Banking split

To protect consumers from poisonous debts amassed by big banks, Sigmar Gabriel, chairman of Germany's Social Democratic Party, has called for a separation of commercial and investment banking, while Cem Özdemir, head of the Green Party, has spoken out in favor of smaller banks and lower debt levels.

With their suggestions, the party leaders hope to reach out to a growing number of Germans who are angry about the chaos on financial markets and increasingly distrustful of big banks.

The separation of investment and commercial banking isn't new. For decades the US government separated the two under its Glass-Steagall Act, introduced in 1933 to rein in a runaway financial sector four years after the Wall Street crash. The legislation disappeared in the late 1990s but is now being discussed again.

Protection against losses

The UK government is debating something similar, called "narrow banking." The goal: to protect customers of commercial banks, which provide depository services and access to credit, from losses incurred by the speculative trading of investment banking arms.

Gabriel believes such a separation in the banking sector would be good for Germany, too. "I want there to be a big sign on the door to the investment banking sector that reads: 'State guarantees end here,'" he told the German newsmagazine Der Spiegel.

While acknowledging that people have the right to speculate with their money, Gabriel said they must be held liable for any losses. The current situation, he added, is one in which the bad deals are pushed onto taxpayers and the good ones grabbed by speculators.

Özdemir is critical of the prevailing logic that large moneylenders can be "too big to fail." In an interview with the newspaper Rheinische Post, he said big banks have far too many incentives to take risks at the expense of taxpayers.

Numerous experts are weary of such remarks. "They sound good and sell well but are ineffective," Wolfgang Gerke, a financial expert with the Bayerisches Finanz Zentrum, told Deutsche Welle. "What is more important is that we have healthy banks with enough equity capital to handle their risks."

Dieter Hein with Fairesearch warns politicians of pointing fingers at banks when they, he argues, are equally to blame for many of the current problems.

Using taxpayers' money

"Banks provide credit - that's their business, and governments borrow lots of money from banks," Hein told Deutsche Welle. "The current crisis in Europe has not been caused by banks but by governments piling up huge debt over the past decades."

Hein is not oblivious to mistakes in the banking sector, though. He points to a few state-owned banks that diversified into areas of finance with too little expertise, only to bailed out later with taxpayers' money.

Hein is also critical of some modern banking practices, like trading in derivates. With some exceptions such as an airline seeking to hedge on kerosene prices, he said derivates make "no economic sense."

As for the separation of commercial and investment banking, Harald Hau, economics professor at the University of Geneva, doesn't really see an issue with banks having their commercial and investment operations under one roof. This is a way for them to tap investment capital at favourable internal rates "when the one unit is doing better than the other," he told Deutsche Welle. "And this is a good option to have in times of crisis."

Calls for greater regulation

Hau said regulation needs to be in place to prevent banks from seeking government aid when they encounter problems with that structure. But if the German banking sector has an issue, it's the lack of a regulator "that has teeth," he said.

Hans-Peter Burghof, finance professor at the University of Hohenheim, agrees.

"We need much stronger supervision of the German banking market than we currently have," he told Deutsche Welle. "We need to intervene more, and we need to reduce incentives for taking risk but all this requires more effective regulation, which we simply don't have."

The Federal Financial Supervisory Authority (BaFin) is the main body in charge of Germany's banking sector.

Critics say that among the agency's various problems, it is staffed with too many lawyers and too few experts who understand risk management.

Author: John Blau
Editor: Mark Hallam