Too Much Or Too Little?

It's better to be safe than sorry. But the international financial sector has largely suspended this old piece of popular wisdom in the past years. Gold diggers in hedge funds, investment banks and private equity companies have raked in millions and billions for years with increasingly risky ventures and credit constructions.

The banks earned well in the process, too. They put together credit packages often worth billions for the deals of the alleged financial geniuses, securitizing them and passing the risks on to the capital market.

It has now become apparent that, once again, greed has deactivated the mind. Everyone only saw the opportunities and faded out the risks. It couldn't go on like this in the long run and has promptly gone sour.

Every day, the financial sector conveys new evil tidings, especially from the United States. The subprime mortgage market is falling apart, hedge funds are insolvent, billions of dollars wiped out, investors have lost their money and banks have been forced to close.

In Germany, the crisis has also reached the first bank. In principle, it's a small bank for financing medium-sized businesses. It was supposed to be a solid thing -- and it is.

But the management at Düsseldorf's IKB Deutsche Industriebank couldn't resist the temptation of big money. The bank invested on a grand scale in funds with US subprime mortgages. It worked for a long time and brought nice profits, which is why a growing wheel continued to be turned.

But when the market toppled, the bank was financially overwhelmed. If IKB had collapsed, it could have sparked a snowball effect with incalculable consequences for the German and international financial markets. That's why IKB's shareholder, the state-owned KfW banking group, is vouching for IKB risks of over 8 billion euros ($11 billion). The major German banks, as well as mutual banks and credit unions have said they will participate in this rescue measure -- and not out of the goodness of their hearts, but rather as self-protection.

For the time being, one banking crisis has been averted. But who knows what else is going to swash across the Atlantic. Internationally, the risks are being newly evaluated and at a much higher level. The stock markets are already a good step away from their peak levels reached just a few weeks ago. But the correction this time is not based on a bubble on the stock exchange, but rather on a credit crisis in the United States that has led to losses at banks around the world.

The reassessment of risks as such is not bad, but rather a good thing. It's more difficult for financial investors to get inexpensive loans worth billions for their purchases. Risk premiums are being demanded. That can only be welcomed in the interest of stability for the financial sector.

Of course, the danger of exaggeration exists here, as well. If the banks are hesitant not only in awarding large credits to speculators and non-solvent home buyers, but also make perfectly normal business financing more difficult, the crisis in the financial sector could penetrate the real economy. Though it's better to be safe than sorry, some willingness to take risk should exist in the financial sector.

Karl Zawadzky is a business editor at DW-RADIO (sac)