In the last few days I have watched some documentaries dealing with the topic of the greed and megalomania of German banks and large companies. Amongst others I watched documentaries about the West LB and the Bavarian Landesbank, Quelle (Karstadt) and Schlecker. In none of them was there a mention of the migration crisis. But even at that time the topic already divided society. Unnoticed. And the decline of social democracy began at that same time. Unnoticed. We have moved further and further away from being a humanist society. We need a new enlightenment.
2012 in Tokyo: at the annual meeting of the World Bank and the International Monetary Fund, the European debt crisis (and risk) was the focus. ECB members sat on the podium. They defended the eurozone and spoke of the rescue of Greece with a correspondingly rigid austerity programme. And especially: keeping the state and the banks separate from each other.
The conference organized by the Directorate-General for Economic and Financial Affairs in Brussels was exciting. It dealt with structural reforms and the deepening of the economic and monetary union. Reforms! Said Draghi. Reforms! Demanded Dombrovskis. Reforms! Summed up Moscovici.
Jean-Claude Juncker, President of the EU Commission has a plan: the “Juncker Investment Plan”. With the help of leverage effects this means that more that €300bn should have been pumped into the European economy by the end of the project. The plan is slowly starting to work – just not in Austria.
The EU is hogging the headlines – not because it is such an amazing construct with a strong and stable foothold in the global political framework, but paradoxically in connection with national and nationalistic ways of thinking. Diversified rather than united…
The current situation in Greece yet again makes it abundantly clear that a European-wide banking separation system is long overdue. It was not until the early summer of 2015 that the lame draft of the EU Economic Committee (ECON) within the European Parliament died a natural death. Yet banking separation is essential to the stability of monetary union and has a strong precedent in the Glass Steagall Act, which is well worth emulating.
A banking separation system was on the agenda of the last EU Commission as part of its central regulation measures. The system is very simple. The principle is that customer business should be separate from high-risk investment banking. The champion of UK banking separation, John Vickers, referred to this as “ring-fencing”. He spoke of protecting the sheep (commercial banking) from the wolves (investment banking) by ring-fencing them. Yet in that very market, representatives of the “too big to fail” banks have succeeded in distancing themselves from any effective banking separation system by a process of constant lobbying.
Michel Barnier, Internal EU Market Commissioner of the Barroso Commission, gave former head of the Finnish National Bank, Erkki Liikanen, the task of investigating possible structural reforms within the EU banking sector. The so-called Liikanen Report on the subject duly appeared in 2012. This was followed by EU member nations agreeing on a two-step approach (full details here), which was then brought to its knees by the Economic Committee of the European Parliament in the early summer of 2015.
Universal rather than separate banks
The reason for this failure was that the draft submitted by Swedish rapporteur Gunnar Hökmark (EPP) highlighted and indeed underlined the importance of universal banks and the need to prevent any strict separation of financial institutions into investment and commercial banks. This runs contrary, for instance, to the German Banking Separation Act, which requires that from 1 July 2015, investment banking and commercial business be divided into separate subsidiaries. If the EU law were to take a laxer stance, German banks would be at a competitive disadvantage within the EU (which would probably be no bad thing from a UK point of view).
Jeremy Corbeyn, a left-wing representative of the Labour Party, has recently re-ignited the Glass Steagall debate. He advocates implementing that particular banking separation model. Corbeyn is predicted to have a good chance of winning election as Leader of the Labour Party. Glass Steagall is a ready-made banking separation model that could be incorporated within the European legislative framework relatively easily.
Glass Steagall in the US election campaign
The Dodd Frank Act, only recently cited by President Barack Obama as a successful example of financial market regulation, has come under heavy fire during the current US primaries, within Obama’s party in particular. Apart from Hillary Clinton, who is thought to have a close relationship with the major Wall Street banks, in terms of financing her election campaign, all other Democratic Presidential candidates like Bernie Sanders and Martin O’Malley advocate re-implementation of Glass Steagall. (It was rescinded under Bill Clinton with disastrous and well-documented consequences for the global financial industry).
The “Glass Steagall Act” was brought before the House of Representatives in 1933 as H.R. 5661 by Henry B. Steagall, approved by the U.S. House Committee on Banking and Currency and enshrined in law on 16 June 1933 by President Franklin D. Roosevelt. The “Glass Steagall Act” provided for the introduction of a banking separation system, or institutional separation of a bank’s deposit and lending operations from its securities business. Banks had to decide whether to operate as business banks, offering classic deposit and lending products and services, such as account management and payment transactions, (commercial banking), or as investment banks dealing in securities (investment banking).
