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​EU bank reforms reveal hypocrisy, even from left-wing European govts

Patrick L Young is expert in global financial markets working in multiple disciplines, ranging from trading independently to running exchanges.

Published time: January 31, 2014 11:05
Reuters / Kai Pfaffenbach

Bankers have never been less popular and it’s difficult to justify rating them above ‘junk’ status.

There are many merits to finance and financial markets - indeed new products such as Social Impact Bonds can hugely help cash-strapped governments provide better social services but bankers per se have failed to demonstrate a useful niche in society.

The political classes are keen to deprecate bankers, although their resolve for reparation has been found wanting given how few bankers have actually been prosecuted for their outrageous behavior during the last boom.

Most shockingly, many bankers remain in situ, comfortably enjoying greater bonuses in the C-suite despite their egregious incompetence during the crisis.

Taxpayers are understandably frustrated at the outrageous partnership between governments (regardless of political tinge) and the bankers. A huge swathe of the finance industry - the banking segment - appears somewhat rotten to its core. This remains a most dispiriting sign given that society cannot prosper without a strong investment and lending sector. Recently bankers have proven incapable of achieving such simple mercantile aims.

Now we have a vast corporate monolith structure to ‘banker-government’, leaving us with the ridiculous situation in which banks profit keep the upside when they turn profits, and when they lose the people pay for their bailouts.

This is the worst of all possible socialist concepts and in no ways represents the free market capitalism which has been the only consistently proven driver of growth in society throughout history.

New EU proposals have suggested some element of hope for banking reform. True, they stop short of the necessary separation of retail banking from their riskier, more freewheeling investment banking counterparts. (Such separation would reduce the capital available to investment bankers, giving them less leverage and hence less opportunity to wreak havoc when they get it wrong). However, various sensible measures have been proposed, including restrictions on how banks trade/invest their depositors’ money.

AFP Photo / Hasan Mroue

The world needs banks to become organizations which can profit from their enterprise but suffer the consequences when they lose money. ‘Heads bankers win, tails taxpayers lose’ is not a sustainable model.

The French and German governments have repeatedly bleated a political mantra of restricting banks. However their reaction to the new EU rules has demonstrated the remarkable hypocrisy of the political classes (even the supposedly socialist ones). The difficulty is that the banking-government nexus has become deeply rooted in the ongoing Western financial crisis.

Governments have overspent consistently, leaving many nations teetering on the brink of bankruptcy (bailing out banks didn’t help either, but the problems are much more deep-seated). Thus France is stifling enterprise while aggressively defending the bankers against Brussels’ initiatives to bring the sector under greater control!

There is a certain method to the madness of the French and German governments (and doubtless others are, in typical EU style, supporting the Franco-German nexus tacitly, but letting Paris-Berlin take the strain of opposing the proposal). Doubtless the political classes realize they have created an ugly situation akin to Stockholm Syndrome: overspending governments have become hostages to the bankers.

Thus Berlin and Paris are terrified that banks are forced to reduce their proprietary trading as it could result in banks selling off assets...and those assets are often government debts, issued by the over-spenders of Western Europe.

In that sense, creating a safer banking system threatens the very stability of Europe itself. Thus there is method to the madness of the French and German governments’ ongoing denial of financial prudence: their reliance on debt finance has led the eurozone to the edge of extinction. This is amidst a panoply of governance which has been woefully inadequate in both banks and ruling cliques alike. Berlin and Paris are terrified restricting banks will cause a bond market meltdown.

In the long-term salvation awaits. The 2008 crisis marked the peak of banker power. It may be decades before it becomes evident but now the banker-government complex clings to their antiquated models at the epicenter of society while being dis-intermediated by new technology.

Social lending (peer-to-peer banking), new currencies not reliant on government fiat such as bitcoin, and the nascent power of crowd funding are all playing a vital role, undermining not merely the clunking fist of the increasingly discredited post-war interventionist state, but also the equally customer-oblivious totalitarian face of ‘modern’ banking.

The EU is trying to reform banks, but the biggest problem is that government has become addicted to debt.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.