Germany Plans New Rescue Fund Banks Could Get off Lightly with Crisis Levy

Germany's banking executives can breathe a sigh of relief. Though the government is planning to introduce a banking levy to protect taxpayers from future bailouts, bank contributions will not be exorbitant. Still, some worry the fund might not be big enough to weather the next crisis.

The skyline in Frankfurt, Germany's banking center.

The skyline in Frankfurt, Germany's banking center.

By in Frankfurt

The members of Germany's coalition parties are extremely proud of their decision: The country's approximately 2,000 banks will "not be allowed to gamble with taxpayers' money in the future" declared Volker Kauder, floor leader for the conservative Christian Democrats (CDU), on Monday. And Guido Westerwelle, the leader of the pro-business Free Democratic Party (FDP), said that those who caused the financial crisis had to face the consequences: "That cannot all come at the expense of the taxpayers."

These were the kinds of grandiose statements used to announce the decision made by the coalition the previous evening. Chancellor Angela Merkel's government really does want the German financial industry to meet its obligations. The banks are to be compelled to pay into a bailout fund for any future crises. The cabinet is expected to start negotiating the legislation next week.

However, neither the FDP nor the CDU or its Bavarian sister party, the Christian Social Union (CSU), want to say yet exactly what form this bank levy and the associated rescue fund will take. How much would the banks have to contribute to it? Which financial institutions will be asked to pay into the fund? On Monday, the ministries in Berlin would give no concrete details.

Coalition insiders, however, speculate that if it is not set up properly, the fund will fail to secure the necessary sums.

In response to the recent global financial crisis, the German government made a total of €500 billion ($676 billion) available in guaranties, capital and funds for the purchase of high-risk securities through the Federal Agency for Financial Market Stabilization (SoFFin). So far, the agency has committed €174 billion in funds and guarantees. In exchange, the agency has taken large ownership shares in the banks it has bailed out, including a 25 percent holding in Commerzbank and 90 percent of Hypo Real Estate (HRE).

If the banks had to build a fund that big, they would certainly feel it. On Monday, the first rumors about massive amounts of money required for such a fund began making the rounds. Financial experts made calculations based on the recently announced bank levy in the United States. If this model were applied, then Germany's financial institutions, over a certain size, would be looking at making contributions of 0.15 percent of their balance sheets to the fund over a 10-year period.

A €9 Billion Fund?

Using that model, Konrad Becker, an analyst with Merck-Finck, estimates that Deutsche Bank would be looking at contributions amounting to some €2.2 billion a year. That would be the equivalent of one-third of their pre-tax profit for 2010. If the recent US rules were to be applied here, then Commerzbank, the country's second largest bank, would have to cough up €1.2 billion a year. And the state-owned regional banks, the Landesbanken, would be hit with a sum in the high triple-digit millions. Levies of this amount would see around €9 billion flowing into the fund a year -- a considerable sum.

However, it seems highly unlikely that the German government is going to crack down that hard on the banks. The sums that are being mentioned in government circles are far more modest, around €1 billion a year.

A spokesman for the Finance Ministry in Berlin responded to the rumors with a simple statement: "This figure is just a wrong as all the others." However, Finance Minister Wolfgang Schäuble had already sought to calm nerves in an interview on German public radio station Südwestrundfunk. The levy on the banks had to remain "reasonable" he said. And floor leader Kauder also spoke merely of a "billion euro" sum.

Other financial experts pointed to the task of the banks to provide Germany's fabled Mittelstand, the small- and medium-sized businesses that are the engine of the country's export economy, with credit. No one is interested in a horror scenario in which a banking levy could be blamed for a credit crunch.

Thus, the punitive levy threatens to be reduced to a kind of paying of indulgences for the banks, and these contributions would only build up a sizeable rescue fund over many decades. That's how long it would take to come up with sums comparable to those that came into play during the recent financial crisis.

After all, the bail out of Commerzbank alone cost almost €20 billion. And rescuing Munich-based HRE required around €100 billion. Thomas Hartmann-Wendels, a banking professor at the University of Cologne, says any possible bailout fund for the banking sector "should be a mid to high double-digit billion figure."

Insurers Escape Levy

The question of how much money is actually supposed to flow into the emergency fund and how long the process should last isn't the only one Merkel's government must address. The issue of who, exactly, is supposed to pay into the fund is also controversial. The CDU/CSU had wanted the insurance companies to also make contributions, since they too could need a bailout in the future -- for an example, look no further than the rescue of insurance giant AIG in the United States, which government officials in Washington considered to be too big to fail.

However, a source with inside information told SPIEGEL ONLINE that this provision is now off the table. The reason? Berlin wants to work closely with its European Union partners on any such fund. For now, it is easier to just concentrate on the banks. It is no coincidence that French Finance Minister Christine Lagarde is to take part in the German cabinet meeting next week.

However, Germany's private banks are not happy with the fact that insurers are being excluded from the proposed levy. In a statement, the Association of German Banks (BdB) announced Monday that it was open to the idea of a rescue fund. However, it argued that the "as a basic principle, the entire financial sector" should contribute.

'Losses in Sector Will Be Shared by All'

A second point of contention, about how much publicly owned banks should have to contribute, has since been largely resolved. The approximately 430 Sparkassen savings banks will only face a very small levy, if they have to contribute anything at all. While in principle all banks will be compelled to pay into the fund, day-to-day client banking will not be taken into account when calculating the levy. "That means that co-operative banks and savings banks are out of the woods," says Dieter Hein, a financial analyst with Fairesearch. The Sparkassen banks concentrate on savings and loans and are barely active on the capital markets.

However, things look different for other banks such as the regional Landesbanken and the DZ Bank, which acts as the central bank for Germany's around 1,200, partly state-owned co-operative banks. They don't have similar levels of customer deposits and could, therefore, face higher levies than the savings banks.

Ultimately, it will be hard to exclude any bank from the levy -- even banks that lost little in the recent crisis and, at least so far, haven't had to turn to the state for help. "In the end, the losses in the sector will be shared by all," said banking expert Hartmann-Wendels. Deutsche Bank, for example will be forced to pay a princely sum since the levy fee would be greater for banks that are more adventurous in their risk-taking.

Nevertheless, many experts still welcome the idea. Rudolf Hickel, an economics professor at the University of Bremen, says that he is very much in favor of the bank levy. The central question remains, however, how the banks will deal with this added burden. Hickel warns that there is "a great danger that the costs will be passed on to the customer."


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