Change bank regulations to let struggling lenders fail -- Weber
BUNDESBANK boss Axel Weber said last night that the German authorities could not let Hypo Real Estate Bank fail when it ran into difficulties with its Dublin-based subsidiary Depfa.
Speaking at the Institute of International and European Affairs, Mr Weber said we future banking regulations must be changed to allow some banks to fail.
"We need a regime where banks can fail in an orderly fashion and this is where the idea of a 'living will' comes in.
He added that there was a risk that the banking problems and the shortage of credit would put a break on recovery.
"Firms are not looking for extra credit yet but can banks deliver the necessary credit when they do?" he asked.
The Bundesbank president held up the stable German property market as an example, noting that home buyers typically have to have 30pc to 40pc of the cost of the house in cash. "Both the idea of 100pc mortgages or even 100pc mortgages is inconceivable," he said.
Earlier, in a speech in Trinity College, Mr Weber said new bank regulations need to address the issue of moral hazard or another crisis will happen.
Next ECB head
Mr Weber, who is widely tipped to become the next head of the European Central Bank and is now busy helping to draft a new regulatory framework for world banks, said the basic answer must be to increase the amount of money lenders have to keep in reserve for emergencies, known as the Tier 1 capital ratio.
The Tier 1 capital ratio should be highest for banks which have a systemic importance and are too big to fail, Mr Weber said.
This will discourage many banks from seeking to become classed as being of systemic importance.
While Mr Weber did not comment directly on banks in Ireland, Finance Minister Brian Lenihan has repeatedly said he stepped in to save Allied Irish Banks and Bank of Ireland from collapse because they were of systemic importance.
So-called utility banks, which do little more than store money for customers and extend loans, should need a lower Tier 1 ratio, he added.
The Bundesbank boss added that supervisors should be able to choose restructuring over bail-outs.
"Restructuring involving private investors would be the first choice and clearly preferable to direct public intervention," he added.
Mr Weber appeared less impressed with US plans to cap the size and limit the activities of banks, known as the Volcker rule after the octogenarian former Federal Reserve chairman Paul Volcker, who wanted to limit the complexity of banks.
"The Volcker rule enforces a corner solution and, as such, might have unintended and unfavourable consequences," Mr Weber said.
"It could, for example, have undesirable effects on the transmission of monetary policy," the German central banker added.
Mr Weber also criticised plans for a levy on banks that could be used to create a fund to bail out troubled European banks in future crises. "First, it would drain capital from banks. But, more importantly, it would not solve the moral hazard problem," he said, adding it could even amplify that problem.
"As the fund would act as lender of next-to-last resort for failing banks (the government would still have to step in if the fund's resources were exhausted in a crisis) the problem would merely be shifted from the level of government to the level of the fund."