German Public Bank Sues European Central Bank

Apr 8, 2015.

German public bank Landeskreditbank Baden-Württemberg, or L-Bank, is suing the European Central Bank to avoid coming under EU supervision and regulation, which would increase L-Bank’s costs and fees. L-Bank argues that higher costs tied to ECB supervision would undermine its ability to support local families and businesses.

Last November, as part of the EU’s ongoing regional integration (and in an effort to regulate too-big-to-fail European banks), the European Central Bank replaced national banking authorities “as the entity responsible for directly supervising 123 of the largest banks across the eurozone, as part of an effort to improve supervision in the wake of the financial crisis.” As part of this oversight, the ECB asserted authority over Landeskreditbank Baden-Württemberg, a development bank in southern Germany.

Landeskreditbank Baden-Württemberg, called “L-Bank” for short, is a public bank. This means that they are run by state governments in Germany, and function as central administrators for municipally-owned savings banks; many of them also serve as development banks. Landesbank Baden-Württemberg finances industrial technologies, information technology, software, telecommunication, and scientific industries. It invests mainly in Southern Germany, but occasionally invests in the rest of the country, as well as Austria and Switzerland.

Some of the German Landesbanken were implicated in the subprime mortgage crisis, but this was because they were pressured by big private banks to accept risky securities and debt obligations in the years preceding the 2008 crisis. They no longer do this, and the ECB’s regulation of the big private banks will presumably solve some of this problem (or, if it doesn’t, that will further reveal to the public the intrinsically corrupt nature of those banks).

Ellen Brown explained back in 2012 that the Landesbanken are the key to egalitarian economic growth across Germany. She wrote:

Because of the Landesbanks, small firms in Germany have as much access to capital as large firms. Workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive. In January 2011, the net value of Germany’s exports over its imports was 7 percent of GDP, the highest of any nation. But it hasn’t had to outsource its labor force to get that result. The average hourly compensation (wages plus benefits) of German manufacturing workers is $48—a full 50 percent more than the $32 hourly average for their American counterparts.

It’s important to point out that spokespersons for L-Bank say they agree “with the aims behind the ECB’s new role.” They simply believe L-Bank “should come under the central bank’s supervision, and had to file a lawsuit with the European Court of Justice to try to reverse this.” L-Bank argues that ECB’s criteria for supervision, which includes that a bank have assets worth €30 billion or more (L-Bank has over €70 billion) are too “mechanical,” since L-Bank, as a public bank, is “legally enshrined” as limited to “low-risk development business.” So on the one hand, L-Bank isn’t participating in the kind of high-risk activity that requires supervision, and on the other hand, compliance with that supervision will entail significant costs, hindering L-Bank’s ability to finance public (and public-friendly) growth in and around Germany.

As an alternative, according to the Hellenic Shipping News, L-Bank proposes being supervised by BaFin, the German Financial Supervisory Authority, and the Deutsche Bundesbank, the central bank of the Federal Republic of Germany. The Hellenic Shipping News also reports:

L-Bank’s concern about ECB supervision resonates with the mood of many German regionally-focused lenders, which frequently argue that the ECB shouldn’t monitor small lenders that don’t pose a systematic risk to Europe’s financial system. L-Bank’s move also highlights the cost of meeting the regulatory burden, an issue that executives at small German banks have until now only discussed privately.

Like the Bank of Canada lawsuit, this lawsuit is the first of its kind: It’s the first legal challenge to the ECB’s supervisory role. And the challenge is radical: It’s not coming from a big, private, for-profit bank that might claim European supervision undermines free enterprise. Instead, the claim, and it’s a cogent one, is that the EU’s quest for control over all aspects of banking undermines public banks’ role in financing the public good.

And the L-Bank is right about something else too: they aren’t like the big private banks in need of regulation. They aren’t corrupt. They don’t feed off the public trough; rather, they give back. According to the Wall Street Journal, “In 2013, it supplied €7.4 billion in low-cost credit to support local projects, businesses and families.”

In many ways, the battle between the L-Bank and the European Union reminds me of the dilemma faced by community banks in the U.S. under the Dodd-Frank regulations. Those regulations (however we might judge their effectiveness) are meant to keep big Wall Street banks honest, but they’re being used to strangle small community banks who have never been responsible for creating any economic crisis.

As Jasper Sky pointed out in February, corruption and financial crime are pretty much endemic to big private banks. “So many big banks have paid huge fines for various forms of major financial crime in recent years,” Sky wrote, “it’s impossible to keep track of them all. The pertinent question isn’t whether one or two big banks have routinely engaged in criminal practices as a core element of their business models. The question is whether there are any that haven’t.” The challenge for public banking advocates is to make the public, and policymakers, understand the risks of public banks getting swept up by the understandable need to regulate big banks. Public banks are the solution, not the problem. “They do not need to worry about maintaining their market share,” Ellen Brown wrote in The Public Bank Solution, “and they have no incentive or authorization to gamble with depositors’ money in the derivatives casino.” That’s a model of which the ECB and other central banking authorities should take note.

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