European intervention on Wirecard is welcome

The Wirecard scandal is another sorry example of regulatory failure in Europe. The decision of an EU financial watchdog, the European Securities and Markets Authority, to launch a fast-track investigation into Germany’s supervision of the collapsed payments group is therefore to be praised. The response to events leading up to Wirecard’s insolvency by both BaFin, Germany’s financial regulator, and FREP, the under-resourced private-sector body that monitors German companies’ accounts, was lacking in the extreme. So eager seemed the German authorities to champion the once high-flying payments firm that officials failed to follow up effectively on numerous media and analyst reports about suspected fraud. Not only that, but BaFin investigated short-sellers and two Financial Times journalists who had raised the alarm.

German officials are far from the only ones in the single currency area to find themselves caught out by a financial scandal. Cases of money laundering have dented the reputation of states on the region’s periphery, while Italy’s banking system was for years subject to overly lax regulation. Nor is supine supervision a problem unique to the eurozone. In the run-up to the global financial crisis, the UK’s Financial Services Authority saw its duty as not only to supervise, but also to promote the interests of the City of London. The German establishment, including its financial regulators, appeared desperate to rally round Wirecard until the very last minute, blind to all the red flags. A clear general lesson is it is impossible to serve as both cheerleader and watchdog at the same time.

The solution in the UK was to bring regulation back within the ambit of the Bank of England. Housing the most important parts of a country’s financial supervision under one roof encourages joined-up thinking. Yet this alone is insufficient. What the Wirecard story highlights is that as finance evolves away from a bank-centric model towards fintech and shadow banks, watchdogs need to switch to system-wide supervision. One of the flaws in Germany’s multipolar approach is that it enabled BaFin to pass the buck. The regulator said it was not fully responsible for supervising the bulk of Wirecard’s activities as it was a technology company and not primarily a bank.

While senior finance ministry officials have acknowledged “radical solutions” are needed, the mooted fix of handing BaFin power to launch investigations into companies’ financial reporting is underwhelming given the regulator’s own mis-steps. The apparent unwillingness by Berlin to consider more radical reform is a worrying indicator that the establishment has failed to fully grasp that the case says much about the failings of Germany Inc. One option would be to shift financial regulation fully to the Bundesbank, Germany’s central bank. One of the advantages is that its headquarters are in Frankfurt — Germany’s financial centre — and not in Bonn, the former capital where BaFin is based. Yet unlike the Bank of England the Bundesbank has never held sole responsibility for keeping finance in check.

A better fix still would be to hand more power to the EU. As with money laundering, payments system scandals are often cross-border in nature. And most would admit that handing the reins for supervising the region’s largest and most complex lenders to the European Central Bank has led to a vast improvement to what went before. It would be naive to view any system of financial supervision as impenetrable, but cutting national ties ought to help create a fairer and safer system of oversight.

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