No Country for the Market: The Regulation of Finance in Germany after the Crisis

Abstract

The severity with which the financial crisis struck Germany in 2008 came as a shock to German elites. The relatively traditional shape of its bank-based financial system was supposed to isolate the country from the vagaries of Anglo-Saxon capitalism. Instead, the government was forced to unprecedented steps, such as the de facto nationalisation of banks and an unlimited guarantee on savings deposits. A comprehensive reform of financial regulation in the country seemed imperative. This article evaluates change in the institutional structure of financial sector regulation and supervision in Germany. The inconclusive debate about the reorganisation of financial supervision, the emergence of new regulation in the field of bank restructuring, and the attempted reform of the deposit insurance system are used as empirical cases. It is argued that the constraints of the German political system impeded the comprehensive reform that might have been expected after a major shock. Instead, a pattern of institutional layering was perpetuated which contains the germs of future dysfunctions.

ACKNOWLEDGEMENTS

I would like to thank the reviewers of German Politics for very helpful comments.

Notes

Regulation is understood here as a process of rule-making, whereas supervision is the implementation of these rules. Frequently, implementation requires institutional change.

On Switzerland, see S. Steinlin and C. Trampusch, ‘Increasing Vulnerability: Financial Market Regulation in Switzerland’, in R. Mayntz (ed.), Crisis and Control: Institutional Change in Financial Market Regulation (Frankfurt: Campus, 2012), pp.143–70.

P. Katzenstein, Policy and Politics in West Germany: The Growth of a Semi-Sovereign State (Philadelphia: Temple University Press, 1987). See also S. Green and W. Paterson (eds), Governance in Contemporary Germany. The Semi-Sovereign State Revisited (Cambridge: Cambridge University Press, 2005), and M.G. Schmidt, Political Institutions in the FRG (Oxford: Oxford University Press, 2003).

F.W. Scharpf, ‘Die “Politikverflechtungsfalle”: Europäische Integration und deutscher Föderalismus im Vergleich’, Politische Vierteljahresschrift 4/26 (1985), pp.323–56.

M. Schmidt, ‘Germany: The Grand Coalition State’, in J.M. Colomer (ed.), Political Institutions in Europe, 2nd ed. (London: Routledge, 2002), pp.55–93.

P.A. Hall and D. Soskice (eds), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage (Oxford: Oxford University Press, 2001); B. Hancké, M. Rhodes and M. Thatcher (eds), Beyond Varieties of Capitalism: Conflict, Contradictions, and Complementarities in the European Economy (Oxford, Oxford University Press, 2007); B. Amable, The Diversity of Modern Capitalism (Oxford: Oxford University Press, 2003).

F. Allen and D. Gale, Comparing Financial Systems (Cambridge, MA: MIT Press, 2001); R. Deeg, ‘Institutional Change in National Financial Systems’, in G. Morgan et al. (eds), Oxford Handbook of Comparative Institutional Analysis (Oxford: Oxford University Press, 2010), pp.309–34.

See for example M. Blyth, ‘Same as it Never Was? Typology and Temporality in the Varieties of Capitalism’, Comparative European Politics 1/2 (Summer 2003), pp.215–25.

Masciandaro documents that more than 90 per cent of his sample countries reformed their supervisory structures between 1986 and 2006. See D. Masciandaro, ‘Politicians, and Financial Supervision Unification outside the Central Bank: Why Do They Do It?’, Journal of Financial Stability 5/2 (2009), pp.124–46.

P.A. Hall and K. Thelen, ‘Institutional Change in Varieties of Capitalism’, in Socio-Economic Review 7 (2009), pp.7–34; W. Streeck and K. Thelen, Beyond Continuity: Institutional Change in Advanced Political Economies (Oxford: Oxford University Press, 2005).

K. Thelen, ‘How Institutions Evolve: Insights from Comparative-Historical Analysis’, in J. Mahoney and D. Rueschemeyer (eds), Comparative Historical Analysis in the Social Science (New York: Cambridge University Press, 2003), pp.208–40.

J. van der Heijden, ‘Institutional Layering: A Review of the Use of the Concept’, Politics 31/1 (2011), pp.9–18; J.S. Hacker, ‘Policy Drift: The Hidden Politics of US Welfare State Retrenchment’, in W. Streeck and K. Thelen, Beyond Continuity (Oxford: Oxford University Press, 2005), pp.40–82.

