According to Martin Wolffe the good old days took place in the 60s when banks just stuck to their traditional banking roles of savings and credit. The growth of the mortgage market has changed all that with banks allowed to create money and get involved in investment banking. Together with the pressure group ‘Positive Money’ and many others he calls for the power to create money to be taken away from banks and centralised with the Central Bank. He calls for banks to return to the traditional methods of banking of money transmission, simple mortgages, growing business and credit cards. He is calling for 100% reserve banking where all deposits are fully backed by matching liabilities of the Central Bank/government and banks are their agents.
As with everything there is an argument for both sides with no loss of experts to speaker for their side.
From the behaviour of the bankers which led to the crash and their continued system of high bonus to themselves it is difficult to justify that they continue to create money. I would say that there should be a separation between retail and investment banking. This way investors who choose to invest do so knowing the risks whilst people who choose to save their money know the banks are not making massive gambles on their money. This would lead to more economic stability. The issue of course is we have come so far down the road that it will be difficult if not impossible to turn back the clock.
I would have to conclude that the agreements made under Basel 3, more capitalisation of banks, more honest grading by agencies and more government oversight is the way to go.
Deutsche Bank had a record setting loss of 6.8 million Euros. In 2015 the IMF called it the ‘most dangerous bank in the world’. Deutchse bank like an octopus is linked to many other banks, like the Bank of America, Morgan Stanley, Barclays, RBS, Bank of China. It is at the centre of the European financial system, and ceentral to German and EU economy—employing 1000000 people. It was removed from Europe’s blue chip index due to decline in stock value.
Germany and the government has shown an unwillingness to step in and if it is allowed to fail might send a message to other banks to be more careful.
With $16 billion in equity and $160 billion in debt and outstanding derivatives 20 times the size of the German GDP and 5 times the size of the Eurozone, Angela Merkel needs to stop the fall of the stock prices otherwise it could lead to a retail depositors run and banking failure.
The results of the failure of the bank would hit German, the Euro zone and the world. However other industries are allowed to fail why should the bank not be left to fail given that these are the consequences of the actions of the bankers themselves.
The US has bailed out banks, the UK has bailed out banks so why not Germany? Maybe Germany should give the Deutshe Bank a chance and save it. However letting a bank that massive fail will send the message to other banks to improve their practices. The impact on the German, EU and world economy will be massive and painful but I think it will set the world on a more truthful path to development and growth.
Culled from discussions as part of my Executive MBA in the Creative Industries
Ashridge Business School