In this early December, the European Parliament seized a crucial issue for the future of financial stability in Europe, unfortunately in particularly difficult conditions. Strong civic and political mobilization will be required for the reform envisaged by the Commission to succeed. However, the game is worth it because it is the centerpiece of the work started in 2009. Without it, it would be difficult to argue that any of the problems revealed by the 2008/09 financial crisis has been resolved.
The idea is to propose a separation of banking activities into traditional commercial banking (bank deposits, lending, payment systems) on the one hand and investment banking, and its often-speculative activities, on the other. Criticized by banking lobbies as of the beginning of the year, the "Barnier proposal" was inherited by the new Commission, which finally presented it to Parliament.
Separating these banking activities would finally provide an adequate response – even if it is not the only nor the most radical one – to the problem of "too big to fail" banks, denounced by the G20 at the time of the financial crisis. Since the 1990s, the concentration of the banking sector has continued uninterrupted, with increasingly large, increasingly international and increasingly interconnected banks. And the trend has not diminished with the crisis, on the contrary. In twelve years the value of assets of the top fifteen European banks has tripled, notably due to derivative markets; it currently stands at 20 000 billion euros – more than the GDP of the European Union. The trend is similar in the US and elsewhere. In result, the international financial system is dominated by a few dozen behemoths whose failure would shake the world economy. And these behemoths are well aware of the fact.
The sense of impunity that this provides is a structural incentive for reckless risk-taking. And the current model of the "universal" bank exacerbates the problem since commercial banking activities provide an implicit subsidy to the other activities. Critics portray the "universal" bank model as a strength, but it has mostly become a speculative force backed by bank guarantees. In the case of derivatives markets, the risk hedging represents only 10% of transactions; the remaining ones being transactions between financial intermediaries themselves. More generally, the NGO Finance Watch estimates that only 30% of banking activities address the needs of the real economy. To the extent that other activities must continue, accounts should at least be separated and each party held responsible for their own risks.
Otherwise, taxpayers will still be made to contribute in order to resolve the next crisis, no matter what the banks say today. Indeed, the little progress in recent years in terms of regulation – essentially, an increase in equity capital and a procedure of "bank resolution" in case of bankruptcy – is very far off. As shown in the OECD studies, the problem lies in the economic model itself: no equity rule will suffice in response to liquidity shocks that may occur in the derivatives and repo markets. As for the idea of a "bank will", given the complexity of the financial system, the idea that it will untangle the various activities of a mega-bank after bankruptcy is somewhat naïve.
The text presented to Parliament is not revolutionary. It merely repeats the proposals of the group of independent experts chaired by Erkki LIIKANEN, the president of the Finnish central bank. Previously, in the United Kingdom, the Vickers report had pleaded in the same sense. However, the resistance of lobbies is fierce. The developments in the United States clearly demonstrate this: the Dodd-Frank Act, which reintroduced the principle of separation, was gradually emptied of its substance. Same result in France and Germany where recent banking laws claim to adhere to the principle of separation but separate little or nothing. If these laws are retained as models for the European level, none of the underlying problems will have been solved.
Part of the problem is that many politicians believed the arguments of the lobbies that claim that the regulation of finance threatens economic recovery and job creation. The argument is absurd, yet even the European trade unions seem hesitant. One must have a short memory to oppose financial regulation and job creation. On the contrary, it is strict regulation of speculative activities that will guide the banks and finance system towards the creation of jobs and the needs of the real economy.
Wojtek Kalinowski, Veblen Institute for Economic Reforms
Translated from French by Julien Moity