W. Streeck, Re-Forming Capitalism. Institutional Change in the German Political Economy (Oxford: Oxford University Press, 2009), pp.14–16.

J.T. Woolley and J.N. Ziegler, ‘The Two-Tiered Politics of Financial Reform in the United States’, in Renate Mayntz (ed.), Crisis and Control: Institutional Change in Financial Market Regulation (Frankfurt: Campus, 2012), pp.29–66.

Independent Commission on Banking, Final Report (Vickers Report), 12 Sept. 2011, available from http://bankingcommission.s3.amazonaws.com/wp-content/uploads/2010/07/ICB-Final-Report.pdf; (accessed 7 Nov. 2012) J. Froud, S. Johal, A. Leaver, M. Moran and K. Williams, ‘Groundhog Day: Elite Power, Democratic Disconnects and the Failure of Financial Reform in the UK’, CRESC Working Paper 108 (2011).

S. Donnelly, ‘The Regimes of Financial Market Regulation in Europe’, European Financial Review (Oct. 2011), available from http://www.europeanfinancialreview.com/?p=3881 (accessed 10 Dec. 2011).

S. Vitols, ‘Changes in Germany's Bank-Based Financial System: Implications for Corporate Governance’, Corporate Governance: An International Review 13/3 (2005), pp.386–96; A. Hackethal, R.H. Schmidt and M. Tyrell, ‘The Transformation of the German Financial System’, Revue d'Economie Politique 117 (2006), pp.431–56.

Allen and Gale, Comparing Financial Systems.

D. Seikel, Wie die Europäische Kommission Liberalisierung durchsetzt, MPIfG Discussion Paper 11/16 (MPI: Köln, 2011).

Hackethal et al., ‘The Transformation of the German Financial System’.

S. Lütz, ‘From Managed to Market Capitalism? German Finance in Transition’, German Politics 9/2 (2000), pp.149–70.

J. Westrup, ‘The Politics of Financial Regulation Reform’, Comparative Research in Law and Political Economy Research Paper 8/2 (2006), p.9.

Hackethal et al., ‘The Transformation of the German Financial System’, p.7.

D. Masciandaro, ‘Divide et Impera: Financial Supervision Unification and Central Market Fragmentation Effect’, European Journal of Political Economy 285/23 (2007), pp.295–307.

R. Deeg, ‘Change from Within: German and Italian Finance in the 1990s’, in Streeck and Thelen (eds), Beyond Continuity, pp.169–202.

Lütz, ‘From Managed’; A. Busch, Banking Regulation and Globalization (Oxford: Oxford University Press, 2009).

S. Burgess, ‘Measuring Financial Sector Output and its Contribution to UK GDP’, Bank of England Quarterly Bulletin 3 (2011), p.234.

Deeg, ‘Change from Within’.

S. Lütz, ‘Von der Infrastruktur zum Markt? Der deutsche Finanzsektor zwischen Deregulierung und Reregulierung’, in P. Windolf (ed.), Finanzmarkt Kapitalismus, Special issue of Kölner Zeitschrift für Soziologie und Sozialpsychologie, 45 (2005), pp.294–315.

For Seifert's account of the affair, see W. Seifert and J. Voth, Invasion der Heuschrecken (Berlin: ECON Verlag, 2006).

L. Kamp and A. Krieger, Die Aktivitäten von Finanzinvestoren in Deutschland (Düsseldorf: Hans-Böckler Stiftung Arbeitspapier 103, 2005).

Lütz, ‘Von der Infrastruktur zum Markt?’.

L. Frach, Finanzmarktregulierung in Deutschland (Baden-Baden: Nomos Verlag, 2010), p.59.

M. Schüler, Integrated Financial Supervision in Germany, Discussion Paper (München: Centre for European Economic Research, 2004).

Frach, Finanzmarktregulierung, p.59.

DB Research, ‘Regulierung und Bankenaufsicht zwischen Nationalstaat und globalem Finanzmarkt’, EWU Monitor No. 8629/6 (2000).

Westrup argues that the formalisation of financial regulation in Germany was due to the increasing political salience of financial markets, given the privatisation of risk which makes financial stability an increasingly important electoral issue. Westrup, ‘The Politics of Financial Regulation Reform’, p.7.

Frach, Finanzmarktregulierung, p.72.

