Banking And Finance: EC Sets Out Moves …

• May 28th, 2010
• Posted by 7thmin

COMMENTARY:

A round of budget cuts in European capitals, (on Thursday in Spain, the parliament approving a €30-billion reductions plan – A$43.7bn, dcerates.com, 28.5.10), is being described as a response to “pressure from the market”.

That has gone down badly in many segments, as with the Spanish parliamentarians who voted “no”, losing by one vote; or union protestors taking to the streets on Friday, in France.

(The Spanish austerity package includes wage cuts of at least 5% for public servants and reduces public investment).

Not least, the European Commission has responded to the question of who rules, (elected governments, or “markets”?), bringing  forward a plan to cause banks to provide  enduring funding against a down-turn.       

BANKS PUT IN QUESTION

Loud expressions of doubt about the ability of governments to honour their debts accelerated in the immediate aftermath of the stimulus spending they engaged in to settle the financial crisis during 2008-09.

After all, since they had committed their reserves, and even borrowings, to bail out banks, might they not be a bad risk in need of bailing out themselves?

NERVOUS PUNTING

Hence down-grading of the credit rating of the Greek government bonds, or the “nervous” punting of the last two weeks on stock exchanges – up, down a bit,  down, up a few percent …

After nearly forty years of concerted activity to build up massive private and discretionary wealth world-wide, (Middle East “petro-dollars”; company profits alienated as bonuses to the private accounts of managers; very large cuts in direct personal  tax in the upper brackets; development of “hedge-funds” and private equity firms operating outside of regulatory frameworks); state lending and borrowing has lost its hegemonic status; the act of budgeting for a surplus in boom-time, and budgeting for a deficit in recession, now has many more complications – especially with high-rollers  out to bet on interest-rate changes, and the like.

LOOKING FOR SAFER GROUND?

The move announced by the European Commission this week answers one conventional view of the world situation, for banks at least, that reversion to 19th century economic ideas can be such a destructive game, they need to move out of the casinos onto safer ground.

Banks require better reserves to cope with crisis; or in the words of the 19th Century Bible song for children: “The wise man built his house upon the rock”.

Hence moves in the United States to separate core activities of the public banking institutions from private investment banking.

EUROPEAN COMMISSION PROPOSAL

Hence, also, the proposal made in Brussels on Wednesday, as a Communication from the EC, on funds, with the following statement:

“The European Commission proposed on 26 May that the European Union establish an EU network of bank resolution funds to ensure that future bank failures are not at the cost of the taxpayer or destabilise the financial system.

“Following discussion at the forthcoming European Council, the European Commission will present these ideas at the G-20 Summit in Toronto on 26-27 June 2010.

“Such funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system.

“The Commission believes that a way to achieve this is by introducing requirement for Member States to establish funds according to common rules into which banks are required to pay a levy.

“The funds would not be used for bailing out or rescuing banks, but only to ensure that a bank’s failure is managed in an orderly way and does not destabilise the financial system.”

EUROPEAN COMMISSIONER BARNIER

“It is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector”, the Internal Market and Services Commissioner, Michel Barnier, said.

“They should not be in the front line; I believe in the ‘polluter pays’ principle; we need to build a system which ensures that the financial sector will pay the cost of banking crises in the future.

“That is why I believe that banks should be asked to contribute to a fund designed to manage bank failure, protect financial stability and limit contagion – but which is not a bail-out fund.

“Europe must take a lead in developing common approaches and providing a model for cooperation which could be applied globally.”

WIDER MEASURES

The comments by the Commissioner foreshadow a wider set of financial management measures, according to a commentary in the Brussels-based European Voice (27.5.10).

“Michel Barnier wants directors and major shareholders to carry more responsibility and limit the number of boards a director can sit on”, it says.

“A major shake-up of corporate governance in the EU’s financial services sector is under preparation by the European Commission.

“In a proposal due to be published next Thursday (3 June), the Commission wants directors and large shareholders to carry more responsibility in ensuring that financial firms do not take unjustified risks.

“The Commission puts part of the blame for the 2008 banking crisis on inadequacies in the current rules. Its proposal will go further than international reforms shortly to be announced by the Basel Committee on Banking Supervision, a club of rich-country bank supervisors …”

The interplay of real interests, risk, ideology and power may be a spectator sport of our time, but it is no fantasy-game on Playstation; nor a World Cup that can free us, for a time, from the daily grind; nor, really, a level playing field for Davids and Goliaths, as in the song being sung: “Everybody knows that the dice are loaded; everybody rolls with their fingers crossed…”

Reference

BBC News, London, “Spanish politicians approve 15bn-euro austerity plan”, 27.5.10. http://news.bbc.co.uk/2/hi/business/10172644.stm, (28.5.10).

Jim Brunsden, “Commission seeks to rein in risky bankers”, European Voice, Brussels, 27.5.10. http://www.europeanvoice.com/article/imported/commission-seeks-to-rein-in-risky-bankers/68050.aspx, (28.5.10).

Leonard Cohen, “Everybody Knows”, (song lyric), Lyrics Freak, SF. http://www.lyricsfreak.com/l/leonard+cohen/everybody+knows_20082809.html, (28.5.10).

European Commission, Brussels, “Commission sets out vision for bank resolution funds”, 26.5.10, IP/10/610.

EC, Brussels, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the European Central Bank: Bank Resolution Funds, 26.5.10, FULL TEXT: http://ec.europa.eu/internal_market/bank/docs/crisis-management/funds/com2010_254_en.pdf, (28.5.10).

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