The financial cataclysm of 2007-2008 and its dramatic long-term effects have clearly demonstrated the inability of the financial markets to regulate themselves. They feel no compunction to do so, and this suits them very well. All the crises that have punctuated the history of capitalism clearly demonstrate that fact. After the present crisis broke, leaders had to change their tune: President Sarkozy of France announced that ‘Self-regulation as the solution to all problems is finished. Laissez-faire is finished. “The market always knows best” is finished’. |1| Yet eight years after the onset of the crisis and seven years after the promises of a return to stricter regulation, nothing serious has been done. The evidence is compelling. In collusion with the banks, political leaders and lawmakers have taken very few steps to restrain financial companies.
In the United States, new banking regulation legislation, the Dodd-Frank Act (which includes the Volcker Rule), |2| was adopted during President Obama’s first term. Passed in 2010, this law is soft in comparison with the regulation imposed by President Roosevelt in 1933, but even so there are delays in its implementation. The banks and their lobbyists, together with the Republicans and Democrats over whom they exercise direct influence, have managed to limit its application. |3| The Volcker Rule prohibits banks from practising proprietary trading
trading Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit. – that is, speculating with their own funds on their own account. It sets limits on the positions banks may hold in hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. or private equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. funds that are not subject to serious regulations. Implementation of the rule was originally scheduled for July 2014, but it actually came into effect in July 2015. |4|
After the banks almost failed in 2008 in the United Kingdom, the government created the Vickers Commission, named after Lord John Vickers, a former chief economist at the Bank of England. This commission submitted its report in 2011, and in December 2013 a law reforming financial services was passed that included some of the recommendations made in the report. |5|
At the European level, a commission headed by Erkki Liikanen, Governor of the Bank of Finland, submitted the Liikanen Report in October 2012. |6| The recommendations in both the Vickers and Liikanen reports go further than the Dodd-Frank Act and the Volcker Rule and include the beginnings of ring-fencing the many and varied activities of banks. None, however, propose reviving the Glass-Steagall Act or the measures that were taken in Europe after the 1930s crisis.
However, neither do any of their recommendations clearly propose the separation of commercial banks and investment banks, or dismantling what have come to be known as universal banks. |7| These reports and laws, along with the proposed banking reform law put by the French government to the National Assembly in December 2012 |8| (adopted eight months later) and the measures taken by Germany, Belgium and others, only go halfway. They propose ring-fencing measures that will prove to be very limited if indeed they are ever implemented. The investment branches of banks will draw on customers’ deposits and put them at great risk because no serious measures have been taken to prevent this. |9| In the framework of a universal bank Universal bank Sometimes described as financial supermarkets, universal banks represent a large financial set-up grouping together and covering the activities of commercial (deposit) banks and investment banks while also providing bank insurance. , the commercial banking section and the investment banking section are jointly liable; which implies that losses by the investment banking section will be borne by the commercial banking section. That is what happened in France, where the €8 billion – as estimated by its CEO, Laurent Mignon – lost by Natixis since its creation were covered by the 17 regional commercial banks of the Banque Populaire group and the 19 banks of the Caisse d’Epargne (savings bank) network, which became members of the same BPCE group after their merger in 2009.
With regulatory authorities making so many concessions to the banking lobbies
Lobbies A lobby is an entity organized to represent and defend the interests of a specific group by exerting pressure or influence on persons or institutions that hold power. Lobbying consists in conducting actions aimed at influencing, directly or indirectly, the drafting, application or interpretation of legislative measures, standards, regulations and more generally any intervention or decision by the Public Authorities. , it is remarkable to hear John Reed, the retired director of Citigroup, declare that the abrogation of the Glass-Steagall Act was a serious ‘error’. He was one of the most ardent proponents of the disastrous repeal of this law during the Clinton Administration. Yet in 2013, he declared that it was urgent to reinstate the Glass-Steagall Act, adding that the financial sector was very flexible and there would be no difficulty in separating commercial from investment banking activities. He argued that unlike industry, in reality banks do not have large, fixed capital bases. |10|
Although the Vickers and Liikanen recommendations for banks were very soft, the European banks (like their US counterparts) nevertheless organised an intensive lobbying campaign to avoid their implementation. Challenges, a French weekly, reported in 2012 what French bankers think of the Liikanen Report: ‘Usually these reports end up in the wastepaper basket,’ said one. ‘Liikanen hardly knows what a bank is’, another sarcastically commented. ‘Finland only has subsidiaries of foreign banks’. Challenges continued in a different tone, noting this comment from Martin Wolf, editorialist at the Financial Times: ‘I fear that under pressure from the bankers too many market activities will be excluded from the ring-fencing. This report is a step forward; the next stage must not be a step backwards’. |11| It just so happens that the Financial Times has also probed into the banking world. It reports that Christian Clausen, CEO of the Swedish bank Nordea and director at the European Banking Federation, says that the Liikanen Report is mistaken concerning the ring-fencing of trading and retail banking activities. |12| Both European and US lawmakers, not to mention top civil servants, have been subjected to intense pressure. In Brussels, where 754 members sit in the European parliament, there are between 700 and 1,000 representatives of the banks, with a budget of €300 million. |13| In 2014 the Corporate Europe Observatory estimated that the number of financial lobbyists Brussels has increased to a staggering 1,700. |14| The banks can also count on reliable and highly placed allies, like Mario Draghi, President of the ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
https://www.ecb.europa.eu/ecb/html/index.en.html and former director of Goldman Sachs. Some voices are being raised among the regulatory authorities criticising the absence of serious banking regulations. Andrew Haldane, Chief Economist at the Bank of England, spoke at a meeting of financial directors in London in 2012 to criticise the way the 29 systemically important banks take advantage of the danger they represent to obtain favourable conditions to access money from the ECB, the Fed FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.
