When all other avenues have been exhausted, the state should bail out a flailing bank, said Deutsche Bank's head economist Norbert Walter. Germany is proud that half of its banking sector is state-run, he added.
The state should throw a lifeline when every other option has been tried, said Walter
DW-RADIO: When and where does state intervention make sense?
Norbert Walter: State intervention only makes sense when all other private economic means have already been implemented -- not just theoretically, but also practically. That means, when a bank incurs speculation losses, changes its management, has used all of its available capital and made an effort to obtain new capital and/or a foreign or domestic strategic investor. Only after these efforts have failed is it appropriate for the state to ask whether it's important to the financial system in the affected country to rescue the institution that's in danger of collapsing or not.
Sometimes it's wise to rescue an important institution that plays an important role in the economy when there is no private solution. But this process should be carefully considered and it's clear that, if this step is taken, it cannot be carried out by a central bank. Rather, it's the job of the government and of those who decide how tax money is spent -- namely, the parliament.
But there already seems to be an imbalance. Generally speaking, companies pay for their own mistakes, but this doesn't seem to be the case in the banking sector. Banks pocket the profits, but expect society to pick up the losses. Is this acceptable?
This is not at all acceptable. It also isn't a very good arrangement for the future, since it encourages making contracts that burden a third party.
And these contracts are responsible for difficulties we've seen at the WestLB and IKB banks?
I didn't say that, you did. We should keep in mind that in Germany -- with transparency and with the agreement of the people and nearly all of the political parties -- half of the banking sector has been state-run from the very beginning. We're very proud of this in Germany. And the politicians are convinced that this is the right way to organize our monetary system. When institutions that are either owned or overseen by the state experience a crisis, as was the case in Dresden [the former headquarters of SachsenLB, which was bought out by another regional bank -- eds.] and Dusseldorf [headquarters for WestLB] and at IKB, it's only obvious that the owners have to step in -- which in this case is the state.
It was the highly paid bank personnel who utterly failed and demonstrated extreme naivete. What personnel decisions can banks make to avoid a repeat of the situation?
Deutsche Bank announced it wouldn't meet its profit target for 2008
The management team was fired and replaced with new managers. It's appropriate that those who squander their own money are no longer suited to run a bank. It's also appropriate that the state and other institutions like supervisory bodies help find new owners. We'd have reason to worry if this process were to be lost. It's been successful in a series of cases where domestic capital and management were available. For example, with Bear Stones and JP Morgan. In other cases, where owners' equity was lost, international investors were ready, like in the case of UBS in Switzerland, where Singapore was ready to subsidize a bank that had lost a gamble but is a very attractive bank in other important areas.
The bank crisis started in the US. But how are things looking here in Germany? Is the situation more stable?
Unlike in the US, or England or Spain or Australia, our real estate prices haven't been exaggerated over the past 10 years. There the prices have more than doubled -- or tripled, as is the case in Spain. In Germany, the prices have remained stable or even sunk in some cases. As far as the real estate market itself goes, we're atypical. We aren't expecting the problems that England, Spain, Australia and the US are currently facing.