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Skip Navigation LinksHome :: Back Issues :: Liko-Bank – Europe’s last resort?

July 2000

Liko-Bank – Europe’s last resort?





Few people expect a large bank to carry enough capital to meet every conceivable financial and operational catastrophe - except perhaps Daniel Zuberbühler, director of the Swiss Federal Banking Commission. In recognition of this, regulators and bankers are wrestling with the question of who should provide liquidity if a "too-big-to-fail" bank gets into trouble and threatens dislocation of the financial system?
The possible choices are: central banks as lenders of last resort; insurance; or mutual insurance by banks themselves.
Some Germans believe they have a model that combines the first and the last of these. In 1974, after the Herstatt crisis which dislocated international currency markets and threatened bank liquidity in Germany, the Germans set up their own Liquiditäts-Konsortialbank - Liko-Bank for short.
It is owned 30% by the Bundesbank and 70% by individual members of the various German bank associations. It has capital and reserves of e224 million with total callable liquidity of e1.7 billion. Its single board includes representatives from the bank associations and the Bundesbank, including Bundesbank president Ernst Welteke, and Commerzbank chairman Martin Kohlhaussen. It has a credit committee headed by Kohlhaussen, which includes Bernd Thiemann, head of DG Bank and Bundesbank director Helmut Schieber. It has no staff but is run by two managing directors, Hans-Jürgen Muth and Jürgen Strege, who also run the export credit agency Aka Ausfuhrkredit-Gesellschaft in Frankfurt.
Thankfully, there isn't much to do. "The services of Liko-Bank haven't been called on for the last 13 years," says Muth. Liko-Bank has intervened only four times since it was set up. Coyly, Muth and his colleagues at the Bundesbank won't say what banks were propped up by the Liko millions. Karl-Heinz Boos at the German Private Banks Association says even then the millions weren't used but only stood behind as guarantees: it was the banks that put up the money.
The credit committee of four must be unanimous about an intervention. The capital and reserves are immediately available; the Bundesbank's refinancing line of e562 million then kicks in, provided the banks also meet their refinancing pledges which can go as high as e951 million. If those funds are exhausted all 135 members and the Bundesbank must be unanimous to raise the refinancing threshold.
The credit is advanced against collateral if it is available, or by discounting the bills of the obligor bank. Liko-Bank itself cannot take credit risk: historically it has passed that through to the bank associations and their deposit insurance funds.
For most conceivable systemic crises e1.7 billion is a drop in the bucket. And, according to Liko-Bank's statutes, that can only be provided to a creditworthy bank. If it's creditworthy surely the bank can get credit from the market, say objectors.
But Edgar Meister, a Bundesbank director, and head of the European Central Bank's banking supervision committee, has proposed Liko-Bank as the model of a liquidity bank for Europe.
He suggests a two-phase increase of its potential by raising its callable funds to e10 billion, then increasing the Bundesbank's refinancing line to e5 billion.
Meister has even suggested that a club of global players should arrange self-support: "I believe it would be desirable," he said in February 1999, "to create an international liquidity-safeguarding fund made up of the major global players, which would also have the most to gain from a largely deregulated and sound Financial system. This will not be an easy undertaking, since there seem to be few incentives for a bank to assume other institutions' risks".
He believes this step would strengthen market discipline and might attract special regulatory concessions for those institutions.
Deutsche Bank board member Josef Ackermann, interviewed the following month in the German daily Die Welt, said he could "only agree" with Meister's suggestion for Europe.
Bundesbank deputy president Jürgen Stark also supported the Liko-Bank model in a speech three months later: "In place of the Anglo-Saxon tradition, which strongly emphasizes the role of the central bank as lender of last resort," said Stark, "giving the private sector a certain autonomy in this area, especially considering the moral hazard problem, has undoubted advantages. The German experience with its association-wide insurance pacts, and the Liko-Bank, should not be rejected out of hand."
But since that initial flurry of interest the idea has gone cold. Much of the cold water has come from the German Private Banks' Association itself, which thinks Liko-Bank is fine as it is but shouldn't be enlarged.
On the other hand the German Savings Banks Association, and the Association of Volksbanken and RaiVeisenbanken would like an increase.
"That's because so many of their thousands of institutions are in trouble," says a private bank representative, "and we big banks would be bailing them out."
Boos at the Private Bank's Association says his members' view - including presumably that of Ackermann's Deutsche Bank - is that other European countries have less need of such a liquidity provider: "It's because the Bundesbank has always been a reluctant lender of last resort," says Boos, "whereas in other European countries this is less true."
Even in euroland, the national central bank is still responsible for the stability of its financial system, and bail-outs, if there are any, should be done at the national level. A pan-European liquidity bank should only be thinkable if the political aspects of responsibility are worked out - and so far they haven't been, says Boos.
Muth at Liko-Bank agrees: "The question of securing liquidity for the banking system is still a national question. It might be an idea for a really united Europe, but not right now." However, the G7-sponsored Financial Stability Forum does not so far seem to have any better idea. The quest continues.






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