Bank levy

The German government believes bankers are mainly to blame for triggering the 2008 financial crisis by trading in increasingly risky investment products. For this reason, Chancellor Angela Merkel's Christian Democrats (CDU) and her coalition partners, the Christian Social Union (CSU) and Free Democratic Party (FDP) agreed at the weekend to regulate banking and impose a levy on financial institutions to offset any future crisis.

Volker Kauder, the parliamentary leader of the CDU, said on national television on Monday, "in future, banks cannot gamble at the taxpayer's expense."

"If this sort of thing happens again, the banks will be able to tap into the fund that they have created,” Kauder said. “It's like provisional insurance."

Nine billion euros if Germany follows US example

The size of the levy is expected to vary according to the size of the bank, and the level of risk it is exposed to, but it is unclear how long banks would be required to pay in to the fund.

If the levy were to be set at a similar level to the 'Financial Crisis Responsibility Fee' proposed by US president Barack Obama, Germany's banks could end up paying around nine billion euros ($12 billion) a year into the fund. The US tax, set at 0.15 percent of total assets, was also proposed by Obama to deal with potential future bank failures in America.

Under this law, Germany's largest bank, Deutsche Bank, would have to pay around 2.2 billion euros a year, around one-third of its pre-tax profits. Commerzbank, another major bank, would have to pay around 1.2 billion euros. Unlike Commerzbank, Deutsche Bank, did not require any government bailout money.

Experts agree all should pay the levy

Martin Ruckes, Professor of Finance and Banking at the University of Karlsruhe, told Deutsche Welle that all banks, including Deutsche Bank, should pay into an emergency fund.

“It's appropriate to have all banks pay into this, especially those that are large enough to threaten the financial system,” said Ruckes.

“It's not a levy that takes into account about what has happened in the past," he continued. "Instead, you look into the future, and say Deutsche Bank may need financial support in the future. That is why large institutions should pay even though they didn't need support before.”

Government sources said the financial market stabilization fund SoFFin established in October 2008 during the financial crisis would manage the fund.

We didn't cause the crisis!

Building societies, savings and cooperative banks operating in low-risk areas, such as the Volks- und Raiffeisenbank are likely to have to contribute less than Germany's larger banks with greater risk exposure.

But the savings banks are still not thrilled with the idea and insist that the government identify which financial institutions caused the financial crisis of 2008, and which did not.

“The savings banks most definitely were not responsible”, said Rudolf Faltermeier, the vice-president of The Bavarian Association of Savings Banks.

“The levy should be imposed on internationally structurally relevant financial instutions,” said Stephan Goetlzl, president of Bavaria's Volks- und Raiffeisenbank.

Professor Ruckes doesn't believe the levy is the best instrument to be used to address excessive risk-taking in the banking industry, but says it is probably the one that has the best chance of being approved. "It doesn't really change the behavior of banks - it just makes them save into an anonymous account,” Ruckes said.

“I think it's a moderately useful instrument, a straightforward way to prepare for future crises in the banking sector, although it will take quite some time to accumulate enough funds to withstand or finance a major breakdown.”

The opposition Social Democrats reject the levy, preferring to impose a speculation tax and more regulation instead.

The government is set to introduce a team of financial experts to work out the details of the coalition's reform plan, and assess the different risk profiles of financial institutions. The panel is expected to outline proposals before the end of the month.

Author: Wilhelmina Lyffyt
Editor: Ben Knight