Academic journal article German Policy Studies

Political Deadlock in German Financial Market Policy

Academic journal article German Policy Studies

Political Deadlock in German Financial Market Policy

Article excerpt

1 Introduction

When in 2011 the financial market crisis turned into a debt crisis affecting not only banks and insurance companies but also entire countries, the negative consequences of the 2007/2008 crisis were not even got over. Governments in Europe and other regions have to prevent the collapse of whole economies or even the entire euro zone. Facing new challenges, the political answers to the crisis before are almost forgotten and the implementation of new regulation is hardly recognized publicly. The same applies to the failed reform of the German financial market supervisory system. With regard to supervision, the German government decided to keep the status quo ante before the crisis although the modification of the system had been a main topic on the political agenda for more than one year. With the crisis on the climax, the government announced to improve regulation and supervision for more financial market stability in the future. At this time, the crisis brought the state in and paved the way for government interventions in market processes. In fact, it was even possible that banks--like the German Hypo Real Estate (HRE)--became state-owned after their insolvency due to the threat of contagion and the collapse of the financial system (Altvater et al. 2010). And although some political reactions show "patterns of symbolic policy reform" (Mugge et al. 2010: 314), the violation of a public good, namely the stability and integrity of the financial system including aspects of consumer protection, put forth the agreement that public regulation and supervision must improve. Therefore, political actors reacted in two ways. First, with measures in regulation, this is the rulemaking concerning risk based capital requirements and other restrictions for the business of the financial industry, and second, with measures in supervision, this is the implementation of regulation by special authoriies (Handke 2010b). The intended reform of supervisory structures in Germany and the related political non-decision are central issues of this article.

The German single supervisory authority BaFin (Bundesanstalt fur Finanzdienstleistungsaufsicht) and similar agencies in other European countries are crucial for the success of financial market regulation. They are not only charged with the supervision and implementation of rules and standards, but they also take part in the establishment of risk regulation within transnational bodies like the European Insurance and Occupational Pensions Authority (EIOPA) or the Basel Committee on Banking Supervision. Further, on the national level, they have to scrutinize internal risk models of companies. In testing these models, supervisory authorities do not only implement rules that cope with the risk of financial businesses, this is the mere risk regulation, but they also have to deal with the severe phenomenon of model risk or model uncertainty. This is "a new risk category [which] can hardly be overestimated" (Sibbertsen et al. 2008: 66), as it covers the mathematical problems of abstracting from reality, to derive risk models predicting the probability of credit default risk. Therefore, the boundaries between risk regulation and supervision are blurring and a supervisory agency like BaFin is involved in both.

Financial market regulation is typically determined by political considerations of governments and "there is little reason to expect that regulatory change will in fact take a form that produces the outcomes so often claimed by its advocates, such as allocative efficiency [...] or, for that matter, financial stability" (Perez/Westrup 2010). Regulatory reforms are not only a function of political interests, but moreover, they are hard to develop and cannot be established over night, since financial market rules are very complex. These two aspects led to the national governments' agreement to make joint decisions in regulation, to coordinate their activities internationally and to construct new rules in a cooperative way between European member-states, the United States of America and other industrial countries (FSB 2009). …

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