27 July 2012

BaFin/Elke König: 'It's time to search for alternatives'

In a SPIEGEL interview, the head of the German financial regulator discusses the scandals rocking the banking world. She advocates a single, comprehensive system of supervision, "otherwise, our oversight of the financial system as a whole gets short shrift".

SPIEGEL: Wouldn't you say [the Libor] system needs either strict controls or genuine reform -- and as soon as possible? Financial investors have tied deals worth hundreds of trillions of euros to the Libor rate.

König: I'm not sure if regulation will help. The fact is that the industry has relied on the Libor blindly. It reminds me of unconditional faith in the verdicts of the ratings agencies, which are also private companies. It's time to search for alternatives.

SPIEGEL: For example?

König: More business deals could be tied to developments with other securities, such as government bonds. And, in any case, the Libor should be determined based on real transactions rather than on estimated values.

SPIEGEL: In the face of recent scandals, even some major players within the industry, such as Munich Re CEO Nikolaus von Bomhard, are calling for overly large banks to be broken up.

König: An economy with global players also needs banks that operate globally. But it's certainly worth considering whether certain lines of business would be better kept apart.

SPIEGEL: Should banking for private clients and investment banking be separated?

König: One option would certainly be to force banks to outsource their own trading to an independent subsidiary …

SPIEGEL: … in other words, the trading a bank performs on its own behalf rather than for clients. We thought German banks had made that change already.

König: I believe that's just a rumour. But having banks do their own trading in moderation doesn't necessarily have to be a bad thing.

SPIEGEL: Politicians within the eurozone want to get a grip on banks' power by establishing a banking regulatory body for the entire common-currency area. Does that course of action make sense?

König: Standardised rules are important. But the question is whether a centralised body in Frankfurt, Brussels or somewhere else is truly better able to anticipate where problems might arise in the financial sector than each country's own supervisory bodies are.

SPIEGEL: You don't believe an employee of a central bank, such as the European Central Bank (ECB), is able to look at difficulties more objectively than a regulator at the national level, who has an interest in protecting domestic businesses?

König: Possibly. But, then again, perhaps (the ECB employee) would miss many problems entirely owing to the language barrier involved in emails and documents or because of cultural differences.

SPIEGEL: Still, German Chancellor Angela Merkel would like to turn the job over to the ECB. Would that make ECB President Mario Draghi your boss?

König: That's still an open question. To me, it wouldn't make sense to have the ECB make decisions and for us to merely implement them. If BaFin has to close a bank, I'd like to at least be involved in the decision. And who foots the bill then? In the most extreme scenarios, this would mean having Mr Draghi make decisions on how to spend German taxpayers' money.

SPIEGEL: What do you think of proposals to establish common Europe-wide funds for just such cases, for liquidating banks or securing savings?

König: That's a possibility in the long term. But we should also recognise that a common deposit-protection scheme carries with it additional risks of contagion.

SPIEGEL: Proponents call it a guarantor of more security.

König: Sure, but what happens when our regulatory systems become liable for southern Europe, as well? At the moment, German savers can remain calm when a Greek bank falters.

SPIEGEL: A Europe-wide supervisory body already exists in the form of the European Banking Authority (EBA). Won't things descend into complete chaos if the ECB, the Bundesbank (Germany's central bank) and BaFin all get involved as well?

König: Let me put it this way: We shouldn't create too many overlaps. The ultimate result should be better oversight. We also need to consider the fact that the ECB represents only the 17 eurozone countries. I would prefer to treat all 27 EU countries equally.

SPIEGEL: But that would only exacerbate the struggles over who holds which responsibilities.

König: Now and then, differences certainly arise between the national regulatory bodies. But, by and large, this international cooperation is very professional and built on trust. It used to be that you first had to apply to make a foreign call before ringing up our English counterparts. These days, you just reach for the phone.

SPIEGEL: Would you prefer to have the EBA be the central supervisory body?

König: At the least, you could say the ECB has conflicting objectives when it comes to monetary policy and oversight. We had this discussion in Germany, too, when we addressed the question of whether bank oversight should be handed over completely to the Bundesbank (SPIEGEL note: BaFin currently shares banking-oversight responsibilities with the Bundesbank). Besides, when it comes down to a crisis situation, these supervisory bodies intervene in banks and, thereby, ultimately in property rights. That requires democratic legitimisation, which is in conflict with the autonomy of a central bank.

SPIEGEL: Is it even possible to regulate banks effectively?

König: Yes, though it's not as if we can have a regulator standing behind every bank employee. But we need to finally confront the issue of regulating the shadow banking system. There are many other types of institutions that are very similar to banks, such as hedge funds and money market funds. If it looks like a duck and quacks like a duck, then it's a duck and should be treated accordingly.

Full interview

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