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Opening of the XIXth German Banking Congress

Bundespräsident Christian Wulff beim XIX. Deutschen Bankentag Berlin, 31 March 2011 Bundespräsident Christian Wulff beim XIX. Deutschen Bankentag © Steffen Kugler

This is the first German Banking Congress since the outbreak of the largest ever global systemic financial crisis. Expectations for this Banking Congress are therefore high. And certainly people are taking a more critical view than they did of past Banking Congresses five or ten years ago. For the repercussions of the grave crisis of confidence in the entire financial sector aren’t over yet and will continue to occupy us.

It’s an undisputed fact that the banks and the financial sector are of vital importance to our economic processes. We’re all aware of the responsible and important role which you as representatives of the financial sector play in the overall development of our economy.

Nor is there any doubt that banks are first and foremost service providers and that the vast majority of the almost 700,000 employees in the German banking sector are responsible and do good work day in and day out. They serve their customers as advisers, fiduciaries and financers. They play a major part in ensuring that savers, those building their own house, traders, SMEs and large companies receive sound financial advice. With the help of their bank, they do business and create sustainable wealth. That’s why many banks have a reputation for trustworthiness and reliability. Their work ensures that the economic cycle doesn’t falter but that it continues to flow and function well.

German banks can look back on a long tradition. They made a valuable contribution towards our country’s rise and prosperity. For that they deserve our thanks. That’s why they enjoy an exceptionally high standing in the German business community and society. It’s important to me that you are aware of this and live up to your responsibility.

The crucial importance of the financial sector to the entire economic system was the only justifiable reason for launching the largest bank rescue of the post-war period in so many countries. This was the only reason why political leaders could justify the sacrifices every citizen in our own and other countries had to make in order to contribute so substantially to the rescue of the financial system.

Let’s remind ourselves once more of the scale of the rescue measures: In Germany, 400 billion euro in state guarantees for the banks and a further 80 billion euro to recapitalize banks in distress were made available. For the eurozone countries, a rescue package totalling 750 billion euro was launched in order to protect our currency – the euro – from the impact of the national debt crises in some eurozone countries. In addition, a further 110 billion euro in assistance were granted to Greece.

This is extremely difficult for politicians to justify: while sports complexes and libraries are being closed due to empty coffers, hundreds of billions of euro are being set aside. A great number of citizens find that very difficult to comprehend.

The outbreak of the financial crisis was a shock to everyone. The global financial world and the entire global economy all stood on the brink of a precipice.

Did this shock have a lasting impact? Did it prompt us to stabilize the foundations of our banking system, to adjust the rules on a permanent basis, to reform the financial system and make it weatherproof?

I still have my doubts. It sometimes seems to me that thanks to the state’s crisis measures many have forgotten what happened and have fallen back into their old ways. I very much hope I’m wrong, but such doubts have to be dispelled.

The financial crisis tested both financial and monetary policy to the limit. We should be under no illusions that such a large-scale and concerted rescue could ever be repeated. Taxpayers wouldn’t be prepared or able to undertake such an extraordinary effort again.

We shouldn’t forget that this crisis didn’t come out of nowhere. The regulatory framework wasn’t strong enough to guarantee the stability of the financial system. And some people had a tendency to exhibit hubris, to overestimate their abilities.

Something else which I find remarkable is that most of the players on the financial markets are men. It would be good for the financial sector if more women were to take over senior managerial posts. Women are said to have a different perception of risk. I believe more diversity here would also produce better and viable results.

Probably some of you already sensed before autumn 2008 that business and bonus trends in the financial sector were too good to last for ever. A long hard look at what was going on around you would have been enough to remind you that all good things come to an end.

So I wonder: how much have we learned from this? Will it have a lasting impact? Have the causes of the crisis been dealt with? Have we really learned from our mistakes?

To be quite frank, I believe the answer to all of these questions is "no" – we’ve neither dealt with the causes of the crisis nor can we say today that we’ve recognized the risks and done everything to minimize them.

I’m aware that progress has been made both at national and international level, namely the efforts at G20 level, the Basel decisions on more equity capital and liquidity and the reform of EU financial supervision. But I’m not the only one asking: is this enough? At national level, the right course was set with the adoption of the Restructuring Act and the introduction of a bank tax. And just a few days ago, the European Council adopted a strategy to take the Monetary Union out of the crisis. However, this can only succeed if the stricter rules and procedures adopted are now consistently adhered to. Only then can the pressing debt problems be solved.

