This week the European Parliament and the European Central Bank rather unknowingly or unwillingly failed to protect the European citizens from the attacks of ‘money sharks’. In two different occasions the two most important European institutions secured the bankers reign on peoples’ money. Let us take one thing at a time.
When the average hard working European citizen reads or hears news about the ‘financial stability and confidence’ he or she immediately thinks that it is about protecting his/hers bank deposits or their retirement pensions. Unfortunately it’s not like that. Let’s see why. When it comes to core decisions, in the political or administrative levels about security, confidence and regulations in the financial markets, things become so complex that it’s almost impossible for the average person to understand. This is also true for the legislators at the European and the national levels.
In reality, the complexity and the ‘epistemology’ in this domain are especially planned to hide the facts. For example the wider public is still not informed that the 2008-2010 financial crisis erupted exactly because ‘financial stability and confidence’ were altogether absent, and the entire financial system in the developed world functioned without adequate legislative or administrative rules.
A hunting place for financial sharks
Every financier or banker was and still is free to do whatever they liked with other people’s money. Actually the ‘grey banking’ and the ‘grey financial system’ continuously expands at the expense of classical banking. The traditional business of banking, that is deposits and loans to and from the real economy, is gradually diminishing. Bankers prefer doing risky business in all kinds of derivatives or gamble in every conceivable market (real or financial). Of course they keep the profits and charge the losses to taxpayers.
The latest proofs of the lawlessness that prevails in the dark universe of the financial world come from the European Parliament, the European Central Bank and the Bank of England. Those are the very authorities which are presumably there to protect the average citizen’s deposits and superannuation schemes from the financial sharks. Let’s start with the European legislators.
The legislators didn’t know
Last Tuesday the European Parliament’s Economic and Monetary Affairs Committee issued a Press release ostensibly commenting on the new rules the EU is about to introduce on financial benchmarking and security. Not to forget that already more than two years have passed after the scandal of the LIBOR (London Interbank Offered Rate) and EURIBOR (Euro Interbank Offered Rate) rigging broke out (interest rate benchmarking) involving the most respected financial houses of the developed world (Barclays, Deutsche Bank, RBS, Société Générale, UBS, Citigroup, Crédit Agricole, HSBC, JPMorgan Chase and the broker RP Martin).
Those benchmarks are used as the base for loans, derivatives, futures, options and a God knows what other financial products. In short those banks have been cheating their clients in more than one way. At that time (the Commission opened the proceedings in February 2013) Joaquín Almunia, the then responsible Commission Vice-President in charge of competition policy said: “What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other’.
What effective rules?
The European Parliament boasts now that it has introduced effective rules against financial benchmark setting rigging. Last Tuesday’s Press release goes like this “A draft EU law to make the benchmarks used to price EU citizens’ mortgages, loans and bonds more trustworthy was backed by the Economic and Monetary Affairs Committee on Tuesday. The text (lead MEP Cora van Nieuwenhuizen, ALDE, NL) aims to clean up the benchmark-setting process, by curbing conflicts of interest like those that led to the London Interbank Offered Rate (LIBOR) rigging scandals of recent years”.
But how are the EU legislators going to control those mighty banks? Last Monday in view of the Tuesday’s 31 March vote the EU Parliamentary Committee issued another Press release saying that “…critical benchmarks that track a large volume of trade will have to comply with principles set out by the International Organisation of Securities Commissions (IOSCO) about how they are produced and calculated. They will be overseen by a college of supervisors chaired by the European Securities and Markets Authority (ESMA) and comprising national supervisors”.
The wobbly caretaker
What is this IOSCO organization though whose principles can secure the financial assets of the average working European? According its own words “IOSCO develops, implements, and promotes adherence to internationally recognized standards for securities regulation. It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda”. In reality IOSCO is a loose international organization of national securities commissions. It comprises 124 ordinary member states, 12 associate members and 62 affiliate members.
