Karl Nolle, MdL
The Wall Street Journal, No 146, 29.08.2007
Germany seeks changes in the oversight of banks
The German finance ministry called for more intense cooperation between the supervisory authorities of German banks in the wake of the near collapse of IKB
Deutsche Industriebank AG and SachsenLB in the past month.
The crisis at the two banks has "renewed debate within the ministry over how best to regulate banks in Germany," a ministry spokeswoman said. As a first
step, the finance ministry wants to "intensify cooperation between different supervisory authorities," pending a general overhaul of the system of banking supervision, she added.
In Germany, banking supervision is divided between the markets regulator, BaFin, and the Bundesbank, Germany's central bank. A spokesman for the Bundesbank declined to comment.
As part of the division of supervisory responsibilities, according to BaFin, the Bundesbank is responsible for signing off on annual reports of banks. For its part, BaFin is responsible for conducting special audits of banks. In dealing with regulators, German banks have complained to the finance ministry that the dual regulatory system can be confusing and should be simplified, the finance ministry said.
Both IKB and Sachsen were nearly toppled when the global liquidity crunch made it impossible for key affiliates to sell commercial paper and repay creditors.
As a result, IKB needed a sizable bailout and Sachsen was sold to another German
state-owned bank, Landesbank Baden Wurttemberg.
As credit jitters hit markets globally in July -- triggered by rising defaults on home loans by U.S. borrowers with shaky credit -- German Finance Minister Peer Steinbruck postponed an Aug. 8 meeting where he was expected to present the German finance ministry's proposal for a banking-supervision overhaul.
The plans, which are being reworked, won't be presented before year end, the finance ministry said. BaFin and the finance ministry will await the outcome of special audits on IKB and Sachsen before moving forward with changes, a person familiar with the matter said.
Officials at BaFin and the finance ministry are looking at how Sachsen and IKB were allowed to provide large liquidity guarantees to off-balance-sheet investment vehicles that exceeded their own size.
These vehicles were designed to issue commercial paper or short-term IOUs and use that money to buy higher-yielding bonds that boosted profits and asset-management fees for the banks. As the credit markets tightened, both banks' ability to meet their commitments were called in to question, requiring a sale or bailout.
Officials at the German finance ministry are also reviewing whether regulators at BaFin could have done more to help avert problems at IKB and Sachsen.
The spokeswoman at the finance ministry, to which BaFin reports, said, "There is no reason to believe BaFin failed. Nonetheless we need to see what lessons can be learned from recent events."
A spokeswoman for BaFin said the agency acted appropriately once the crisis unfolded, adding the intensity and scale of the crisis in the credit markets wasn't something that was widely anticipated.
BaFin actually identified many of the risks facing Sachsen, but regulators appear to have been slow to act. In a special audit ordered by BaFin in 2004, KPMG auditors found it was impossible for members of the Sachsen supervisory board to determine the volume of off-balance-sheet transactions or to determine the risks entailed in them.
The problem was partly resolved in December 2006 when Sachsen's Dublin-based SachsenLB Europe PLC unit began to record its trades in a transaction book as required by law, according to a PriceWaterhouseCoopers report in April 2007.
Some of Sachsen's potential commitments to off-balance-sheet investment vehicles that ultimately led to Sachsen's fall were also identified in the KPMG audit. Auditors flagged the risk of a margin call -- the demand to post additional collateral -- by U.K. bank Barclays PLC should the value of assets in one conduit fall by 10% or more, according to the report.
By Edward Taylor in Frankfurt and
David Crawford in Berlin