Methods for alleviating the problem of Too big to fail in Germany

Abstract

As a result of the last financial crisis, the problem of Too big to fail (TBTF) escalated in many countries, among which in Germany. The complexity and volume of the investment activity run by many banks caused liquidity problems which threaten their further operations. Therefore, in order to stabilize the financial market, the countries were forced to dedicate significant public resources to save the banks threatened with failure. Animated discussion on the TBTF banks made it necessary to seek regulatory solutions which would reduce the scale of TBTF problem. These solutions should be based on higher capital requirements, recovery and resolution of credit institutions, regulating derivatives and hedge funds as well as structural reforms of the banking sector in the spirit of the GlassSteagall Act. The aim of this article is to present the structural reforms implemented in Germany under the so-called Trennbankengesetz and the assessment of their impact on reducing the scale of TBTF problem in Germany. The authors propose a research hypothesis stating that the structural reforms of banking sector implemented in Germany are too liberal to definitively solve the TBTF problem. That is why in the last part of this article, the authors have formulated their own proposals to reform the banking system in the spirit of GlassSteagall Act, taking into consideration the universal model, typical of the German banking sector.

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Fig. 1

Source: Own study prepared on the basis of Sanierungs- und Abwicklungsgesetz

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Correspondence to Jan Koleśnik or Anna Dąbkowska.

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Koleśnik, J., Dąbkowska, A. Methods for alleviating the problem of Too big to fail in Germany. J Bank Regul 22, 11–23 (2021). https://doi.org/10.1057/s41261-020-00125-1

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Keywords

  • Too big to fail
  • Banking regulations
  • German banking sector
  • Glass-Steagall Act
  • Global financial crisis