Its principles and authority are so loose that it is completely incapable of imposing any effective rule or control on financial benchmarking. It hasn’t even recognized that there was a racket with LIBOR and EURIBOR. It calls it an “attempted manipulation of benchmarks”. In reality the European Parliament has bestowed the protection of the financial assets of the European citizens to a completely slack organization which can protect nobody and nothing.
ECB lost the legal fight
Now let’s turn to the new measures allegedly meant to enhance financial stability in centrally cleared markets in the EU, which the European Central Bank and the Bank of England just announced. Before doing that one should keep in mind that the London City and the British real estate and other markets are the world’s largest washing machines, whitewashing any important amount of money. The British bankers were the pioneers in our brave new financial world. That’s why during the latest financial Armageddon the first western lender to go bankrupt was the British bank Northern Rock at a cost of around £50 billion to the British taxpayers.
On 29 March the European Central Bank and the Bank of England announced “a series of measures aimed at enhancing financial stability in relation to centrally cleared markets within the EU”. In reality they did exactly the opposite. The result of their joint action will be a relaxation of the security and stability rules, because they opened the mainland European markets to London’s mega-sharks.
The devil in the details
In detail now, it must be mentioned that this whole affair of the joint action of the two central banks comes after the British authorities won a case in the European Court. The Court opened the way to a British financial ‘novelty’, the UK Central Counterparties-CCPs, to offer their services of financial clearing in the Eurozone, from which they were initially excluded by the ECB. According to the relevant ECB announcement “In its judgment on 4 March 2015 in case T-496/11 brought by the UK Government, the EU General Court “[annulled] the Eurosystem Oversight Policy Framework published by the ECB in so far as it sets a requirement for CCPs involved in the clearing of securities to be located within the Eurozone”.
Of course the ECB had very good reasons to exclude those risky private British ‘clearing houses’ from offering their services (clearing in all kinds of securities and tradable assets) in mainland Europe. According to the ECB “A CCP places itself between the original counterparties to a transaction, effectively guaranteeing that if one counterparty fails, the CCP will continue to perform on the transaction to the other party”. The British economic establishment aims at promoting their CCPs as the new pivotal agents in the new financial environment, where all important transactions will be carried out through central clearing agents.
A brave new financial world
More so if the G20 soon makes it obligatory that all the standardized over-the-counter transactions in derivatives be centrally cleared. However nobody can imagine what will become of our brave financial system if a CCP goes bust. Mind you however that the British-inspired central clearings will be carried out by a lot of private agents without strict monitoring, rules or adequate reserves. In reality, a part of the lucrative risk management may now gradually slip to CCPs.
However, given the decision of the EU Court, the ECB tries now to offset the risks of allowing those totally unsafe British CCPs to offer their services in the Eurozone markets. So the two central banks concluded the following agreement, “The ECB and the BoE are today (29 March 2015) extending the scope of their standing swap line in order, should it be necessary and without pre-committing to the provision of liquidity, to facilitate the provision of multi-currency liquidity support by both central banks to CCPs established in the UK and euro area respectively. CCP liquidity risk management remains first and foremost the responsibility of the CCPs themselves”.
What the ECB and the BoE are doing?
In reality what the two central banks are doing is to make the EU and the British taxpayers responsible to offer the needed liquidity to keep the market going, when a CCP fails. What else could a financial villain hope for? Pocket the profits and ‘nationalise’ the losses! And there are plenty of CCPs in London.
All those arrangements in the European Parliament, the European Central Bank and the Bank of England are to facilitate the extravagant life of financial sharks and promise to bailout their establishments of paper cards if they go bankrupt. The EU legislators offer a token protection to the EU hard working savers/depositors the nature of which they don’t understand. At the same time the ECB is forced to offer the needed liquidity, in case a British financial crook in the form of a CCP goes bankrupt. In any case the question remains, who can control the CCPs if they decide to increase their revenue by withholding a clearing for some hours or days or by accepting as real a delusive or phony transaction?
In short nothing is as it looks in our brave new financial world. In reality it is exactly the opposite of what it says it is.