Financial expert on the banking crisis: “How much more crisis is needed?”

Financial expert on the banking crisis
“How much more crisis is needed?”

03/21/2023, 4:21 p.m

After the great financial crisis in 2007 and 2008, everything was supposed to be different and the banks were to be more heavily regulated. However, the decisive reforms did not materialize. The entire financial system is still unstable, explains Gerhard Schick from the Civic Movement Financial Turnaround. The expert explains which measures are most urgent now to prevent the next big crisis.

ntv.de: Politicians and the media are alarmed after the collapse of the Silicon Valley Bank in the USA and Credit Suisse in Switzerland, among others. For years they have been warning of the danger of a repeat of a major financial crisis, calling for reforms to make banks safer. Is this an I-told-you-so moment for you, proof that you were right all along?

Gerhard Schick: Above all, I am angry because the politicians responsible have not tackled the necessary reforms. As an organization, we launched Finanzwende five years ago precisely because we saw that the undesirable developments that had already led to the great financial crisis in 2008 were in some cases simply continuing. Central reform measures intended to stabilize the financial system have not been taken. I’m little surprised.

Is this now the new banking crisis or a foreshock and thus the chance to implement reforms that are still effective before a major catastrophe occurs?

I’m not a geologist, but maybe it’s actually like an earthquake: the experts can pinpoint where tectonic stresses are and warn that they’re about to discharge. But when that will happen, and whether it will be one big earthquake or several small ones, is not known in advance. It is quite possible that the situation will calm down for the time being after the unprecedented measures taken by Credit Suisse and the insolvent US banks. That the crisis will not spread further for the time being. However, the whole system remains fundamentally unstable.

What are you up to?

One indicator that showed increasing instability even before 2008 was that the financial market was growing faster than the real economy. All this means is that the amount of debt that companies, governments and individuals have to carry has increased relative to what is generated. And this development has continued almost unchanged since then.

Industry representatives and politicians, on the other hand, emphasize that a large number of reforms have been initiated and that the banks are in a much better position than before the financial crisis. Bad loans were reduced. Bank liquidity and equity requirements have been tightened. Stress tests are carried out regularly. To name just a few points.

Yes, indeed many things happened. As a member of the Bundestag, I myself was there when thousands of pages of regulation were passed. However, when the crisis became more distant and public pressure on the government and parliament eased, the banking lobby was able to prevent or decisively weaken some of the very central reform projects. For example, a law for a separate banking system had already been prepared. Risky investment banking should be separated from the traditional business of lending and customer deposits. The legislative project was completely overturned under pressure from the industry.

Another example is the rating agencies. After 2008, there has been much talk about the problems of having only three agencies sharing this market, and being paid and dependent on the actors whose products they are supposed to review. The problem persists almost identically to this day. And finally, we come to the capital requirements. Yes, on the one hand the bank representatives are right when they say that the banks have more capital today than before the crisis. But you have to be aware of the extreme level at which this comparison is based. Before the crisis, larger banks had around two to three percent equity capital, today they have to use around four to five percent as much of their own money, which is almost twice as much. But that means that 95 percent is still debt-financed. Every home builder can immediately understand what kind of risk this means if, for example – as is the case now – interest rates rise. In order to have an effective buffer for losses in the event of a crisis, the banks would have to hold at least ten percent equity.

In your view, are these the most urgent measures that need to be taken: enforcement of the separate banking system, reform of rating assignments and tightening of capital requirements?

In my opinion, the most important of the above is an increase in equity. The most urgent thing, however, is to finally implement the banking union in the EU. It has been partially launched, but a crucial building block, an institution that could organize the resolution of banks and deposit insurance across Europe, still does not exist.

What role does Germany play in financial reforms in Europe or in preventing them?

In the various reform projects, other governments within the EU took on the role of slowing things down, so that in the end important parts were not implemented. In the case of the banking union, it was Germany. France opposed the split banking system. The idea of ​​a financial transaction tax was thwarted by several governments, including the UK at the time. The decisive factor, however, is not so much which government opposed which point, but rather the fact that they acted under pressure from the financial lobby in their country. Sensible reform steps are always blocked by the industry as soon as the interest and thus the pressure from the public wanes – to the detriment of all of us.

Can the current crisis be the decisive wake-up call?

If reforms can be enforced at all, then – as has unfortunately been shown in recent years – only directly under the impression of a crisis situation. In this sense, the widespread outcry generated by the recent bank failures gives me hope. On the other hand, in 2008 we were on the brink of a complete collapse of the global financial system and failed to make the crucial reforms. This experience makes me skeptical and I ask myself: how much more crisis will it take for those responsible to wake up?

Max Borowski spoke to Gerhard Schick