Following the world economic crisis or Great Depression in the period between 1929 and 1933, banks had to contend with massive losses, thanks to strong integration and networking between investment and commercial banking, both on the securities side (stock exchange falls) and on the lending side (defaults on loans). The idea of separating the two segments was to ensure that such events did not repeat themselves.
Fintechs an example of banking separation in action
Proponents of the banking separation system, and the Glass Steagall model within the European Parliament in particular, led primarily by Philippe Lamberts of the European Greens, Fabio de Mesi of The Left and Jakob von Weizsäcker of the SPD, believe in the merits of a joint trans-Atlantic initiative to implement the Glass Steagall model of banking separation system in both the US and Europe. The latest developments in Greece, (bank suspensions, capital market controls due to the fact that purchase of state assets = domino effect), as well as the increasing threat of a financial collapse from China should give added impetus to this idea of sustainable separation of commercial banking from investment banking.
Not only that, since the current Turkish G20 presidency is focusing on the issue of “Financing SMEs”, a worldwide initiative to implement Glass Steagall or similar models would also be advisable. SMEs are a key economic, employment and economic stability factor, not only in Europe – in many emerging economies (including incidentally Russia and Brazil, as well as members of the BRICS) EMUs form the backbone of the economy. And, as their financial partners, customer banks are essential – whether analogue or digital. Furthermore, thanks to the Fintechs, systems are emerging in the digital world that follow the banking separation model. Fintechs are not universal banks but customer-focused digital banks. They generally offer a service geared to a particular target market, and so far they tend to be targeting classic “bank” customers.
However it will be a great political challenge to integrate this project into the major EU Commission project of Capital Market Union – particularly given the fact that a “Brexit” must be avoided or is undesirable in any event. This takes us right back to the start of my deliberations. We are in for some exciting political times. Stay tuned.
I am actually a very sceptical observer of American politics – especially its inherent contradictions. The world’s largest democracy still applies the death penalty to a large extent, has yet to develop a functioning healthcare system and shows signs of ever-increasing social tension. Well into the late 1960s, its black people were treated by law as second-class citizens. And as the world’s biggest military power, the US operates via direct or indirect aid as an interventionist force, or self-titled “world police”. Despite all of this, the US has an important role model function for the European Union (EU), in terms of its constitution.
Earlier this month the European Commission released its plan for the Single Digital Market. A very important step in fact for the EU’s competitiveness and in particular the boost to innovation is needed, and yet its contents are a disappointment.
At first glance two things stand out in the plans for the Single DigitalMarket. Firstly, the approach taken to the topic is analogue and web 1.0 rather than web 4.0. And secondly this concept has no vision. There is not a single measure supporting the advantages of the European Union, its diversity, its regions. Quite the opposite: regional protection is dropped, and instead we get Geo-blocking as it’s known.
Geo-blocking watch out
For many users this is at first view a positive development. For the economy a prospect which is not exactly non-threatening. In the Commission’s view, it is clear: the digital union should become the backbone of the forthcoming union of the capital markets. Once again the strength of standardisation takes priority over protection of individualisation.
The regional banks provide a concrete example. Their regional know-how and knowledge of their particular business location, region and community area makes them strong. They understand the needs and requirements of the local economy. This is a valuable asset – using an economically successful region to make the country strong and subsequently the European Union strong as well. The regions are the driver of growth and the strength of the EU. And nevertheless everything is done not to utilise this strength.
Green Paper casts its shadow
Geo-blocking in the strategy of the Digital Union is already casting its first shadows on the proposed green paper on retail financing. One of the focus points will be cross-border financing of loans or perhaps opening current accounts and savings accounts (if they are not in any case already history by then because of Draghi’s low interest rate policy). The consequences are already clear: only large, financially sound institutions will be able to afford cross-border activities. These are not necessarily to be found among the ranks of the regional banks. Even more so, given that some regional banks such as the German savings banks adhere to the regional principle. This means that they are permitted to operate only in their region. One can imagine the competition which will erupt in a financial group, and that in the end only the strong are left. However, the “strong” will have achieved their strength not only through their bread and butter business. The conclusion will probably be the end of a business model that is nearly two centuries old.
Where is Europe’s digital response?
At the same time it would have been so easy to enact measures to digitalise and support the regional strength of Europe. Fibre-optic expansion, free WLAN, support programmes for digitalisation of SMEs. Digital upgrade. Instead of this a kind of digital Schengen is being created. With no concept behind it. And above all no vision.
