EMU banking : well-behaved vs rogue systems?

The grounds for the German attitude on this specific area can be found in an open mistrust toward some of our banking systems, as expressed in the oft-heard sentence, “(in a mutualized fund) Southern banks will be bailed out by German banks”. The four German banking associations stand resolutely behind this dictum, and their lobbying of Berlin has obviously been quite effective.

The presumption seems to be that there are two opposed scenarios in European banking. On the one hand, a number of banks in several countries got into “existential” trouble and had to ask for huge public bailouts –indisputable facts-, while on the other hand, well-managed and buoyant German institutions have stuck to much higher standards of business behavior –a view that conflicts head-on with reality.

In fact, this is a lopsided view. The German banking system has had a recent record of misdeeds that is often glossed over. Problems could be said to start with the flagship of the system, Deutsche Bank, which just posted s €1 mm loss in 4Q13. In recent years, this institution had to face serious charges of “espionage” on individuals and law firms critical of the bank (back in the 2000s) as well as of corruption in Japan (2013); high executives were involved in a tax row with the authorities (2009); numerous claims for damages in the USA address alleged irregularities committed by the bank in the American mortgage market (where Deutsche Bank was a prominent player).

Its role in the recent Libor scandal was as indefensible as that of several other major banks. It has already been heavily fined by the EU. At present the bank is also being investigated, along with several international colleagues, for alleged manipulation in currency markets.

But this is not an isolated example. To name a few others, IKB, a public bank, was the first European collapse that can be traced back to the USA mortgage market; West LB, a Landesbank boasting an ancient pedigree, went out of its depth in the world of bank investment and now its brand is no more; a prestigious Depfa Bank miscalculated the virtues of municipal bonds in the USA and not only went under but also managed to bring down its head company, which to this date is still owned by the German government; misguided strategies of Commerzbank, second banking name in Germany, shook the institution and called for strong public support (by now, mostly repaid by a new management team).

The Centrum für Europäische Politik in Freiburg is a well-known think-tank, mostly focused on studies about the social market economy. In July 2013, the CEP published a thorough proposal to review the structure of the eurozone, whose first chapter deals in particular with the financial systems. If you delve into Table 2, you will find data of the European Commission detailing amounts of State aid granted to banks in the period October 2008-December 2011. People who might believe that the German financial system is well above these frailties, will be shaken to find that right after Ireland (with €350 mm).

German banks were the main beneficiaries of public support (to an amount of €259 mm). Spain and others follow. The figures have been updated by the European Commission, but the scenario is still the same. The CEP did not comment, just reproduced the figures.

In short, the non-cooperative attitude of the German authorities on the national-vs-mutual nature of the resolution fund rests on highly questionable grounds. There is no a priori reason to suspect that Germany would have to keep dousing fires in banks throughout the EMU. Some of our banks, and some of their banks, can regrettably be blamed for performing a similar “comedy of errors” in total disregard to its impact on critical macroeconomic variables, such as the national budget or public debt, or on the present or future burden on taxpayers.

The German official line, however, is zealously protective. It mostly succeeded in keeping medium and small institutions away from ECB supervision, and throws light on their persistent pressure to limit the scope of the stress tests programmed by EBA or now the ECB, or to soften the terms set for each test. German banking includes first-rate institutions –as our systems do- but –as in our own- is not free from managerial greed, miscalculation, and ill-founded strategies.

None of the systems stands as a paradigm of excellence. In the final analysis, who knows, a mutualised resolution fund –if it ever came to life- might have to start operations by bailing out a German bank!