10 years after the financial crisis
„Die Banken tun so, als ob es die Krise nicht gegeben hätte“
Unlike some European countries, Germany emerged from the financial crisis largely unscathed. Now more than ten years after the worldwide recession began, experts are warning that serious risks still persist.
While countries like Greece, Spain and Italy are still dealing with the fallout from the 2008/2009 financial crisis, the German economy seems to be running smoothly. Gross domestic product has risen consistently since 2010, unemployment rates are low and exports are booming. Even at the height of the crisis, German government bonds were hot ticket items.
In 2011, British newspaper The Economist referred to German Chancellor Merkel as “Angela in Wonderland” in view of Germany’s exceptional financial standing. Financial experts are not as optimistic, and point out how hard the financial crisis really hit Germany with billions in spent to bailout the banks. At the end of 2015, the German Finance Minister’s Academic Advisory Board issued a serious warning about the possibility of another financial crisis looming on the horizon, noting that German banks were still anything but stable. Economist and banking expert Martin Hellwig, then director of the Max Planck Institute for Research on Collective Goods in Bonn, was involved in drafting the letter. In an interview, he explains his concerns about the banks.
Mr Hellwig, at the end of 2017 the heads of the most important central banks and regulatory authorities agreed on the new Basel III international regulatory framework for banks. It is intended ensure banks can regain stability in a crisis. Is today’s financial world safe?
Safer maybe, but not safe. If we lower the speed limit for trucks carrying dangerous chemicals to 140 from 150 kph after an accident, we have made them somewhat safer, but most certainly not safe.
What do you mean exactly?
The banks’ level of debt was a serious factor in the crisis. If you carry a lot of debt on the books, it doesn’t take much to push you over into bankruptcy. In 2007 the large banks had lent between 96 to 98 percent of their total equity, and only retained between 2 and 4 percent. That rate today is around 93 to 96 percent, which is still irresponsibly high.
Basel III stipulates that banks will have to retain 8 to 13 percent of their own capital in future - depending on the size of the bank - and can therefore no longer lend as much as before. Is that enough, or what capital ratios would you see as appropriate?
20 to 30 percent would mean losses would not immediately threaten an institution’s existence and the contagion effects in the system would be significantly weaker.
Banks claim that regulation is too complicated and expensive, and that it is keeping them from granting loans.
It might be too complicated, but that is partly down to them. And it is only too expensive for the banks, not for society as a whole. For banks debt is cheap because they only bear part of the costs. The billions in bailouts from taxpayer money have to be included in the overall cost of excessive debt. But the banks are acting like the crisis never happened.
The federal states of Schleswig-Holstein and Hamburg sold off the HSH Nordbank, which had been plagued by crises for years, for EUR 1 billion at the end of February. Was that a good deal?
I can't really say whether it was a good deal or not, since I am not familiar with the terms of the contract. The two states had spent a total of EUR 17 billion keeping the bank afloat since 2004. Getting a billion for it now still sounds pretty costly.
Professor Martin Hellwig is a German economist who served as director of the Max Planck Institute for Research on Collective Goods in Bonn until 2017. He chaired the board of the independent German Monopolies Commission from 1998 to 2004 and is a member of the Academic Advisory Committee of the German Ministry of Economic Affairs. | Photo (detail): © picture alliance / dpa How much did the financial crisis cost the German taxpayer overall?
If I tallied it all together, it would come to anywhere between 70 to 80 billion euros. That is more than for any other country that was not at the heart of the crisis.
In contrast to German banks, US banks are making billions in profits again. Have they gone back to their old gambling ways?
Maybe. But the USA also cleaned up a lot better than we did. Many banks were shut down or taken over, which makes it easier for the others to earn money now.
That didn’t happen in Europe?
Right, here relatively few banks actually went under. And there are still a lot of bad loans on the books, around 800 billion in the euro zone, mainly business loans in Italy. But the ship loans German banks issued are also problematic.
A bad loan means the debtor has defaulted on payments and is unable to repay the loan on time. What is the standing of German banks at the moment?
Doing business with local deposit customers and companies is the only truly profitable part, and it is firmly in the hands of savings banks and credit unions. The big banks and state banks don’t have the same foundation.
The savings banks and the cooperative credit unions specialise in private customers and SMEs. In view of the difficulties of the major banks in this area – do you see further expenses facing public budgets down the line?
I see three major problems. First of all, there are still billions in bad debts on the books. Secondly, the banks are still unprofitable and are not earning margins with the current low interest rates. Thirdly, a rise in interest rates, if it happens at all, will create another set of problems, such as for those banks that have granted ten- to twenty-year fixed-rate mortgages at very low interest rates today. So it is very important that the central banks proceed cautiously.