22 April 2013

Finance Watch: Position paper on German bank reform

Executive Summary [abridged]

1. Finance Watch welcomes the introduction of resolution and recovery plans as tools of crisis prevention and management. Contrary to the current reading of the Bill, it however urges the expansion of resolution and recovery planning to all banks.
2. In its current form, the banking reform Bill is likely to lead to situations in which German tax payers will have to bail-out foreign banks. If Germany keeps its exemption of non-systemically important credit institutions from its Recovery and Resolution regime as proposed in the Bill, there is a high risk that this will have a negative influence on the scope of the EU Directive dealing with Bank Recovery and Resolution as it is to be expected that Germany will also defend the same exemption at EU level (if it failed to do so, Germany would have to change Article 1 of the current Bill soon after its adoption). In turn, narrowing the scope of the EU Directive on Bank Recovery and Resolution to systematically important credit institutions only would have the dramatic consequence of emptying this Directive of its effectiveness. To illustrate this point, this would mean that, had this Directive with a scope reduced to systemically important credit institutions only been in place before the current Spanish banking crisis, it would have been of no use as the Spanish credit institutions that failed collectively and led to the current crisis were not so-called systemically important institutions.
3. The proposed way of separating banking activities will only be of limited consequence in practice. De facto, the Bill will not stabilize financial markets and increase the security of taxpayers sufficiently... With a view to being coherent with the recommendations made by the Liikanen Report (that does not exempt market making), and so as to apply lessons learned from the crisis, Finance Watch underlines the need for separation principles that do not exempt market-making and that apply lower thresholds for the determination of which banks’ trading activities are to be separated.
4. Finance Watch suggests an alternative rule that will enhance taxpayer protection whilst allowing the vast majority of small and medium size banks in Germany to keep on serving their customers as they are today.

© Finance Watch