Stichting Onderzoek Multinationale Ondernemingen
Centre for Research on Multinational Corporations
Response by SOMO to the
Consultation by the High-level Expert Group on reforming the structureof the EU banking sector
About SOMO
SOMO is a Dutch non-profit research and advisory centre, which was established in 1973. SOMO investigates the consequences of internationalisation of business and of multinationals policies, particularly where sustainable development and developing countries are concerned. SOMO’s main target groups and stakeholders are civil society organisations worldwide although SOMO has no membership. Through knowledge combined with action, SOMO strives to achieve sustainable economic, social and ecological development, the improvement of workers’ lives and the eradication of exploitation, poverty and inequality. From that perspective, SOMO has researched the financial sector since 2004.
The Interest Representative Register ID number of SOMO (Stichting Onderzoek Multinationale Ondernemingen) is 70953241037-94
For more information see:
Contact person: Myriam Vander Stichele, Senior Researcher
Contact information:
SOMO
Sarphatistraat 30
NL: 1018 GL Amsterdam
Tel.: (+ 31) 020-631291
Fax: (+31) 0206391321
email:
As an organization, SOMO would like to respond to the “questions to banks”which are actually questions of concern to all citizens and to SOMO as a research organization with a civil society. Having little capacity, as compared to banks themselves, to provide a full input for this important consultation, please accept the following short points with references to publications by SOMO or in which SOMO cooperated.
- Social and environmental sustainability should be integrated in banking reforms
So far, the reforms in Europe have failed to address a fundamental question: how can banks and the financial sector fulfill the needs of society and the economy ? This goes beyond the current reforms which mainly try to avoid too many risks, which is of course necessary. However, the fundamental principles of bank reform should be:
-Financial stability is a public good. This means amongst others that governments and supervisors should have more intervening powers, e.g. in the risk management of banks. In other words, the internal rating based approach that has not been reformed after Basel II and is still applicable needs to be urgently reformed.
-Banks should be regulated so that their financing activities and financial services contribute to financing the orientation of economies, businesses and societies to social and environmental sustainability. Systemic risks should not only be defined as risks to financial instability but also as risks to societies (e.g. lack of businesses that create jobs due to lack of credit) and the environment (e.g. climate change by financing coal power plans). This can amongst others be done through better including social and environmental risks in risk assessment models of banks. See for instance the SOMO publication “The missing dimension” to be downloaded at < > and detailed proposals in other publications to be downloaded at <
-Banks should not design, offer or engage in socially useless activities (as A. Turner is used to say). This means amongst others that banks should withdraw from many purely speculative activities and services, including food commodity derivatives trading, offering commodity index funds and (synthetic) commodity exchange traded funds (ETFs). See amongst others SOMO publication: “Feeding the financial hype” to be downloaded at < Nor should banks provide lending to hedge funds or be owner of hedge funds (Volcker rule).
- Banks should not be connected with tax havens
Given that tax evasion (e.g. “tax planning”, shadow banking, SPVs) mostly through tax havens is an inherent in the business model of many banks, this has led to lack of transparency through secretive jurisdictions and the financial sector being one of the least taxed (as the EC analysis has shown) while requiring the most tax money for bank bail outs.
This means amongst others that:
-Banks should not offer tax evasion services or advice (e.g. as wealth management services)
-Banks should have none of their operations and transactions in tax havens, secrecy jurisdictions and countries that offer tax evasion possibilities or secrecy.
-Banks should not use tax evasion strategies for their operations and transactions (this includes indeed not using some possibilities in countries like Luxembourg, the Channel Islands and the Netherlands or Dutch Antilles.
- The decision-making process for regulating the financial sector needs to be changed
Regulatory capture has been considered by Prof. Stiglitz and many others as an important cause of the financial crisis. SOMO and others have monitored how the huge lobbying by the banks since 2009 has allowed to weaken and slow down the bank reforms (Basel III, CRD IV/CRR, …). The influence by banks on bank reforms is undue and without any legislative control, harming public interests since legislators/regulators and citizens/civil society (organisations) have too little capacity and expertise to counter balance all the arguments. The complexity (on purpose) of the financial sector has been an effective instrument to frighten citizens to get into the discussions of reforms and to accept the dominance of the point of view of banks to be heard and integrated in the reforms. Some solutions are:
-strengthening the capacity of regulators, legislators and supervisors;
-transparency and prohibitions of undue financial sector lobbying (e.g. getting leaked texts) should be enforced through laws about lobbying;
-providing means for financial education of citizens and strengthening civil society organisations with one or more genuine public interest perspectives
In addition, the conflict of interest within the European Commission’s mandate should be addressed. The DG Internal Market and Services has the mandate to propose legislation to ensure the stability of the financial sector while at the same time to ensure the competitiveness of the financial sector. However, the experience was and the thinking often still is that strict regulation undermines competitiveness. The regulatory mandate should therefore be undertaken by an other DG than the one that is responsible for the competitiveness and the single market.
- Free trade agreements (FTAs) undermine regulation and promote undue risky competition
In the reforms, there is no review of the free trade and investment agreements of financial services, such as in the GATS and free trade agreements with South Korea. However, liberalization of trade and investment in financial services has lead to huge competition that resulted in very risky strategies and business models across the atlantic and elsewhere. In addition, the GATS and FTA rules prohibit governments (and parliaments) to implement certain financial sector rules as is currently being done during the reforms. For more information, see amongst others the SOMO briefing : “Business as usual ? “ to be downloaded at <
As a retail customer, I would like to respond as follows to the questions:
What impact do the current and ongoing financial regulatory reforms have on the availability and cost of financing and other retail customer services of banks (including access to basic payment systems)?
The financial services to non-wealthy clients are getting less and less, with lots of automatic and computerized services which are not always safe and not always providing the best services.
What are the views of retail customers with respect to structural reform of banking in general and in particular with respect to the structural reform proposals to date (e.g. US Volcker Rule, UK ICB proposal)? What structural reforms would be desirable from their point of view?
When I speak to my fellow citizens and explain the current on-going financial reforms, they do not understand how it is possible that banks are still not well regulated as they do not have enough capital reserves (i.e. Basel III/ CRD IV/CRR has a very slow decision-making and implementation period), banks can still engage in speculative activities at own risk (i.e. proprietary trading is still not forbidden), that there is still no bank crisis resolution mechanism that takes into account that most likely not 1 bank at a time but many banks in a time of crisis will be in problems at the same time.
In other words, as citizens there is a desire for more fundamental and structural reform whereby the retail banks whose deposits are guaranteed by public money are separated from banks that engage in speculative activities. However, any (class of ) speculative activities and institutions involved in them should not be able to threathen the financial stability. Where financial products are so complex and non-transparent that regulators/legislators have difficulties to regulate them and supervisors difficulties to understand the (social and financial stability) impact of those products and even lack the resources (in time of budget cuts) to fully supervise those complex financial products, these products should be forbidden so that citizen feel safe of not being overtaken by events that they or their representatives cannot control.
What are the main concerns of retail customers in their relationship with their bank?
The main concerns of citizens are whether their money is safe at the bank or safely invested in the financial products the bank is offering them. If banks are failing, and even after reforms are allowed to fail, there is no institutional safe haven for citizens to safe their money as most other investments are also subject to losing money, including their pension funds.
What are retail customers' recent experiences in terms of access to credit andsavings and investment?
Access to credit for buying a new house is getting more and more tight, making it more difficult for customers to buy a new house and thus for others to sell their house when they need to move.