08 April 2013

Paul N Goldschmidt: Compatibility of ethics and finance - A fully-assumed challenge or wishful thinking?

The call by French Budget Minister Cazeneuve for a rapid implementation of Banking Union, which is indispensable for the survival of the euro, EMU and the EU itself, will remain wishful thinking as long as a fundamental overhaul of the governance of the financial system remains unaddressed.

During his television interview last Sunday, Bernard Cazeneuve, the newly-appointed French Budget Minister, in search of an answer to the Cahusac scandal and the continued public opinion’s disenchantment with the political establishment, called upon the authorities to engage in a “shock of moralisation of the financial sector” adding to François Hollande’s programme of “shock” measures aimed at competitivity, taxes, simplification, etc. To achieve his goal, he added, quite correctly, that it was necessary to reach an international agreement which presupposes a common posture of EU Member States and an acceleration of the implementation of the Banking Union.

Benefitting from his large experience as Minister responsible for European Affairs, it must not have escaped his attention that, far from strengthening a common vision, the recent calamitous management of the Cypriot crisis has seriously inhibited further progress on this subject. Not only have signals become blurred on the, so-called, easiest segment of the project, the SSM (Single Supervisory Mechanism), but positions have hardened concerning the mobilisation of resources of the ESM (European Stabilisation Mechanism) for dealing with “legacy” commitments when recapitalising in the future failing banks. In addition, any progress towards a form of mutualisation of a Depository Guarantee Scheme (DGS) seems ever more illusory.

The simultaneity to the Cypriot crisis and the Cahusac scandal offers, nevertheless, a unique opportunity to promote bold decisions which could change fundamentally the context and bring forward solutions to the problems created by national and offshore tax havens. Public opinions are now ready to countenance radical reforms which, undoubtedly, will foster strong and deep-seated opposition. Hereunder, we outline a series of proposals aimed at contributing to the discussion of this highly sensitive question, with which the EU and its international partners must grapple.

a) Agree on a common basis for defining a Deposit Guarantee Scheme: The agreement on a DGS should focus on the beneficial owner rather than on the “account”. The aim of a DGS is to protect the great mass of small savers and not the wealthy. Subject to envisaging an increase in the amount guaranteed, it is only fair that States (taxpayers) should not be called upon to compensate preferentially those who are in the advantageous position of multiplying the number of their accounts.

To achieve this objective a series of measures should be implemented: banks who offer a DGS should require from depositors, on a voluntary basis, a list of all bank accounts held by the beneficiary, whether in the country of abroad. Failure to provide the information would forfeit the benefit of the DGS. When opening a non-resident account, permission should be secured authorising the transmission of information to the fiscal authorities of the beneficial owner’s residence (American model).

Once these measures are agreed at European level, they could serve as a template for a global agreement.

b) Specify the currency in which the guarantee is expressed: All State deposit guarantees should be expressed in the legal tender of the country concerned. With regard to the eurozone, in the event of the exit of a Member State from EMU, the amount of the guarantee should be automatically converted into the new legacy currency at the initial exchange rate imposed by the Government (whether administered or free floating). In the event of converting deposits subsequently, the exchange risk should be entirely born by the depositor.

c) Establish a common hierarchy of norms for bailing in liabilities within the framework of banking liquidations/restructurings: The sequence of bailing in shareholders’ equity and creditors’ claims of a banking institution should be clearly specified: ordinary shareholders, preferred shareholders, convertible subordinated debenture holders, subordinated debt holders, senior debt holders, certificate of deposit holders, unguaranteed depositors. Each issue of securities by a bank should specify the exact ranking of the claim among the universe of creditors. Guaranteed deposits and secured creditors will continue to benefit from the State guarantee for the former and the proceeds of the realisation of the security for the latter.

d) Specify the segregation of assets held by a bank on behalf of its clients: Assets held by a bank (other than deposits and claims on the institution itself), such as securities, claims on third parties, property titles, contents of safe deposits, etc. remain at all times the sole property of the client unless pledged or otherwise encumbered by a guarantee provided to the bank or to third parties. In case of a liquidation/restructuring of the bank, clients must retain immediate and free access to their assets.

e) Limit the access to national and international payment/settlement mechanisms for countries/banks that refuse to participate in the agreements: When opening an account, the bank will be obligated to specify whether it is party to fiscal cooperation agreements, exchange of information obligations, a DGS, etc. so as to inform the account holder of a the risks being assumed. The exclusion of a bank from participation in day to day financial mechanisms such as Swift, the interbank market, payment and settlement platforms or access to Central Bank refinancing, should act as a powerful deterrent and hinder considerably money laundering and tax evasion schemes often associated with tax havens.

Conclusion: The measures suggested here above, are a necessary precondition to promote a Banking Union within the EU. They would, subject to their validation by a more detailed assessment, provide the demonstration that governments are determined to grasp the nettle of widespread fraud and other abuses whose ongoing occurrence can only abet the rise of populism and lead to significant social upheaval. The financial and economic crisis makes the continuing widening of inequalities even less tolerable, in particular when it is occasioned by  the unacceptable and dishonest active or passive behaviour of so many members of society, exercising prominent positions in both the public and private sectors.

The call by Minister Cazeneuve for a rapid implementation of the Banking Union, which is indispensable for the survival of the euro, EMU and the EU itself, will remain wishful thinking as long as a fundamental overhaul of the governance of the financial system remains unaddressed.

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Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt