News
BackOn 29 January, the EU's internal market commissioner Michel Barnier presented the long awaited proposal for a shadow banking system. The aim is to separate the risky activities of big banks from the core business (deposits and lending). However, the proposal - not least because intensive lobbying by the banks - has been so watered down that it is hardly adequate to limit the risks of the banking system.
What is it about?
During the years before the crisis, many banks turned speculating on their own account into one of their main occupations, thereby losing sight of their actual business - managing saving deposits and financing investments. This went well until the speculation bubble burst and the taxpayer had to foot the bill for the bank’s casino bets gone wrong in the financial crisis.
The Commission, which, due to liberalising the financial markets, only made this prolonged period of undesirable development possible, promised under pressure of the public, to change the situation. An Expert Group set up by the Commission under the leadership of the Governor of the Bank of Finland, Erkki Liikanen, presented far-reaching proposals in a report. At its heart, the report of the Group suggested that in future banks should no longer speculate with their customers’ money. To achieve this, the actual banking business (deposit-taking, providing financial services to the non-financial sectors in the economy) should be strictly separated from the casino part, hence speculations by the bank to increase profit. If the casino sector had gambled money away and was therefore no longer able to pay its debts, it could simply be declared bankrupt without the smaller saver or taxpayer suffering any losses.
The Commission proposal
However, the proposal by the Commission presented this week, deviates from the recommendations of its own Group. It still grants banks the option to engage in “proprietary trading”, if a connection to current or future customer activities can be made, whatever the meaning of this is. Heaven knows how this is supposed to be interpreted and controlled in future. Is it enough if a bank just claims that its speculative bets have something to do with a future business relationship?
The task to develop relevant detailed rules shall be given to the European Banking Authority EBA, which to a large extent is not subject to the democratic participation of the European Parliament. Hence, it will be left to the technocrats whether the rules have substance. It must also be criticised that bank branches and speculative banks, which, even though “separated” on paper, may in future maintain close economic relationships. Hence, the danger remains that the investment sector drags the classic sector of the bank into the abyss.
Another key problem of the Commission proposal lies in the fact that only 29 of the EU’s biggest banks are to be affected by the new rules, which exclude many other players, whose collapse also would have a dramatic impact. Other national exemptions shall also be possible, as the Commission proposals provides for Member States, which already adopted “similar rules”, not at all to be affected by its new proposal. Who comes immediately to mind as the main beneficiary? Correct: once again Great Britain and the City of London, who claim that they adopted much stricter rules than the ones proposed by the Commission a long time ago. It is also not clear whether Germany and France will be affected by this rule.
It is once again the case that the Commission only a few months before the elections to the European Parliament does not pluck up the courage to take a firm stance against the banks and to proceed with a serious reform of the banking sector. The ball is now in the corner of the European Parliament.
Finance Watch, a civil society-trade union alliance, which was established as a counterbalance to the one-sided dominance of the expertise from the banking lobby, comes to a similar conclusion (see further information below).
Further information:
Proposals by the Commission
Finance Watch
Criticism by MEP Sven Giegold (DE)
During the years before the crisis, many banks turned speculating on their own account into one of their main occupations, thereby losing sight of their actual business - managing saving deposits and financing investments. This went well until the speculation bubble burst and the taxpayer had to foot the bill for the bank’s casino bets gone wrong in the financial crisis.
The Commission, which, due to liberalising the financial markets, only made this prolonged period of undesirable development possible, promised under pressure of the public, to change the situation. An Expert Group set up by the Commission under the leadership of the Governor of the Bank of Finland, Erkki Liikanen, presented far-reaching proposals in a report. At its heart, the report of the Group suggested that in future banks should no longer speculate with their customers’ money. To achieve this, the actual banking business (deposit-taking, providing financial services to the non-financial sectors in the economy) should be strictly separated from the casino part, hence speculations by the bank to increase profit. If the casino sector had gambled money away and was therefore no longer able to pay its debts, it could simply be declared bankrupt without the smaller saver or taxpayer suffering any losses.
The Commission proposal
However, the proposal by the Commission presented this week, deviates from the recommendations of its own Group. It still grants banks the option to engage in “proprietary trading”, if a connection to current or future customer activities can be made, whatever the meaning of this is. Heaven knows how this is supposed to be interpreted and controlled in future. Is it enough if a bank just claims that its speculative bets have something to do with a future business relationship?
The task to develop relevant detailed rules shall be given to the European Banking Authority EBA, which to a large extent is not subject to the democratic participation of the European Parliament. Hence, it will be left to the technocrats whether the rules have substance. It must also be criticised that bank branches and speculative banks, which, even though “separated” on paper, may in future maintain close economic relationships. Hence, the danger remains that the investment sector drags the classic sector of the bank into the abyss.
Another key problem of the Commission proposal lies in the fact that only 29 of the EU’s biggest banks are to be affected by the new rules, which exclude many other players, whose collapse also would have a dramatic impact. Other national exemptions shall also be possible, as the Commission proposals provides for Member States, which already adopted “similar rules”, not at all to be affected by its new proposal. Who comes immediately to mind as the main beneficiary? Correct: once again Great Britain and the City of London, who claim that they adopted much stricter rules than the ones proposed by the Commission a long time ago. It is also not clear whether Germany and France will be affected by this rule.
It is once again the case that the Commission only a few months before the elections to the European Parliament does not pluck up the courage to take a firm stance against the banks and to proceed with a serious reform of the banking sector. The ball is now in the corner of the European Parliament.
Finance Watch, a civil society-trade union alliance, which was established as a counterbalance to the one-sided dominance of the expertise from the banking lobby, comes to a similar conclusion (see further information below).
Further information:
Proposals by the Commission
Finance Watch
Criticism by MEP Sven Giegold (DE)