Germany because Germans believe bonuses should not be awarded however, in the US, you have something called "incentive" but you wouldnt understand what that means because you would have to be measured for your work. Ungloublisch..

Where is Germany's regulation? None...Perhaps it will come in the form of huge taxes to its citizens because Socialism is something where the society is to blame for your ngligent banking system. "Why Germany's banks are more screwed up than America's" is a great article by Businessweek. You should read it. Yes, go ahead, say it, its our facist news magazine but highlights the many problems in the German financial system...
21:28 April 1, 2010 by dbert4
What "wise" man? They're all morons, proved that during the crash.
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