The eurozone has so far been spared from bank failures. But some rules for banks need to be stricter, economists are demanding.
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After 2008 everything should get better. Never again should taxpayers pay for the problems the banks cause through their pronounced striving for profit. To this end, extensive requirements for the banking sector were issued with the “Basel III” framework. But what has happened in the past two weeks makes these promises unbelievable for many.
Governments and central banks supported several institutes, including the Silicon Valley Bank in the USA and Credit Suisse in Switzerland, with interventions worth billions. So what went wrong with banking regulation – and why are some of the rules still too lax?
Economists have been arguing about the right regulation for years. Not surprisingly, the banks see themselves unjustly criticized. They point out that they have implemented the requirements of the regulators, including more equity, higher capital buffers and a debt ceiling. But apparently there are still gaps:
Higher capital requirements
One of the most important regulatory instruments are the capital requirements for banks. For example, an economic crisis could cause customers to use up their savings and withdraw from the bank. In order to avoid a cash shortage, banks must hold part of their customer deposits as liquid funds and cannot pass them on – for example in the form of loans. Opinions differ on how high this proportion should be.
Before the financial crisis, the buffer was around two to three percent of total deposits. After the financial crisis, this was massively intensified. According to the applicable supervisory rules “Basel III”, at least 4.5 percent of the common equity tier 1 ratio (CET 1) is now required. In the case of some “systemically important” major banks, the rate is even significantly higher – Deutsche Bank, for example, has to meet 10.55 percent. The responsible regulatory authority decides individually how much a bank has to withhold.PAID 13_23 Ten lessons from the banking crisis 16.00
Regardless of the amount, this is a tour de force for the banks. Because the more deposits they have to put aside, the less money they can lend and earn from it. This was a problem, especially during the low-interest phase, at least that’s what banks claimed, which is why many institutes put their money in long-dated government bonds. These brought more returns than parking the money “overnight” at the central bank. But when interest rates rose at record speed last year, the bonds became a problem for many banks – most notably for the Silicon Valley Bank (SVB) in the USA.
Their customers were mostly start-ups, for which rising interest rates mean higher costs. So they initially lived on their deposits with the SVB, which at some point could no longer cover the increased need. As a result, she sold her long-term government bonds at a high loss. As losses piled up, customers lost confidence and SVB went bankrupt soon after.
Something like this cannot be ruled out in Europe either. Even the savings banks recently wrote off around EUR 8 billion on long-term bonds. Generally, however, this is not a problem as long as the bonds can be held to maturity.
Eurozone has not yet fully implemented Basel III
In order to make the financial sector even more stable, the citizens’ movement Finanzwende has long been demanding higher equity ratios for banks. Instead of the average 4.5 to 5.5 percent own funds requirements, at least 10 percent is necessary, said the head of “Financial Systems and Real Economy”, Michael Peters, recently in the “State of the Nation” podcast. “The rules in this country are no better than in the USA or in Switzerland,” says Peters. Standards were actually set with “Basel III”. But these are neither sufficient nor are they fully implemented – unlike in the USA, for example. “And even then, we’ve now seen that that’s not enough.”
Banking economists like Andreas Pfingsten from the University of Münster counter that the bank regulation is basically sufficient. With the large number of small and medium-sized institutions, he sees the problem that they are administratively over-regulated. That leads to enormous cost pressure, which often leads to mergers, so Pfingsten to Capital. That could actually not be in the interest of the regulators. Because the larger the institute, the more difficult it is to process in the event of insolvency. STERN PAID UBS Credit Suisse (C+) 19.08
One way of relieving the burden on smaller banks would be, for example, that individual goals no longer have to be achieved as an institution, but only as a group – for example, in which the small Volksbank no longer counts, but the cooperative group. In individual cases, one always has to question whether new specifications are of any use on a large scale, said Pfingsten. Every specification needs a representative in the bank and small institutes in particular cannot afford this in the long term.
Other economists like Sascha Steffen from the Frankfurt School of Finance & Management also believe that regulation makes the financial system fundamentally safer. “We have enough rules, we just have to apply them properly.” He now expects new and better stress tests at banks. The latest developments in Switzerland and the USA would have to be incorporated into the methodology.
The chairwoman of the Advisory Council, Monika Schnitzer, wants to use a new stress test procedure to examine, for example, whether government bonds in bank balance sheets really do not pose a risk or whether they should be backed with equity. There are already signs of something similar in the USA.
European deposit insurance: useful or not?
The citizens’ movement Finanzwende is still skeptical that all this will be enough. A European deposit insurance scheme, for example, could provide better protection. Customers are currently getting a refund of 100,000 euros even if their bank goes bankrupt. In the USA it is even 250,000 euros by law – and the political statements allow the conclusion that the sum could be even higher.
Customers in the USA and Switzerland may have gotten off with a black eye, says Peters from Finanzwende. In the two countries, a solution was quickly found within their own country Disclaimer Capitaln. If banks in the eurozone went bankrupt, there would only be one resolution authority, but 20 different deposit guarantee systems – one for each country. “I can’t imagine how Credit Suisse could have been saved over the weekend,” says Peters.PAID Interview Hellwig Banking Crisis October 6th
But the debate has also flared up in the USA as to the maximum amount that bank deposits are guaranteed. US Treasury Secretary Janet Yellen told a Senate committee on Wednesday night whether protection for all US deposits would require congressional approval. Although a temporary increase in deposit protection is conceivable, this will not happen indefinitely. This question could also arise in the euro zone in the near future – although no major problems at banks have become known to date.
Source: Stern