FED – decentralized central bank : http://www.federalreserve.gov/ , the Bank of England and other financial institutions. He considers that the loans these institutions have made to the banks are equivalent to subsidies amounting to $700 billion. |15| Since then, the ECB has lowered its interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. -rates, thus generously increasing the value of its aid to the banks.
Andrew Haldane recommended a dramatic reduction in the size of the banks. Thomas Hoenig of the US Federal Deposit Insurance Corporation (FDIC) said that the ring-fences put into place to separate different banking activities are easily breached. He pleaded for the adoption of a Glass-Steagall type law in order to strictly separate commercial banks from investment banks. |16|
In January 2013, the Basel Committee stepped back from enforcing one of the flagship rules it had promoted for banks. They would no longer be required to maintain a safety net of permanent reserves (liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. coverage ratio – LCR) sufficient to endure a thirty-day period of crisis. This rule would have come into effect in 2015; it has now been postponed until 2019! The financial press announced this victory of the banks over the authorities on its front pages. On 8 January 2013, headlines in the Financial Times announced the victory of European banks after the relaxation of the Basel rules, |17| and on 12 January The Economist headlined: ‘Bank liquidity. Go with the Flow. Global regulators soften their stance on liquidity.’ |18| Not only is implementation of these measures postponed until 2019, which considering the urgency of the situation is tantamount to indefinite postponement, but the banks can use structured and/or toxic products such as Mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral. Backed Securities (MBS MBS
Mortgage Backed Securities See ABS. ) as guarantee capital.
So banking folly has a great future – especially as there is more to come. At the end of January 2013, to the bankers’ delight, Michel Barnier, the European Commissioner in charge of financial markets, announced that he would not follow the Liikanen Report’s main recommendation to ring-fence investment banking activities from commercial banking activities. On 30 January 2013, the Financial Times headline was ‘Brussels retreat on key bank reform’ |19| and explained in its columns that the European Commission had retreated on the requirement that could be imposed on banks to force them to separate their highly speculative market activities from their core activities.
In January 2014 Michel Barnier announced a proposal concerning the thirty biggest European banks. |20| This excludes the British banks, which are regulated by the Financial Services (Banking Reform) Act of 2013, following the recommendations of the Vickers report. The bankers responded with cries of horror, because the Commission wanted to force them to separate their potentially riskiest operations and transfer them to ad hoc subsidiary companies. |21| The Economist, which rejects the proposal, was quite clear and frankly cynical:
|Happily, Mr Barnier does not have the final word. His proposal must now be approved both by European governments and by the European Parliament. There is still time for the elaborate to-ing and fro-ing of European law-making to improve his proposal – or to bury it. |22||
Due to the European elections in May 2014, the proposal could not be adopted before the end of 2015, giving the banks ample time to put pressure on the European authorities. In fact, as the Financial Times forecast in January 2013, Michel Barnier and the European Commission are not proposing to split up banking activities at all, but only to shift risky assets to an ad hoc subsidiary. And the decision to actually require banks to create a subsidiary will emanate from the regulatory authorities in the bank’s country. In the Eurozone, that is the ECB, which has little inclination to impose any strict regulation on the banking sector.
