Last week the Transparency International’s EU office was back among the bankers at the European Commission’s Group of Experts on Banking Issues (see previous post here). Quite a lot has happened since that February meeting. Most importantly, Transparency International’s EU Office decided to become a founding member of Finance Watch a new Brussels-based civil society body that will provide an important counterbalance to the banking lobby at a time when the EU is steering through some of the most far-reaching reforms of the financial sector. We have also added to our expertise in this area by appointing Jacques Terray as a special advisor on financial services issues. Jacques is a member of the TI international board, Vice-President of TI France and has had a long career in law and banking, playing his part in financing the Euro Tunnel, Euro Disney and the launch of the Euro currency (it remains to be seen which is the most enduring achievement…).
This time, rather than remain passive observers of the fray, Jacques agreed to present TI’s case for introducing more transparency in the financial sector. It may seem odd to have to explicitly make this case after the high-profile cases of fraud, conflict of interest and insider trading exposed by the financial crisis, not to mention the role of the financial sector as a conduit for much of the illicit proceeds of corruption.
But we need to face up to an apparent paradox. Why did the financial crisis originate precisely in those countries with relatively high levels of transparency in the financial sector? Our view is that there were at least 3 factors that offset the trend toward greater formal disclosure requirements: the growing opacity of financial markets and instruments, systematic conflicts of interest among crucial gatekeepers such as auditors and credit rating agencies, and lax supervision and enforcement by regulators.
This final point – the failure of supervisors – is particularly relevant at EU level. The very different supervisory cultures and rules that were in place in Europe prior to the crisis allowed banks to game the system, prevented national regulators from having a complete picture of emerging trouble-spots and made the process of saving failing cross-border financial institutions protracted and uncertain. To remedy these problems, the EU established a new cross-border authority in January 2011 – the European Banking Authority (EBA) – that will have a key role in supervising national regulators, coordinating information flows, ensuring consistent rules and a more harmonised approach. It seeks to create nothing less than a ‘single European rulebook’ for financial markets. It will carry out ‘peer reviews’ of banking supervision in each European country and, most urgently, will conduct the ‘stress tests’ that will assess the health of the European banking sector and will be made public later this month. If it operates effectively, its establishment represents a great stride forward in creating more transparency around financial services regulation in Europe.
Will it operate effectively? That depends on 2 critical and related factors: the extent to which it itself is committed to transparency and good governance; and whether it can avoid the conflicts of interest that often threaten such pan-European initiatives.
On the first point, the omens are good. Last month, the EBA voluntarily handed over information that had been withheld by its immediate predecessor body, the Committee of European Banking Supervisors (CEBS), in response to a complaint by a Swedish trade unionist. True, the gesture was partly in response to an investigation by the European Ombudsman, and, true, the information – a list of attendees at a CEBS organised public meeting – is hardly the sort of thing that will prick the ears of Wikileaks. More encouraging is the commitment to further openness and transparency in the EBA’s official response and the Ombudsman’s pointed reminder that it is subject to EU rules on access to information, including “obligations to be proactive and, in particular, to make documents directly accessible to the public in electronic form”. We will see how the Authority performs on this score.
On the second point, the signs are more ominous. Earlier this week, the EBA received a thundering broadside from Germany’s senior bank regulator, Jochen Sanio, who accused it of “lacking legitimacy” as a result of poor corporate governance structures, and criticised its handling of the stress tests. Closer examination of these comments show more than an element of special pleading on behalf of German banks. Given the supervisory board of the EBA is made up of national regulators such as central banks who, in a pan-European context, may still see themselves as champions of “their” financial sectors, it is clear that the EBA will come under intense pressure internally and externally to favour certain interpretations of the rules. As we know, the best way for the EBA to protect itself against perceptions of conflict of interest – not to mention accusations of hypocrisy – is to operate in the most transparent manner possible with high standards of corporate governance. For many on the EBA’s supervisory board, this may mean breaking the habit of a lifetime.
Carl Dolan, Transparency International Liaison Office to the EU