Beyond Wirecard: What Really Ails German Finance
On the surface, the collapse of Wirecard is rooted in an accounting scandal made possible by gross failures on the part of Germany’s supervisory authorities. This is shocking enough in a country that prides itself on a highly skilled bureaucracy.
At its core, though, the Wirecard affair is about much more.
First, it reflects the shaky state of the national banking sector,
systematically distorted by a political and business culture peculiar to
Germany.
Because the authorities and politicians are not entirely
blind to the weaknesses of the German banking sector, they were willing to
engage in a big and very risky bet.
All hoped that Markus Braun’s crafty storyline about a
fintech based in a Munich suburb becoming a global champion would pan out. It
would give a much-needed boost to the German financial sector.
In view of this irrational thinking, the “reforms” bandied
about in Germany, especially by Olaf Scholz, finance minister and the Social
Democrats’ candidate for chancellor in next year’s election, are unlikely to
address the problem.
The mooted “solutions” — regular rotation of accountancy
firms, separating their lucrative advisory business more clearly from
accounting, adding supervisory staff and tightening laws and regulations — make
up a familiar package.
But they fail to address the underlying issue, which is the
German banking sector’s fragility. It is teetering no matter where you look.
Deutsche Bank is a shadow of its former self.
Commerzbank is even worse off. Savings banks cannot cope
with zero interest rates. The once grotesquely overblown Landesbanken are still
in the throes of consolidation. Co-operative banks are not in good shape,
either.
For a country that is the world’s fourth-largest economy,
this is disturbing.
The biggest driving force behind the collective blindness
and groupthink that played out in the Wirecard collapse is a profound, but
widely unacknowledged, German inferiority complex about banking. There is a
genuine question about whether Germans can really operate a successful banking
sector.
It is a cliché to say that a nation’s financial sector is
“over-banked”. But in Germany, it is a reality. The market is dominated by
public sector banks, which are under less profit pressure than private banks.
This depresses the earnings potential for all lenders. It
results in lower margins in the interest business and higher risk costs with
private customers and the lower tier of corporate customers.
Besides, Germany has a higher share of distributors and
independent financial brokers who claim much of the margins, especially from
the lucrative market segment of better-off households below the hedge fund
client level. Many countries do not have such structures.
There is comparatively little commission business in
Germany, since its citizens invest less than other nations in stocks. Unlike
some European countries, Germany has extremely strict consumer protection laws,
which make high interest rates for subprime customers in the credit card
business impossible.
These fundamental structural weaknesses demanded attention.
Instead, Wirecard’s emergence was seen as a magic wand that would wave the
other problems away.
What is to be done? The answers are all unsatisfactory.
Unwinding the market structures is basically impossible. One reason is that
many public sector banks offer cushy board jobs for retired politicians.
In the end, a cultural shift is needed. It should be based
on three principles, each still quite alien in Germany. The first is
transparency. This is necessary to encourage the adoption of ideas, incentives
and business practices that might challenge Germany’s most cherished habits and
closely guarded methods.
Embracing this principle may prevent a repeat of the
disastrous mistake Germany made in the Wirecard scandal of blaming the
unfolding mess on “perfidious Albion”. Clearly, suppressing information, rather
than probing it rigorously, is not the way to go.
The second principle is financial capitalism. It means
accepting that an economy is strengthened not by protecting powerful
incumbents, but by keeping important companies accountable and at the top of
their game.
Finally, there is supervision. Regulators should focus on
correcting market failures, not on protecting national reputations or
champions. Pursuing the latter agenda leads to competitive decline or to even
bigger scandals.
In contrast, exercising the oversight function is vital to a
nation’s sustainable economic strength. If that principle alone were firmly
embraced, it would constitute major progress for Germany.
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