Friday

23rd Oct 2020

Interview

Euro crisis 'not solved,' German bank supervisor says

  • The ECB's cheap loans to banks are an 'addictive medicine' (Photo: Wolfgang Staudt)

Cheap loans from the European Central Bank (ECB) might have calmed the euro crisis, but the fundamental problems are still there: governments have too much debt and no strategy to get out of it, Raimund Roeseler, executive director for banking supervision in Germany's Federal Financial Supervisory Authority (BaFin), has said.

"The sovereign debt crisis is certainly not solved. The ECB pumped more money into the system, but that doesn't make states automatically more solvent," Roeseler told EUobserver in an interview in his office in Bonn, the former German capital.

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  • Raimund Roeseler is in charge of banking supervision in Germany (Photo: Kai Hartmann Photography / BaFin)

The €1-trillion-worth of cheap loans handed out by the ECB last year created "a lot of liquidity" on the banking market, but banks still prefer to park their money overnight in the ECB rather than lend it to each other due to lingering mistrust, he noted.

"The problem is not so much with the banks, but with the states. There are still concerns about the solvency of states and what will happen if a state gets in trouble," Roeseler said.

"The banks' situation is correlated: German banks having bought German bonds are in a more fortunate situation than banks from some other states. Solving the sovereign problem is the number one priority. But my concern is that all this liquidity might relieve the pressure on governments to do so," he added.

One potential risk of the extra liquidity could be a new financial bubble, he warned:

"An even greater risk is that there is still no exit strategy, about how to extract all this extra liquidity," he said.

"The ECB's cheap loans programme was a medicine that helped the patient to recover. But it also creates addiction. We need a therapy that cures the addiction without killing the patient," he added.

EU bank supervisor is 'second-best' option

Established in 2002, BaFin employs more than 2,000 people and deals not just with banking supervision, but also with insurance companies and financial services.

It is currently giving "technical input" to "relevant working groups" on the new eurozone banking supervisor to be hosted by the ECB.

Roeseler said it would have been better if the supervisor had been given powers over other financial sectors.

"It is certainly a second best solution to have a banking-only supervision at eurozone level, without including insurance and securities the way BaFin does," he said.

He gave the example that if an insurance supervisor had given solo advice to insurance firms to reduce their bank exposure during the 2008 banking crisis, the banking sector would have been hit even worse.

"It's an important lesson: What we do in the banking supervisory authority has consequences on the other supervisory sectors and the other way around," he noted.

BaFin's powers in Germany go as far as ordering a bank to fire a top manager, something the upcoming eurozone supervisor should also be able to do, Roeseler noted.

He said the EU supervisor will above all need competent staff who are "able to understand the banks' business models."

He added that even if regulators' salaries are not are not as high as those in the banks they supervise, many former investment bankers want to switch to "the good side."

He noted that even the good guys need internal controls, however.

He recalled an incident from the young days of BaFin when the head of the IT office was convicted of embezzling €4 million through fake invoices.

"We learned a lot from the fraud case, which happened in BaFin's very early days. We have a lot more internal controls now. But this can happen in any company, when someone has his mind set on defrauding," Roeseler said.

Libor should be scrapped

Meanwhile, BaFin is currently probing Deutsche Bank for its alleged involvement in the so-called Libor affair, where a handful of traders from global banks rigged the British interbank lending rate used as a benchmark for at least $360 trillion worth of financial products.

"Banks have completely underestimated the incredible greed of the people involved, there were too few control mechanisms. In retrospect, it is not very surprising such interest rate manipulations took place," Roeseler said.

"I think the Libor system cannot survive in this formula, based on voluntarily reported interest rates which are not being negotiated. Maybe it should be scrapped, not reformed. If I was one of the 12 bankers having to volunteer in reporting how bad the real situation is, I might not have an incentive to do so," he added.

Euribor, the key interest rate for eurozone banks, is based on a similar system to Libor.

But as there are over 40 banks involved, "so it was more difficult to rig the rate," Roeseler said.

Instead of Libor/Euribor, the German supervisor would prefer a different model, based on bonds with various maturities. But that is also a matter for politicians to decide.

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