Efforts by western governments to prevent the collapse of their banking systems could cause more harm than good if leaders failed to agree on a radical reform of their financial systems, Germany’s top economists warned on Wednesday.
The council of “wise men” – five academics who advise the government on economic policy – said the bank rescue packages adopted in the US and Europe might “encourage behaviour that could massively increase risk-taking, particularly among lenders”.
The warning comes ahead of the Group of 20 meeting on the financial crisis in Washington on Saturday, and reflects growing concern among economists on the impact of rescue measures.
The council welcomed the “debate [ahead of the G20 meeting] about far-reaching reforms to create a more stable international finance architecture. For this to succeed, however, the governments must be ready to delegate some supervisory competences”.
Without such reforms, the economists argue, the measures taken in Europe and the US to protect banks – including credit guarantees, state-financed capital injections and the acquisition of illiquid assets – could encourage a resumption of irresponsible lending.
The council recommended the creation of a global supervisory apparatus with a reformed International Monetary Fund at its helm, as well as changes in accounting standards that would lift some of the pressure on banks to deleverage too fast in times of rapidly falling asset prices.
“We’ve put all the passengers in lifeboats. Everyone is safe. Now we must start to think about what caused the accident in the first place,” Bert Rürup, the council’s chairman, said.
Despite their caveats, the economists welcomed the rescue packages, which they said had averted the collapse of entire national banking sectors. But they stressed that the sums at stake – European governments alone have pledged €1,500bn ($1,875bn, £1,215bn) in assistance to banks – meant governments had a special duty to implement plans sensibly.
They should steer a finely calibrated course, the economists said, acting neither too passively – which could extend the life of institutions that have no viable business models – nor interfering in the day-to-day management of banks, something experience had shown the state was not qualified for.
“State support should concentrate on those banks with the best business models,” they said, pointing to the case of Japan. There the state acted too passively during an earlier financial crisis, unnecessarily postponing the sector’s reconstruction.