VZCZCXRO4542
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHRL #0161/01 0420855
ZNR UUUUU ZZH
P 110855Z FEB 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 0402
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 000161 
 
SIPDIS 
 
SIPDIS 
 
TREASURY PASS TO FEDERAL RESERVE 
 
E.O. 12356:  N/A 
TAGS: EFIN EINV ETRD PREL PGOV GM
SUBJECT: STEINBRUECK CALLS FOR TIGHTER BANKING 
REGULATION 
 
 
¶1. SUMMARY:  For months, German Finance Minister Peer 
Steinbrueck (SPD) refrained from commenting on the 
sub-prime mortgage crisis in the U.S. and possible 
measures to prevent similar turbulences in the future. 
Now, in the week leading up to the G-7 Finance 
Minister meeting in Tokyo he finally broke his 
silence.  In a series of interviews with German and 
international media, Steinbrueck vented his anger over 
what he characterized as the careless behavior of 
banks and called for regulation that goes beyond the 
Basel II accord that would require more equity for 
risk-intense financial activities.  Steinbrueck 
believes the German system of state banks is in 
desperate need of consolidation but stresses that it 
should be up to the German states to implement any 
changes.  Embassy contacts have said that Steinbrueck 
had been looking forward to an opportunity to speak 
out for some time and feels very strongly about the 
points he made, especially those with respect to 
equity held by banks.  He also reportedly feels 
vindicated, having warned that lacking transparency in 
the international financial system would make it 
vulnerable to a crisis.  END SUMMARY. 
 
BANKS HAVE TO COME CLEAN 
------------------------ 
 
¶2.  Steinbrueck puts much of the blame for the current 
crisis on the behavior of the banks involved, 
particularly U.S. banks.  "In a careless way," he 
said, the U.S. banks gave mortgages to clients that 
were not really credit-worthy.  "Those banks then 
bundled the loans and sold them off to profit-hungry 
investors around the world."  In Steinbrueck's view, 
the banks were only able to do these transactions 
because they could keep the risks off their balance 
sheets.  "We have to close this accounting loophole," 
Steinbrueck said, criticizing the fact that bank 
managers are forced to acquire business by volume, 
regardless of the risks attached.  In order to calm 
the financial markets again, it is time for the banks 
to come clean and disclose all of their losses.  He 
accused the banks of taking a piecemeal approach to 
the disclosure of their sub-prime exposure, which 
contributed to market volatility. 
 
MORE REGULATION NEEDED 
---------------------- 
 
¶3.  Steinbrueck proposes several measures to prevent 
future financial crises similar to the one triggered 
by the sub-prime mortgage crisis.  Like many experts, 
Steinbrueck views the introduction of the tougher 
Basel II credit rules as an important step and calls 
on the U.S. to quickly implement these rules. 
However, he is now calling for measures beyond Basel 
II and wants to require banks to hold two percent in 
additional equity for risk-prone financial 
transactions.  In Steinbrueck's view this would keep 
banks from taking on risks beyond their means -- as 
was the case with several German banks.  While 
Steinbrueck stressed he would look to the G-7 and 
international fora for a joint introduction of such 
measures, he also expressed his intention to make 
changes in Germany alone if no consensus can be 
reached.  Finance Ministry experts confirmed to us 
that there would be room -- even within the EU 
framework -- to further tighten Basel II rules. 
 
¶4.  The association of private German banks told 
EconOff it will wait for Steinbrueck's proposal to be 
spelled out in detail at the G-7 meeting before taking 
an official position, but already rejected in 
principle the idea of additional equity requirements. 
"We did not spend years in the Basel round to figure 
out just the right percentage of equity needed...to 
now simply put two percent on top (of it)," an 
association spokesman told Embassy.  "The beauty of 
the Basel II accord is that it leaves breathing room 
for the banks to freely operate."  He also rejected 
the notion of a risk-dependent equity buffer saying 
that Basel II already incorporates such an element. 
The association spokesman also warned that higher 
equity requirements meant less investment.  "We should 
take such 'pro-cyclical' measures at a time of slowing 
growth." 
 
A CRISIS FOR THE U.S. BUT NOT FOR EUROPE 
 
BERLIN 00000161  002 OF 002 
 
 
---------------------------------------- 
 
¶5. Steinbrueck considers the financial crisis to be 
far from over, predicting it will be "with us for most 
of 2008."  Separately, he told the Ambassador on 
February 1 that the ongoing turmoil in the markets has 
had "a deep impact on the German banking sector." 
However, he stressed that there were differences 
between the economic situation in the U.S. and Europe. 
"In Germany the fundamental indicators are still 
positive," he insisted.  Steinbrueck believes the 
downward correction of the government's growth 
forecast from 2 percent to 1.7 percent is realistic. 
He pointed out that he had no interest in being overly 
optimistic since it would cause his fellow cabinet 
members to increase their financial demands. 
Steinbrueck -- and also Economics Minister Glos -- 
rejected the idea of a German stimulus package. 
Steinbrueck pointed out that the Merkel government had 
already introduced a 25 billion euro-investment 
program for 2007 - 2009 which was beefed up by 
additional state measures of another 10 billion euros. 
Furthermore, the lowering of the unemployment 
insurance rate from 4.2 percent to 3.6 percent at the 
beginning of 2008 together with the introduction of 
the corporate tax reform (also taking effect this 
year) were additional stimulus injections of 26 
billion and 5 billion euros respectively.  Anything 
beyond those measures would actually jeopardize the 
budget consolidation course "and such a signal would 
increase market volatility," Steinbrueck fears. 
 
THE GERMAN BANKING SYSTEM 
------------------------- 
 
¶6. Steinbrueck did not exclude the German banks from 
his criticism.  He particularly targeted the German 
state banks (Landesbanken) which engaged heavily in 
structured investment vehicles (SIV), a product "they 
were not properly familiar with."  Steinbrueck 
expressed disappointment over the failure of state 
banks to consolidate.  "This is a failure of the state 
governments.  Now the consolidation will come anyway, 
but it will take place in a moment of weakness of the 
state banks."  He made clear though that he had no 
intention of engaging the Federal Government in the 
process except for use of "moral persuasion." 
Steinbrueck fears that the minute the Federal 
Government gets involved it will be called upon to 
cover Landesbank losses. "This is a problem created by 
the states and will have to be solve by the states." 
 
TIMKEN, JR