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German banks weren't just victims of the financial crisis

German banks weren't just victims of the financial crisis Interview with the Bild newspaper on 17 September, published in the online edition 

17.09.2018 | Jens Weidmann

Interview with Jens Weidmann conducted by Kai Weise.
Translation: Deutsche Bundesbank

Would you say we all fell victim to US speculators back then?

There's more to the story than that. The financial crisis was a German crisis as well. While it’s true that the crisis originated in the United States, German banks were more than just victims. Many of them had taken on more risk than they were ultimately able to bear. 

You were the Chancellor’s policy adviser back then. Were you aware of the risks that the banks – many of them small institutions and Landesbanken – were exposed to? 

The uncertainty surrounding exposures was part and parcel of the problem at that time. Banks were invested in highly complex products with opaque risk profiles.

And many banks were trading in those products without understanding them – and hardly anyone has been punished for doing so.

Punishment is a matter for the criminal prosecution authorities. I understand that many people had been expecting managers involved in particularly severe instances to be hauled into court and prosecuted. And I can also appreciate their disappointment. But for that to happen, a court of law ultimately needs to be satisfied that a crime has taken place.

Ten years ago, one could be forgiven for thinking that the government had lost control of the situation. 

Events back then crushed many people’s confidence and shattered trust in the financial system. And you could say that confidence in the government took something of a knock as well. In a situation like that, it was right and important for the government to intervene decisively. You will remember that the Federal Chancellor and the Finance Minister spoke directly to the general public to put an end to the loss of confidence. And the regulatory framework has been toughened up as well.

So you’re saying that a financial crisis like the one that happened a decade ago couldn’t happen again today?

The banking system has been made more stable. Above all, the capital requirements that banks are expected to meet have been increased. That gives them a buffer to use in case they run into difficulties. And more of their owners’ money is at stake because regulators have strengthened the liability principle, which is that whoever reaps the benefits must also bear the liability. But at the end of the day, no one should be under any illusion that the government can prevent crises from happening altogether. Taking on risk is what businesses and banks are supposed to do in a market economy. Imagine you develop a new product – you have no way of knowing how well it is going to sell. And the bank that helps finance it doesn’t know either. But the amount of risk does need to be properly reflected in the borrowing rate paid and in the prudential requirements.

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