We mustn’t forget that these debt crises were fuelled by banks being too ready to lend large loans. For a long time, many didn’t look too closely. And they assumed that high interest rates didn’t mean high risk, for others were footing the bill. This, too, contributed to the systemic dimension of the financial crisis. In some countries, the national debt crisis thus became a major factor in the "other side of the coin" as regards the shortcomings of the financial sector. In my view, there can be no doubt in future private creditors will have to write off their claims in the event of a debt overload. This is more or less inherent to the system. Resistance to this is making many suspicious. The problems in all eurozone countries have to be tackled at the root. That applies in particular to the banking sector where we have to make quicker and more sweeping progress in restructuring. In Germany’s case, we have to reform the Landesbanks. The owners have to do more to live up to their responsibility, also with regard to sustainable business models.

Despite the headway which has already been made, I remain convinced – and this is the first of three arguments I’ll put to you today – that to date it has only been possible to contain the financial crisis and stabilize the banking sector. The reasons for the difficulties, the reasons for the economic and financial problems and for the crisis have not yet been addressed. In some cases, time has merely been bought. I fear that without a fundamental change of course, new financial crises are looming ahead.

Admittedly, the causes are manifold. The global systemic crisis is, as it were, the result of “multiple failure”. However, this mustn’t lead us to look for an excuse for those who have made mistakes. Whoever breaks the law must be prosecuted. However, there’s little use in pointing the finger at individual banks or sections of the banking industry. Many things have gone wrong in many different places. This also applies to banks which seem to have weathered the financial crisis well but, of course, benefited – and indeed still benefit – from the government’s rescue measures. However, it also applies to supervisory bodies and central banks, as well as politicians.

Many of the radical changes in the financial sector are due to the rapid development of information and telecommunication technology. This has made many innovations possible which have benefited customers, for example, in the spheres of non-cash transactions, in online banking or in securities trading. But there are no doubts also other financial innovations whose purpose or usefulness is unclear. I believe the onus is on banks to explain their sometimes extremely complex products in clear and comprehensible terms to both customers and regulators.

These include investment products and securities which often involve considerable financial risks and, on closer inspection, high fees for the customer. Many investors can’t understand the complex structures of these products – even though all too often many of them seem to be recklessly keen on gaining a high return. Are these investment products sound? Banks in Germany have already issued more than half a million index-linked securities certificates, many of which are highly speculative or contain bonus elements. We have to ask ourselves: is this development really healthy or are we repeating the mistakes of the past? Those who sell financial products have to understand them, as should those who buy them. Otherwise both sides should let it be.

Recent reports have claimed that almost 40 per cent of the stock market turnover in Germany takes the form of high-frequency trading. Some experts point out that this trading boosts market liquidity within a fraction of a second and lowers trading costs. That may be. But wouldn’t it be better to consider whether slowing things down might not produce better results? That it might lead to carefully considered decisions on the financial markets? To more caution when investing money or trading securities? Otherwise, an increasing volume of high-frequency trading could also lead to high-frequency decisions on the financial markets. Is that really what we want? I think we should and must take a much more critical look at this than hitherto, especially when we consider the sums involved.

I therefore want to state very plainly that it was a mistake to deregulate and liberalize the movement of capital and the capital market around the world without creating a functioning global regulatory framework beforehand. A regulatory framework which allows what is desirable in economic and financial policy terms and which drastically clamps down on what is undesirable and damaging. A global financial market needs a solid framework with clear rules and fair competition conditions. That would be in keeping with good regulatory tradition.

If we want to preserve free movement of capital and free capital markets – and that’s what is ultimately at stake – then we have to address these shortcomings now.

One key rule in our market economy is that companies shoulder the investment risk. Those who make profits can also withstand losses. Liability must remain with the company. This also means that businesses can fail. We have to respect this basic principle, even in the financial sector and banking industry. That the International Monetary Fund is now warning the systemic risks in the financial system have grown has therefore made me think. It cannot be that our rescue and support measures end up once again increasing false incentives for the financial sector. We therefore urgently need a convincing answer to the question as to how to deal at international level with complex systemically relevant banks.