Under the evocative title ‘La réforme bancaire en Europe sera (aussi) une coquille vide’ (Banking reform in Europe will (also) be an empty shell), the French financial daily La Tribune aptly sums up the situation:
|This is not really a surprise. The proposed European reform that aims to separate retail banking activities from investment on the financial markets will prove to be little more than hot air. According to a source at the Banque de France, the most recent version of the proposed law will be very similar to the ‘German and Belgian laws’ already adopted in 2013 and 2014 – in other words, it will not separate much of anything. And yet a real separation of banking activities would seem to be indispensable in order to avoid a repeat of the spread of a financial catastrophe into the real economy by contagion, as unfortunately happened in 2008-2009. Then, a law requiring large banking groups to separate deposit banking activities from trading or investment banking would have prevented taxpayers’ implicit guarantee of retail banks – which is legitimate as long as such banks play a vital role in the real economy – from being applied to the riskiest forms of speculation engaged in by those same groups. (…) Initially, the proposed European law separating banking activities, called the ‘Barnier Proposal’ – filed before the renewal of the European Parliament last May –, went farther than the French and German banking laws, for example, where separation is concerned. But, after nearly being abandoned under pressure from the banks, it will probably be presented to the MEPs in a heavily modified form. (…) In other words, the publication of the Liikanen Report will not have produced any changes as far as Europe is concerned. Yet more dashed hopes which, this time, may very well signal the end of legislative debate about the structure of banks in Europe. |23||
Iain Hardie and Huw Macartney do a good job of showing how the German and French governments came to the defence of the interests of the big private banks in their countries and prevented the adoption of measures separating certain banking activities:
|[…]Both French and German governments have sought to undermine the EU-level constraints on their large banks. They have done so by introducing their own national-level ring-fencing regulations, which, while claimed to be in line with the EU proposals, actually undermine them.|
In the final analysis, the purpose of the EU and French and German national reforms are at odds: the EU seeks to promote more substantive change in banking structures, but national authorities are using their reforms to protect the status quo. The initial political rhetoric in both countries (largely in the context of elections) called for substantial reform in response to the perceived failures of the respective banking systems. However, the need for a national political response to the banking crisis did not determine the strength of that response. As the ring-fence debate unfolded, weak French and German reforms emerged, and the timing of these national laws – as part of a coordinated response by the two governments – sought to forestall emerging EU legislation. While claiming to separate ‘speculative’ activities from those central to the financing of the real economy, national authorities are using the national laws to protect structural aspects of their domestic banking systems. |24|
A large number of proposals in the long-term financing initiative have now been rebranded Capital Markets Union. The European Commission published a preliminary report highlighting its early priorities for Capital Markets Union in February 2015.
These ‘new’ proposals by the EU Commission are nothing short of disastrous: Capital Markets Union is nothing more or less than a promotion of shadow banking and a vast operation in support of the universal bank model. |25| As Aline Fares of Finance Watch wrote: ‘Whereas the Banking Union aims to make the European banking system safer and to protect public money, the Capital Markets Union aims to increase the competitiveness and profitability of the EU finance industry (hence the support from the financial industry) by developing non-bank lending, or “shadow banking”, in Europe.’ |26|
And lastly, the negotiations between the USA and the EU on the Transatlantic Free Trade Area (TAFTA) include a chapter that seeks to increase financial deregulation. |27|
The repeated U-turns, compromises and half-measures that we have seen over a long period of time are clear proof that the current governments and authorities cannot be trusted to really put order into the murky world of finance. Banks have contributed to the worst economic and social crisis since the 1930s through the decisions they made. The decisions of the central banks to give them unlimited access to credit, without imposing any changes in the rules of the game, have aggravated its effects.
The real crux of the problem is that, because of the size of banks and the devastating effects their mismanagement has on the economy, banking is much too important an activity to be left in private hands. The banking sector uses public money, has a state guarantee and provides an essential and fundamental service to society. Banking should therefore be considered a public service.
Governments must take back their power to manage and direct the country’s economic and financial activities. They must also have methods for investing and for reducing public borrowing from private institutions to a minimum. This requires that private banks be expropriated without compensation, transferred to the public sector and placed under citizen control. Such radical action will make it possible to protect savings and financial activities for the common good and to guarantee the jobs and working conditions of bank employees. For this it is essential to create, under citizen control, one public system for savings, credit and investment. |28| The necessary choices involve the elimination of the capitalist banking sector, both for credit and savings (commercial banks) and in the field of investment banking. In fact there should only be two types of banks: public banks with public service status (under citizen control) and moderate-sized co-operative banks.
