Bloomberg News

Merkel Says Banks Must Be Allowed to Fail to Ease Taxpayer Risk

April 15, 2013

German Chancellor Angela Merkel said banks must be allowed to fail if they run up unsustainable losses because her government can’t afford to rescue them a second time after the 2008 financial crisis.

Merkel, addressing the BdB association of German commercial banks in Berlin today, said policy makers haven’t solved how to handle “too-big-to-fail” financial institutions that risk needing government bailouts. Germany couldn’t mount another round of economic stimulus measures and bank bailouts without “losing trust internationally,” she said.

“It must be clear that banks without sustainable business models can fail,” Merkel told the audience of Germany’s leading bankers. “Our citizens, that is the taxpayers, won’t settle for anything else. This will take some time.”

Merkel, who is running for a third term at the helm of Europe’s largest economy in Sept. 22 elections, revived a theme she has honed during the euro area’s debt crisis, saying global financial markets require further regulation and watchfulness by policy makers.

German taxpayers shored up eight of the country’s biggest banks with more than 300 billion euros ($392 billion) in capital and guarantees during the turmoil sparked by the 2007 meltdown of the U.S. housing market. The banks are in varying stages of repaying the funds.

While banks have made progress on boosting their capital ratios, they “still have a way to go” and confidence in the financial industry hasn’t fully returned, Merkel said.

Basel III

Merkel said Basel III bank capital rules must be applied globally and not just by European firms. U.S. regulators delayed the rules for U.S. lenders last year.

The Basel Committee on Banking Supervision, whose first two versions of global financial standards failed to avert crises, established a new set of rules in 2010 dubbed Basel III. At least 7 percent of banks’ risk-weighted balance sheets must be backed by common equity that can absorb losses, up from 2 percent before the 2008 crisis, the committee determined.

Banks have a duty to serve the economy, Merkel said, citing a “phase of weak growth” in the euro area that has led to a split in sovereign-bond yields and a divergence in commercial lending rates among the currency union’s 17 countries.

High interest rates for the “real economy” in countries such as Portugal are creating the risk of a credit crunch that would hold back a recovery, she said. Even so, there is no alternative to the push for “solid finances” across the euro region, she said.

“You’re absolutely right, we carry a responsibility for the bigger picture,” Juergen Fitschen, Deutsche Bank AG’s co- Chief Executive Officer, said at the event, addressing Merkel. “Much of the solution has to do with society as a whole and if we let everyone participate, we’ll get to a solution that society accepts, that we create value for all.”

Fitschen today succeeded Andreas Schmitz as president of the BdB, a lobby group for Deutsche Bank and other commercial lenders.

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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