On the subject of vision: this is nowhere to be found in the paper. No initiatives on creating a European Google, Facebook or Twitter, as other economic regions have (China, Russia). Instead of that, more bureaucracy to prevent the dominant position of the American companies. No attempts to create a European Silicon Valley and thus to prevent the digital brain drain to the USA. The concept of the Digital Union is lacking in every socio-political approach. No mention of social data, the key issue and strength of every digital society.
Digitalisation is a far-reaching development, which creates new socio-political phenomena, makes entire industry sectors disappear or creates new ones. The EU ultimately needs a strategy so that it doesn’t suffer any harm and or disadvantage because of digitalisation, but becomes strong and competitive. The Digital Single Market presented here will not find any followers.
“Technical rationality is the rationality of domination itself.” Max Horkheimer and Theodor W. Adorno: Dialektik der Aufklärung (Dialectic of Enlightenment).
There was a major power in post-war America: its middle class. And yet this class has been on the verge of dissolving, disintegrating and vanishing. For nearly 30 years. Elizabeth Warren has made it her goal to protect it – and will not make the presidential campaign easy for Hillary Clinton by doing this.
In European terms, Elizabeth Warren is actually a working class child. Her earliest negative experience was when her father was seriously ill. The only way to fund the health insurance was through a loan which seemed reasonable at first, but which was in fact high-risk and kept the family in a state of tension for a long time. And as she herself emphasises, this was just the beginning of an unfair financial system which worked its way from Wall Street throughout the country. Senate and Congress are reliant on Wall Street and its lobbyists thus manage to repress main street banking and its influence in American centres of power. The last remnants of the Glass-Steagall Act were repealed during the Clinton Administration (i.e. under Warren’s political colleagues and Bill Clinton, husband of the most promising Democratic presidential candidate). In Europe or rather the EU, this model is known under the general term “separate banking system” and its individual approaches by Volcker, Vickers and Liikanen.
“Too big to fail, means too big”
Warren has styled herself as the protector of the middle class against dubious financial institutions and high-risk lending, and her popularity is increasing. Two thirds of Americans are now scrutinising activities on Wall Street very closely and consider “Too big to fail” to be a provocative topic. Elizabeth Warren is a great advocate of reinstating Glass-Steagall and also regards the fight against the Wall Street mechanisms as a key issue in the Democratic presidential campaign. Former Maryland Governor Martin O’Malley is one of many in support of Warren attempting even now to make Glass-Steagall an issue in Senate. His belief: “If banks are too big to fail, they are too big.”
Meanwhile the figures suggest that a further financial collapse in the US is imminent, which is being expedited and encouraged by the continuing unrestricted activities of the “big banks” and their methods.
Many Americans have still not recovered financially from the 2008 financial crisis and detect in their government support of the Wall Street Banks rather than focus on consumer banks. Warren quotes in this respect the average annual income which is USD 4,000 below the annual income in 2008. There are twenty million people registered with the food stamp programme, in order to have basic food security at least. Student loans are at unprecedented levels because of the high interest rates of federal loan programmes. Warren is very critical of this, as it is causing a rapid rise in the debt burden of young Americans.
In addition, many families are faced with the problem that they are not able to pay their monthly rent or housing loans.
Financial reforms weakened the middle class
According to Warren, the financial sector reforms have not cleaned up the banking sector and made it more trustworthy. Instead, they have allowed the already large banks to grow by a further 30-40%. She believes that the restructuring and reform of the financial sector is still unfinished. Her proposals include:
- Financial institutions and individuals should be accountable if they cheat customers
- Taxpayers should no longer have to foot the bill if banks default
- Tax policies which encourage financial instability and risk-taking should be changed
- Clear guidelines should be developed for tougher regulations on the shadow-banking sector
Meantime there has been great approval and support for Warren at all of her public appearances. She will not enter the ring herself against Hillary Clinton in the Democratic primaries, but Clinton will nevertheless not be able to ignore the party’s progressive left wing represented by Warren. Whether she will make Glass-Steagall an issue is probably already difficult. In any event Warren, the fighter for the middle class, is an important component in the 2016 presidential campaign, and encourages perhaps for some a political scheme in the EU and/or Austria.
In the wake of the tax reforms, (though it is questionable whether the word ‘reform’ is even appropriate in this context), bank secrecy will apparently go by the wayside. Many would probably say that is no reason for concern. “After all, those who have nothing to hide have nothing to fear”. But it is also a matter of our right to privacy and protection of the private sphere – the ordinary citizen’s claim to freedom from interference by the state.