VZCZCXYZ3123
OO RUEHWEB

DE RUEHFT #0636/01 0641455
ZNR UUUUU ZZH
O 041455Z MAR 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4987
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES  IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS FRANKFURT 000636 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EU GM
 
SUBJECT: Views from Frankfurt on German Banking Regulation and 
Supervision in the Wake of the Subprime Turmoil 
 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
REF: DUESSELDORF 0007; b. 08 BERLIN 0161 
 
¶1.  SUMMARY.  Following months of global financial turmoil, German 
banking regulators have taken steps to harmonize and standardize 
their practices.  At the same time, Germany's Finance Minister has 
become more vocal in criticizing the current regulatory system, 
calling for higher capital requirements for banks.  CG Frankfurt 
Econ Off and Econ Spec met with Frankfurt-based banking officials 
and executives to discuss views on tighter regulation, finding 
general consensus that the recent demarcation of powers between 
regulatory agencies was a positive development.  On the other hand, 
reactions to Finance Minister Steinbrueck's call for more action are 
skeptical.  Few believe that EU member states will cede supervisory 
authority to the European Union, and will instead continue working 
towards greater coordination and convergence.  END SUMMARY. 
 
BUNDESBANK AND BAFIN DEFINE COMPETENCIES 
---------------------------------------- 
¶2.  The February 5 agreement between Germany's central bank, the 
Bundesbank, and its financial supervisor, the Federal Financial 
Supervisory Authority (BaFin), ended a long-standing debate over 
areas of responsibility between the two (reftel a).  Officials at 
the Bundesbank said they welcomed the agreement because it further 
ensured the institution's long-standing reputation as Europe's most 
independent central bank.  The agreement leaves the Bundesbank 
firmly in charge of everyday monitoring, while BaFin will assumes a 
coordinating role (i.e. banking supervision, sanctions, 
policy-making), including interacting with the Finance Ministry on 
rule-making.  The Bundesbank can now focus on its main duties: 
maintaining stability and acting as a lender of last resort. 
 
¶3.  Private bankers have responded favorably to the agreement noting 
that by eliminating duplication, the two bodies will save on 
reporting costs.  An executive at Deutsche Bank pointed to the 
significant cost savings for smaller banks, resulting from fewer 
BaFin special audits.  An executive at Helaba said that leaving 
day-to-day oversight with the Bundesbank "made sense" due to the 
Bundesbank's location in Frankfurt -- Germany's financial capital. 
Opinions varied on which supervisory institution benefited most from 
the recent agreement, with some contacts noting that BaFin, as the 
regulatory authority, had won the real power and others commenting 
that Bundesbank, now firmly responsible for day-to-day auditing, had 
most of the work. Most agreed, however, that the new agreement was 
more efficient and made sense. 
 
STEINBRUECK'S CALL FOR ACTION GETS LUKEWARM RESPONSE 
--------------------------------------------- ------- 
¶4.  Both before and during the recent G-7 Finance Minister meeting 
in Tokyo, German Finance Minister Peer Steinbrueck responded to 
global financial turmoil, calling for Germany to tighten banking 
regulation by raising capital requirements 2% over Basel II 
guidelines, if necessary unilaterally (reftel b).  With Basel II 
only having gone into effect on January 1, 2008, Bundesbank 
officials cautioned against premature conclusions.  Moreover, they 
criticized Steinbrueck's proposal as unnecessary, since most banks 
already exceed the minimum requirement. 
 
¶5.  Officials at the European Central Bank (ECB) speculated that 
Steinbrueck's proposal could be a back door to his goal of achieving 
furthering bank consolidation. (Note: raising capital requirements 
would disproportionately impact small banks.)  They questioned 
whether such a requirement would run counter to the European Union's 
stated goal of maintaining a level playing field in the banking 
sector.  Several sources pointed out that Steinbrueck's call had 
failed to address the real root of financial turmoil: special 
investment vehicles and conduits that operated off balance sheets, 
had no capital requirements, and had to be rescued by large 
liquidity injections once the commercial paper market dried up. 
 
TOWARDS AN EVER CLOSER UNION? 
----------------------------- 
¶6.  Officials at the Bundesbank and the ECB agreed that European 
supervisory bodies needed to move toward greater standardization, 
but that a single European Union supervisory authority was unlikely, 
even in the long run.  The lack of common reporting standards among 
eurozone members creates difficulties for the ECB, which makes 
decisions on the basis of different methodologies that can not be 
properly compared.  ECB officials pointed out that since 2003 member 
states have slowly moved towards convergence through the so-named 
Lamfalussy framework and greater cooperation has been achieved 
through the Committee of European Banking Supervisors.  They further 
argued that, even if the political will existed, the EU would need 
to take on law-making authority and revise the union treaty, both of 
 
which were unlikely. 
 
¶7.  COMMENT.  As the full extent of the damage to the German banking 
industry caused by the subprime crisis unfolds in 2008, the debate 
on banking regulation will continue with officials and politicians 
looking to ward off the next crisis.  While the system has, for the 
most part, responded well, experts here intend to keep a close eye 
on the implementation of Basel II reforms and on how BaFin and the 
Bundesbank adjust to their more clearly defined roles.  Perhaps the 
most critical question will be how politicians react if more banks 
fail and the public outcry increases.  END COMMENT. 
 
¶8.  This cable was coordinated with Embassy Berlin and CG 
DUESSELDORF. 
POWELL