The fatal consequences of state guarantees in the European financial sector

European economic policy always strives to ensure fair conditions of competition in the internal market. The public sector regularly comes into the focus of supervisors when state aid distorts the free market. Especially in the financial sector, such interventions have led to far-reaching disruptions in the past. The history of the German Landesbanken offersinstructive examples of how well-intentioned government collateral can fuel unwanted speculative bubbles.

Strict supervision of state aid and market monopolies

The European Competition Authority is vigilant to ensure that unjustified state subsidies and undue advantages for individual companies are prevented. At the same time, the supervisors carefully ensure that no group structures arise that could occupy dominant positions. Regularly, this strict control leads to conflicts withnational and regional governments. Sometimes it is important to prevent comprehensive company mergers, sometimes severe penalties are due if companies abuse their dominant market position. For example, the merger of the stock exchange operators from Frankfurt and New York had to finally fail a few years ago.

The discovery of hidden privileges of the Landesbanken

The supervisors prohibited the project, as de facto monopolies would have arisen in the trading of complex financial instruments. A few decades ago, the Brussels competition watchdogs were again looking for spectacular audit cases. During internal meetings, young employees recalled their scientific theses. In doing so, they had intensively engaged with the specialPrivileges of the German Landesbanks. Institutions such as the Saxon Landesbank, the Westdeutsche Landesbank or the Bavarian competitor were able to refinance themselves on the capital market at exceptionally favourable conditions.

The Nature of Government Default Liability and Its Benefits

The reason for these advantages was the so-called guarantor liability. This legal term describes the obligation of the institution of public institutions to fully satisfy all creditors in the event of insolvency. For public savings banks and state banks, this principle applied well into the new millennium. For private banks, this wasSpecial treatment has always been a massive nuisance. Public institutions had a clear advantage in raising fresh capital.

Political change and the struggle for abolition

Thanks to government backing, debt securities issued by public institutions could be negotiated on significantly better terms than those of private competitors. In the case of private banks, the tax authorities would not step in to repay bonds in an emergency. Attentive employees presented their findings at said meetings and encouraged in-depth reviews. TheCompetition watchdogs sensed their big cases, and the bureaucracy’s machine mills began to spin. Until the end of the last century, preservers of these privileges could prevent worse.

The lazy compromise and the race for cheap money

Under governments at the time that were traditionally associated with public savings banks, private competitors did not dare to openly attack. However, with changes in government and the introduction of European common currencies, the climate changed fundamentally. Global thinking and deregulation of financial markets now set the agenda. Private institutes demanded immediateCancellation of state guarantees, while public banks and regionally rooted politicians resisted desperately. This tough wrestling eventually resulted in typical compromises.

The fatal consequences of unchecked liquidity procurement

State collateral was not immediately tipped, but multi-year transitional periods were granted. Within these periods, public institutions were still allowed to provide themselves with state-backed funds on the open market. These generous deadlines shamelessly exploited public institutions to quickly secure huge sums of subsidized money. Expertsestimated the volume of last-minute funds to be unimaginable. Assumed interest rate advantages over normal market participants resulted in annual subsidies in an immeasurable amount.

The plunge into speculation and smashing

The institutions now urgently needed to invest this enormous liquidity profitably. However, expansions of the classic customer business were hardly possible, as the markets were already distributed. The institutions now had ample capital, but there was a lack of viable business models for the investment. The result was reeling from loss trades to further loss trades. SomeInstitutions speculated on high-risk credit securitisations and had to be taken over by other public banks.

The lessons from the uncontrolled money glut

Others became entangled in expensive and completely nonsensical takeovers of foreign institutions. In the end, only breakups or bailouts by the taxpayer remained. The precarious development of public institutions impressively proves fundamental economic truths. Unreflective and artificially discounted liquidity supplies to the financial sector inevitably lead to massiveSpekulationsexzessen. Letztlich tragen Allgemeinheit und Steuerzahlende die Zeche für verfehlte Finanzpolitiken, wenn alle vernünftigen Grenzen der Risikobereitschaft ignoriert werden.