Licence to kill: banking experts discuss EU crisis management proposals

Commissioner responsible for the functioning of the EU’s internal market – has pledged to improve the representation of civil society groups in these meetingsto avoid the perceived stranglehold that the banking industry had on the European regulators in the run-up to 2008’s financial meltdown.

On the evidence of the meeting I attended this week (Monday 14 February), Barnier and his team still have some way to go. Europe’s banking industry is hugely top heavy: out of the 8, 838 banks in operation, the top 40 control 70% of the assets. Most of these heavyweights were represented at the meeting and will be familiar to you from headlines over the last 3 years: Goldman Sachs, Deutsche Bank, ING, Royal Bank of Scotland etc. etc. Of the 40 or so fully-fledged members present, I counted only 1 independent academic, 1 national consumer organisation and 2 NGOs/think-tanks (SOMO Centre for Research on Multinational Organisations and the Centre for European Policy Studies). Not exactly the ‘pluralism’ that the Commission in its own internal guidelines recognises as the ‘final determinant of the quality of expert advice’.

It is also a heavily gender-biased group, with only 4 women representing financial institutions. This reflects the structure of the industry itself and may also partly explain the bullish, macho talk that peppered the discussion, much of which hinged on whether new EU legislation should give regulators the legal basis to ‘kill’ senior bondholders or depositors – i.e. oblige them to take a loss – in the (hopefully rare) circumstances of a bank completely failing. The discussion took place in the context of the proposals the Commission has tabled on the crisis management of the financial sector, which is built on 2 fundamental premises: 1) the disorderly and ad-hoc approach to bailing out the banking sector seen in recent years – especially cross-border institutions – must be replaced by an agreed and transparent procedure that all EU countries can sign up to; 2) the political decision taken by the

European Council that tax-payers should never, ever have to pick up the tab again. The proposals are currently in the consultation phase with a deadline of 3 March for responses.

The response of the finance industry representatives echoed their advice to regulators down the years: don’t overdo it, be flexible, keep your options open; even if you get the legislation on the books you won’t have the skills, knowledge or resources to keep up with a fast-moving and nimble market; the money will only go elsewhere, either unregulated markets or countries – in short, nothing should really change. There was even the hint that as some states have made a modest return on their bail-out schemes, e.g. the US Troubled Asset Relief Programme (TARP), they should be grateful to the financial sector for the investment opportunity!

This final point glosses over the fact that the financial crisis has now concentrated assets in even fewer firms than before and that increased profitability is a result to some extent of a lack of competition. Banks that were ‘too big to fail’ have in fact become bigger than ever. The Commission implicitly acknowledged this by pointing to the work that its Directorate-General for Competition is doing on state-aid and competition in the financial sector. At this meeting, however, the suggestion that the best way to prevent a repeat of the 2008 crisis is by downsizing bank balance sheets and restructuring the sector was batted away with vague references to ‘economic efficiency’ and ‘rendering business models unviable’. It took one of the independent academics present to point out that there is no evidence that large balance sheets are good for the wider economy, as distinct from the profitability of the banking sector itself.

The process is eye-opening in many respects. EU financial services reform is so fiendishly complicated that there is a risk that efforts are funnelled into narrow technical issues of insolvency and corporate law where the views of practitioners naturally dominate. What look like robust and clear-headed proposals can be watered-down to the nth degree in endless iterations, rather like a homeopathic preparation. The TI-EU office will make sure that it follows this process and hold those who are steering it accountable to ensure a financial sector that serves all economic actors in an equitable and transparent manner.

Carl Dolan, Transparency International Liaison Office to the EU