Financial Reform
April 10, 2008
"The leadership of our industry recognizes its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future," said Josef Ackermann, CEO of Germany's biggest bank, Deutsche Bank, on Wednesday, April 9, in Frankfurt.
Ackermann presented a reform proposal by the Institute of International Finance (IIF), a body of 375 international financial institutions that he heads. The IIF's report was delivered shortly before the finance ministers of the Group of Seven industrial nations are due to discuss banking conduct and monitoring efforts on Friday in Washington.
"We shouldn't count on regulating away the banks' problems," agreed Manfred Weber, managing director of the Association of German Banks.
More transparency and accountability
The IIF's 98-point paper focused on strengthening risk management and improving transparency for complicated products by simplifying pricing systems and making more information available to customers.
According to the report, short-term pay incentives for financial managers increased their willingness to take unnecessary risks -- something that should be avoided in the future by developing a plan that links managers' compensation to long-term success.
International rating agencies, which have been generally criticized for underestimating risks, also came under fire in the paper. The IIF recommended that rating agencies revise their capital asset pricing models to make them more understandable to the customer.
In an effort to enforce these reforms, Ackermann, speaking on behalf of the IFF, proposed a monitoring group to be put in place by the end of the year.
"We are considering a group of approximately 10 to 20 highly respected experts and eminent leaders of finance who can combine their experience and knowledge to alert the industry to actual and potential vulnerabilities and market developments that pose systematic risks," said Ackermann.
The IFF is expected to deliver a detailed code of conduct for banks this summer.
German bank goes under
Also on Wednesday, Germany's first banking fatality tied to the financial crisis was announced. The small German investment bank Weserbank said that it had begun insolvency proceedings. Banking watchdog BaFin said the closure had more to do with the bank's new business model than with the financial crisis.
Weserbank chief Gerold Lehmann saw it differently: "Under normal circumstances, we never would have had to close the bank. We are suffering from a loss of trust as a result of the financial crisis."
World-wide losses and write-downs have totaled more than $200 billion since the market crisis began in the United States late last year.
Light at the end of the tunnel
German Finance Minister Peer Steinbrueck said in the Thursday edition of the business daily Handelsblatt that he was concerned that a similar financial crisis could happen again, but also warned against inflated pessimism.
"That the market is plunging doesn't mean that it will plunge forever," said Steinbrueck. He added that the check and balance mechanisms don't function properly if the risk of insolvency is so high that the state or emergency banks have to step in.
Nevertheless, Europe is not experiencing a recession, said the finance minister. Growth estimates in Germany for 2008 span a wide spectrum, varying from 1.3 to 2.1 percent.