K. Dyson, ‘In the Shifting Shadows of Crisis: Pivot Points, Crisis Attribution, and Macro-Economic Policies under Grand Coalition’, German Politics 19/3 (2010), p.404.

M. Brackmann, F.M. Drost and J. Münchrath, ‘Einlagensicherung: Das große Versprechen’, Handelsblatt, 25 Feb. 2009.

H. Zimmermann, ‘Varieties of Global Financial Governance? British and German Approaches to Financial Market Regulation’, in E. Helleiner, S. Pagliari and H. Zimmermann (eds), Global Finance in Crisis (London: Routledge, 2009), pp.121–36. From January 2011 onward, the so-called Alternative Investment Fund Managers directive regulates hedge funds at the EU level.

Dyson, ‘In the Shifting Shadows of Crisis’.

J. Wieland, ‘Die Krise der Finanzdienstleistungsaufsicht’, Die Verwaltung 43/1 (2010), pp.83–94.

Das Parlament, Kaum Kompetenzen für die Kontrolleure, No. 36–7, 1 Aug. 2009.

Das Parlament, Bankenaufsicht in einer Hand, No. 42–3, 12 Oct. 2010.

Sachverständigenrat, Jahresgutachten 2010/11: Chancen für einen stabilen Aufschwung (Wiesbaden: Statistisches Bundesamt, 2010).

G. Bohsem, ‘Reform der Finanzaufsicht verschoben’, Süddeutsche Zeitung, 7 June 2010, p.21.

Reuters Deutschland, ‘Bundesbank soll Banken kontrollieren – Versicherer auch?’, 8 Oct. 2009, available from http://de.reuters.com/article/companiesNews/idDEBEE59709G20091008

Die Zeit, ‘Reformvorhaben: Bund verschiebt die Reform der Finanzaufsicht’, 7 June 2010, available from http://www.zeit.de/wirtschaft/2010-06/bankenaufsicht-finanzaufsicht-schaeuble (accessed 20 Dec. 2010).

CDU/CSU, ‘Pressemitteilung: Koalition einig über Reform der nationalen Finanzaufsicht’, 16 Dec. 2010.

S. Afhüppe and M. Kurm-Engels, ‘Das Reförmchen’, 16 Dec. 2010, available from http://www.handelsblatt.com/politik/konjunktur-nachrichten/nationale-finanzaufsicht-das-refoermchen;2714594 (accessed 19 Dec. 2010).

BaFin, Jahresbericht 2010 (Berlin: BaFin, 2011), pp.141–2.

Entwurf eines Gesetzes zur Stärkung der deutschen Finanzaufsicht, 2 May 2012, available from http://www.bundesfinanzministerium.de/nn_82/DE/BMF__Startseite/Aktuelles/Aktuelle__Gesetze/Gesetzentwuerfe__Arbeitsfassungen/2012-05-02-Ref-Finanzaufsicht.html?__nnn=true (accessed 9 May 2012).

The following two sections draw heavily on my parts of a paper co-authored with Stefan Handke for the Cologne Max Planck Institut für Gesellschaftsforschung research network ‘Institutional Change in the Regulation of Financial Markets’, organised by Renate Mayntz.

R. Zohlnhöfer, ‘Between a Rock and a Hard Place: The Grand Coalition's Response to the Economic Crisis’, German Politics 20/2 (2011), pp.227–42.

P. Steinbrück, Unterm Strich (Hamburg: Hoffmann & Campe, 2010).

Ibid., p.211.

In November 2010, the following banks requested capital from SoFFin: Aareal Bank €0.38bn; Commerzbank €18.2bn; Hypo Real Estate Holding €7.7bn; WestLB €3.0bn. Overall, SoFFin provided: €29.28bn. See SoFFin website.

HRE, IKB and HSH Nordbank are the biggest beneficiaries to date.

I thank an anonymous reviewer of German Politics for this point.

Zohlnhöfer, ‘Between a Rock and a Hard Place’, p.232.

Bertinchamp Axel, ‘Restructuring Act: Background and Content’, BaFin Quarterly 4/10 (2010), p.6.

Bundesministerium für Finanzen, Key Issues Paper: Preventing Crises with Banks Paying their Due, 31 March 2010, available from http://www.bundesfinanzministerium.de/nn_103342/EN/Topics/Financial-markets/Articles/20100816-Key-issues-paper-Preventing-crises-with-banks.html?__nnn=true (accessed 7 Nov. 2010).

