Tackling reform

Almost two years after the collapse of Lehman Brothers investment bank triggered the financial crisis, market reform efforts are finally beginning to take shape. The United States has made the most progress, setting up control mechanisms and granting investors the right to more information on financial products.

Meanwhile, European Union member states have agreed to largely symbolic measures like the capping of bankers' bonus payments. The push for deeper reform has become a bogged down in the debate over how much regulatory power can be concentrated in Brussels without sacrificing national sovereignty.

Throughout this process, Germany has actively promoted some proposals, blocked others, and even chosen to 'go it alone' on occasion.

Bank levy

One key measure that Germany and the rest of the EU pushed hard at the summit of G-20 nations last month was the introduction of a bank levy. Although Europe failed to convince the rest of the group to adopt the tax, a number of countries, including Germany, are moving to introduce a levy of their own accord.

Berlin wants financial institutions to contribute 0.04 percent of their balance sheets - minus customer deposits - annually to help fund future bailouts.

Andreas Neukirch, the chairman of GLS bank, describes the proposed legislation as a "blunt instrument" because it doesn't influence the lenders' day-to-day operations. He argues that it could lead to even more risk-taking.

"(There's a risk) that the bankers involved will say 'well, we've paid into the insurance fund, so we're entitled to get something back'," Neukirch said.

Transaction tax

Neukirch says the introduction of a transaction tax would be more effective than a flat levy because banks would be charged according to their turnover.

The German government managed to muster support for the tax across the EU, but once again, the proposal was shot down at the G-20 summit by emerging markets and non-European industrialized nations.

The actual implementation of a European transaction tax would most likely have been blocked by the United Kingdom, which is home to a large number of major financial institutions.

"If leading economies like Germany introduce such a tax, they won't see capital flows move elsewhere to avoid payment. Instead, they'll see more and more countries follow suit. At least, that's the signal we're getting from those smaller European nations that would climb on board if Germany were to make the first move."

But for now it doesn't look as though Berlin is prepared to take unilateral action. Lawmakers fear that a solo attempt to introduce a transaction tax could harm the nation's economic recovery.

"The result would be that many of the stock exchange transactions that currently take place in Frankfurt would instead be handled in Luxembourg, Singapore, London or New York," said Andreas Schmitz, the president of the Federal Association of German Banks.

Relocation risk

Singapore is already looking to lure European hedge fund managers to the city-state with low taxes and a newly developed business district equipped with cutting edge trading facilities.

German funds may be among the first to relocate. Last week lawmakers in Berlin approved legislation to "prevent misuse of stock and derivative markets".

The law prohibits 'naked short selling' - a process in which traders bet on falling prices by selling a stock they do not own in the hope they can buy it back later at a discount. If the price of the stock does indeed fall, the trader makes a hefty profit - but if the price rises, they incur large losses.

The unilateral ban attracted harsh criticism from both domestic and international observers. Even former West German Chancellor Helmut Schmidt piped up, telling Cicero magazine that the Merkel government's attempt to curb global speculation by going it alone was laughable.

Financial expert Karl-Heinz Paque from the University of Magdeburg agrees: "The federal government obviously wanted to send a message, but all experts agree that it won't make any difference because the majority of short selling occurs in London."

"This is not a good policy," Paque added. "This is merely action for the sake of action."

With more than 80 percent of European hedge funds operating from offices in London, Andreas Neukirch from GLS bank says the German ban will neither stop speculation nor disadvantage German financial institutions.

"I'm confident (the ban on naked short selling) will not harm the economy or the citizens of Germany," Neukirch said. "Instead it will help prevent really unjustified market fluctuations and dampen the escalation effect in times of crisis."

"In my opinion, you can't go wrong with a ban on short selling."

Author: Zhang Danhong (sje)
Editor: Chuck Penfold