Translated by CADTM
|1| Speech by Nicolas Sarkozy, 25 September 2008 at Toulon (in Damien Millet and Eric Toussaint, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Policies), Paris: Le Seuil, 2012, p. 34). See also the opinion piece by Didier Reynders, Belgian Minister of Finance between 1999 and 2011: ‘Tirer les leçons de la crise financière’ (Drawing lessons from the financial crisis), Le Soir, 24 April 2009, http://archives.lesoir.be/tirer-les... (in French).
|2| See Daniel Munevar, ‘Un pequeño recordatorio de parte de JP: La importancia de la Volcker Rule’ (A little reminder from JPMorgan Chase: the importance of the Volcker Rule), CADTM, 25 May 2012, http://cadtm.org/Un-pequeno-recorda... (in Spanish only).
|3| See Matt Taibbi, ‘How Wall Street Killed Financial Reform’, Rolling Stone, 10 May 2012, http://www.rollingstone.com/politic.... See also Les Echos, ‘La réforme de Wall Street reste aux deux tiers inachevée’ (The Wall Street reform remains two-thirds unfinished), 12 December 2012, p. 28;Gina Chon, ‘Federal Reserve Considers Delay to Volcker Rule’, Financial Times, 17 November 2013; Tom Braithwaite and Gina Chon, ‘Volcker comes of age in spite of protests’, 10 December 2013; Gina Chon, ‘Banks hope for ballot blow to Dodd-Frank’, Financial Times, 22 September 2014.
|6| This was the High-level Expert Group on reforming the structure of the EU banking sector; (Liikanen Report), 2 October 2012, Brussels.
|7| As we saw in Chapter 2, the universal bank groups all the banking professions – commercial banking, finance and investment banking, asset management, insurance. Its danger is that losses due to high-risk activities jeopardise the assets of small savers.
|8| Full text: Projet de Loi de séparation et de régulation des activités bancaires, N° 566 (Proposed Law on the separation and regulation of banking activities), Assemblée nationale (the French Parliament), 19 December 2012, http://www.assemblee-nationale.fr/1... (in French). The Dutch and Danish authorities are also working on projects, but the result will probably be disappointing.
|9| See the excellent review by Gaël Giraud concerning the French Bill and the measures known as Dodd-Frank, Vickers, and Liikanen: http://www.lavie.fr/www/files/media... (in French). Gaël Giraud shows that this law is more favourable to the status quo, and so to the banks, than the Dodd-Frank law and the recommendations of the Vickers and Liikanen commissions. See also ATTAC, ‘Les 20 propositions d’ATTAC pour une véritable réforme bancaire’ (20 proposals by ATTAC for true banking reform), Paris: ATTAC France, 14 February 2013, http://www.france.attac.org/article... (in French).
|10| John Authers, ‘Culture clash means banks must split, says former Citi chief’, Financial Times, 9 September 2013.
|11| ‘La cloison bancaire est bien fragile’ (The banks’ ring-fencing is very fragile), Challenges, 11 October 2012, p. 28.
|12| Richard Milne and Patrick Jenkins, ‘Nordea chief takes a swipe at Liikanen’, Financial Times, 30 October 2012.
|16| The summary of what Andrew Haldane and Thomas Hoenig said is drawn from: Financial Times, ‘Warnings over steps to reform biggest banks’, 28-29 October 2012, p. 3.
|17| Brooke Masters, ‘Banks Win More Flexible Basel Rules’, Financial Times, 8 January 2013.
|18| ‘Bank liquidity. Go with the Flow. Global regulators soften their stance on liquidity’, The Economist, 12 January 2013, p. 60.
|19| ‘Brussels retreat on key bank reform’, Financial Times, 30 January 2013.
|21| The complete text of the proposal is available on the European Commission Website: Proposal on banking structural reform, 29 January 2014, http://ec.europa.eu/internal_market.... For an official summary, see the press release: http://europa.eu/rapid/press-releas.... For a favourable review, see Le Monde, ‘L’ambitieuse réforme des grandes banques européennes de Michel Barnier’ (Michel Barnier’s ambitious reform of major European banks), 29 January 2014, (in French) http://www.lemonde.fr/Économie/art.... See also this positive reaction, with qualifications, by the European Green Party: ‘Séparation des métiers bancaires. Les Verts au PE appellent à des mesures plus ambitieuses’ (Separation of banking activities. Green MEPs call for more ambitious measures), http://www.philippelamberts.eu/sepa... (in French). Finance Watch was also favourable: http://www.finance-watch.org/press/....
|23| Mathias Thépot, ‘La réforme bancaire en Europe sera (aussi) une coquille vide’ (Banking reform in Europe will (also) be an empty shell), La Tribune, 29 April 2015 http://www.latribune.fr/entreprises...
|27| Lori Wallach, ‘The corporation invasion’, Le Monde diplomatique, December 2013, http://mondediplo.com/2013/12/02tafta See also another agreement in negotiation: ‘Public Citizen, TISA Leak Reveals 10 KeyThreats to Commonsense Financial Regulations’, 2 July 2015, https://wikileaks.org/tisa/financia...
is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.
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