GERMANY WILL this week call on the world’s largest economies to adopt joint measures to prevent banks from becoming “too big to fail” in future financial crises. In a letter to counterparts from the Group of 20 (G20) largest economies, German finance minister Peer Steinbrück urged members to agree on “international rules that facilitate the insolvency and liquidation of large, internationally active banks”.
The proposal, which comes ahead of a G20 finance ministers’ meeting in London at the weekend, is among the most concrete steps floated by a government in response to the dilemma posed by the collapse of Lehman Brothers in the US a year ago.
That bankruptcy caused the world’s financial infrastructure to seize up as banks stopped lending to each other in anticipation of further insolvencies. The crisis forced governments and central banks to intervene by injecting massive amounts of capital and liquidity into their paralysed financial sectors and bailing out banks.
Speaking last week, German chancellor Angela Merkel called on G20 government heads, who meet in Pittsburgh later this month, to discuss “what we could do so that we no longer have banks that are in a position to blackmail governments”.
In his letter, Mr Steinbrück wrote: “It has proved unavoidably necessary to rescue banks from insolvency, if they are large and relevant to the continued functioning of the banking system, in order to prevent damage to our countries’ economies. This is not an acceptable situation.”
Officials said talks had taken place at the working level within the G20 on additional measures that could prevent banks from becoming so large as to threaten their countries’ economies.
These could include “variable geometry” capital requirements depending on a bank’s balance sheet, which would force larger banks to set aside more capital than smaller ones.
“This would put an additional cost on running a large bank since higher capital requirements mean lower profitability,” one senior Berlin official said. – (Copyright The Financial Times Limited 2009)