And that brings me to my second argument: we can no longer afford another crisis of this magnitude. For such a crisis would not merely be a crisis in our financial and economic systems but a crisis in our democracy which would ultimately undermine the acceptance of our economic system. I therefore call upon the financial sector to actively help devise clear rules in order to guarantee the stability of the banking sector and of the financial markets.

This is necessary to ensure that politicians don’t end up under pressure to take action. Politicians must once again set up a regulatory framework for the financial system. There is no other option: The rules have to be tightened so that the financial system can again become more resistant and crises less likely. There is a price to be paid for this additional security and stability, but it is indispensable.

I also want to stress that banks have to share responsibility for the cohesion of our society. And, of course, the matter of salary levels has to be mentioned here. In the days when the members of the board of banks were not employees but, rather, were personally liable for any debts incurred, this question was not to the fore. But we have to conduct this debate today.

It goes without saying that bankers require a high degree of expertise and training which is often demanding. But, ladies and gentlemen, that also applies to other walks of life. Many other professions require extensive training, perseverance and considerable dedication. I and many others therefore find it difficult to understand why it’s possible in the financial sector to earn such high salaries without being expected to carry some of the risks. After all, many other professions also play a very important role in our society: whether it be teachers or carers in an old people’s home who look after many people every day, or architects and engineers who design innovative buildings and carry responsibility for bridges and infrastructure. At present, midwives are fighting for the future of their entire profession because high premiums for liability insurance are eating up their low income.

Therefore, the question of the level and structure of salaries in banks is not just a functional question – and certainly has nothing to do with envy. This is also about incentives which have to be set at the right level so that dealings on the securities markets are not determined by short-term considerations, so that decisions are not based on the results of the current business year or perhaps of the coming one. But it’s also about stating clearly that in a globalized economic order there cannot be groups within our society who appear to live in a parallel world. Groups who base their salaries on a supposedly vast creation of wealth, which, in the final analysis, is no such thing and damages the entire economy. Anyone who wants to belong to a country’s elite, must also set a good example and assume responsibility – without any ifs or buts.

That brings me to my third argument, which takes the form of an appeal to you. I believe banks have a special responsibility to win back trust. In their own interest, they have to show that they have undergone the change in values which is required now. This is in their own interest because the actual capital of banks is trust and credibility. Banks and their staff provide a service, their work is not an end in itself. There has long been consensus within our society that one shouldn’t exploit the inexperience or lack of judgement of a business partner to gain an advantage, and that one shouldn’t profit from a blatant incongruity between what the two sides have to offer each other. This sets limits which have to apply in particular in the interconnected and globalized banking sector on the international financial markets.

First and foremost, bank managers – both male and female – should help to ensure the sustainable success of their customers’ economic interests. One of the strengths of German banks has always been their presence on the high street, the fact that they know customers personally and value them. This has given rise to long-term viable business ties, as well as intact relations based on trust. That had a stabilizing impact during the financial crisis.

The bank sector cultivates a down-to-earth commercial language. You know, ladies and gentlemen, what it means when guarantees have to be provided and payments become due. You know that you have to give something back to society, which provided guarantees for banks.

We all have to realize that we are faced with ever tougher global competition. If we don’t want to fall behind, then we need efficient structures and we have to resolve the difficulties in the financial sector as quickly as possible.

As an economically strong nation, Germany strives to show leadership qualities. Our strengths are reliability, credibility and a high level of creditworthiness. Our economy and our society are based on trust. Germany has to be prepared in Europe, and at global level, to move ahead to achieve intelligent and sustainable economic progress. We must not let others take the lead. Anyone who wants to gets things moving has to move themselves.

In order to focus ahead, we have to remember that moderation and reason are our maxims. Moderation is a primary virtue. For the banking and financial sector this means that the days of excessive dividends and quick profits are over and must never return. They mustn’t return for the banks, which will have to cope with lower returns and tougher security regulations. Nor for the savers and investors who were blinded by the intoxicating returns to be acquired on the stock markets and recklessly went for quick profits. Nor for politicians who have to regain the upper hand at both national and international level by finally abiding by the rules, getting public finances into shape, as well as by laying down clear rules for the financial sector. All of this may sound very sober for today’s meeting but it would be a viable route to take. And that’s what matters in the end. We should be able to take a more relaxed view of things in five years’ time. Until then, we have to sort out everything that has come off track.