Financial Times 2010.

J. Wilson, ‘German Bankers in Attack on Regulations’, Financial Times, 26 Oct. 2010, p.10.

T. Öchsner and G. Bohsem, ‘Wirtschaft läuft gegen Bankenabgabe Sturm’, Süddeutsche Zeitung, 28 Mar. 2010, http://www.sueddeutsche.de/geld/bankenabgabe-wirtschaft-laeuft-sturm-1.23795 (accessed 7 Nov. 2010).

Deutscher Bundestag, ‘Finanzausschuss billigt Banken-Restrukturierungsgesetz’, 27 Oct. 2010, available from http://www.bundestag.de/presse/hib/2010_10/2010_341/01.html (accessed 7 Nov. 2012).

Handelsblatt, ‘Ackermann wettert gegen Bankenabgabe’, 1 June 2011, available from http://www.handelsblatt.com/unternehmen/banken/deutsche-bank-chef-ackermann-wettert-gegen-deutsche-bankenabgabe/4245202.html (accessed 7 Nov. 2012).

Handelsblatt, ‘Roundup’, 8 July 2011, available from http://www.handelsblatt.com/economy-business-und-finance-roundup-bund-laender-kompromiss-zur-bankenabgabe/4380940.html (accessed 7 Nov. 2012).

G. Wiesmann and J. Wilson, ‘Commerzbank faces Bail-out’, Financial Times, 15 Dec. 2011, p.15; G. Bohsem, ‘Und bist du nicht willig’, Süddeutsche Zeitung, 15 Dec. 2011, p.23.

Deutsche Bundesbank, Monthly Report (June 2011), pp.61–2.

Handelsblatt, ‘Einlagensicherung: Privatbanken senken Garantien’, 17 Oct. 2011.

Brackmann et al., ‘Einlagensicherung: Das große Versprechen’.

In 1998, in compliance with EU directives, deposit insurance was made compulsory for all private and public deposit institutions.

N. Böhmcke, ‘Experteninterview’, 1 Dec. 2009, available from http://www.wiwo.de/finanzen/reform-des-einlagensicherungsfonds-dringend-noetig-415675/ (accessed 5 Feb. 2011).

M. Frühauf, ‘Banken wollen Einlagensicherung reformieren’, FAZnet, 24 Nov. 2009.

F.M. Drost, ‘Systemwechsel gefordert – Streit über Reform der Einlagensicherung’, Handelsblatt, 17 Jan. 2010, available from http://www.handelsblatt.com/politik/deutschland/streit-ueber-reform-der-einlagensicherung/3347538.html (accessed 17 Jan. 2011).

European Commission, Proposal for a Directive on Deposit Guarantee Schemes, 12 July 2010.

German Bundesrat, Resolution 437/10, Draft Directive of the European Parliament and the Council on Deposit Guarantee Schemes, 24 Sept. 2010.

Frankfurte Allgemeine Zeitung, ‘EU reformiert Sparerschutz’, 20 June 2011, available from http://www.faz.net/frankfurter-allgemeine-zeitung/wirtschaft/einlagensicherung-eu-reformiert-sparerschutz-1654459.html (accessed 7 Nov. 2012).

‘Einlagensicherung: “Verschleppungstaktik”’, Zeit Online, 1 March 2012, available from http://www.zeit.de/2012/10/Einlagensicherung (accessed 15 May 2012).

S. Suárez and R. Kolodny, ‘Paving the Road to “Too Big to Fail”: Business Interests and the Politics of Financial Deregulation in the US’, Politics & Society 39/1 (2011), pp.74–102.

A. Benz, ‘Intergovernmental Relations in German Federalism – Joint Decision-making and the Dynamics of Horizontal Cooperation’, Paper presented at a conference on the federalization of Spain (Zaragoza, 23 March 2009), available from http://www.forumfed.org (accessed 5 Sept. 2011).

Silvia Bolgherini and Florian Grotz (eds), Germany after the Grand Coalition. Governance and Politics in a Turbulent Environment (New York: Palgrave, 2010).

This argument departs from Zohlnhöfer, ‘Between a Rock and Hard Place’, pp.237–8, who claims that partisan veto players account for the shape of policies after the crisis. This is probably true for short-term emergency measures, but not for longer-term solutions devised by political actors.