Committee for the Abolition of Illegitimate Debt

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 Market activities
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 Lobby
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 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:

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:

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:

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]

Conclusion

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