Watching the Banks

Thursday's news that Chancellor Angela Merkel and her pro-business Free Democrat partners want to make Germany's central bank, the Bundesbank, solely responsible for monitoring the country's banking affairs comes as no great surprise.

The federal bank has been quite vocal about the fact that it feels up to the job, and with the clouds of economic woe still darkening the skies over Europe, there is a certain feeling that a change would be as good as a rest. Or indeed, better.

Chairman of International Banking and Finance at Frankfurt's Goethe University Reinhard Schmidt says the announcement is a very good thing for the banking sector.

"I think it is very important that decisions be made where people have access to the best information," he told Deutsche Welle, adding that he believes the Bundesbank is the best choice.

One mind better than two?

As it stands, Germany's banks are overseen dually by the Bundesbank and the Financial Services Authority, known as BaFin. The latter, a federal institution which falls under the jurisdiction of the Finance Ministry, has come under fire of late for failing to avert a number of recent banking disasters.

Schmidt says the division of labor between the two supervisory bodies is unnecessary and lacks much-needed clarity.

"Presently the Bundesbank is responsible for supervision. It then shares its results with BaFin, and BaFin does a bit more supervising," he explains.

Under such a system, he maintains, it is inevitable that some does missing, which in turn can have monumental consequences.

But banking expert Thomas Hartmann-Wendels disputes the widespread perception that Germany's two-tiered approach creates more problems than it solves.

"To some extent I think this is about prejudice towards a state authority, and the Free Democrats' lack of confidence therein," he told Deutsche Welle.

Not all bad

As far as Hartmann-Wendels is concerned, the two bodies regulating the banking sector have not been the worst of bedfellows.

"In reality, I don't see many problems in having the regulation split," he says. "To my knowledge there have been no serious problems of co-ordination between the two institutions."

The financial expert goes further, suggesting that even if the Bundesbank were to hold the supervisory baton all by itself, the biggest change would be to its status.

"I think the people who do the job will remain the same, the employees of BaFin will become employees of the Bundesbank," Hartmann-Wendels says. "To change the name will not change banking regulation and will not improve banking supervision."

So what will? Schmidt says the main lesson the banking sector should have learned from the current crisis is to make sure they manage risk properly.

"Supervisory powers should monitor risk management systems more closely," Schmidt says, adding that they should also look keep a tighter watch over the viability of banks' business models - a task he believes the Bundesbank is perfectly well equipped for.

The importance of being impartial

Even if that is the case, there is another worry buzzing about Germany, and that is one of political impartiality. Many are concerned that the Bundesbank, despite it pledges to the contrary, could allow its regulatory policies to be influenced by the state, which is keen to avoid a repeat of the current and costly crisis.

In order to ensure that the federal bank does not forget its resolve, Hartmann-Wendels says it should be overseen by another independent body. "Naturally the banking regulator needs some independence," he explains. "But the regulator should also be regulated."

Schmidt, however, disagrees. He says the vast amount of time the Bundesbank spends under the media spotlight already constitutes regulation by the public.

Reporter: Tamsin Walker
Editor: Sam Edmonds