平和
和平
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ASIA
26 March 2014
Trade unions push for financial reform

Trade unions push for financial reform

We need to find the ways and means to socialize profits -- rather than privatizing profits and socializing losses -- for the common good of our society, argued Jayasri Priyalal from UNI Apro.

We need to find the ways and means to socialize profits -- rather than privatizing profits and socializing losses -- for the common good of our society, argued Jayasri Priyalal, UNI Apro finance director, at a recent UNI Europa Finance Conference in Greece.

Socialize financial profits, not losses

Jayasri has very kindly shared with us his intervention at this conference, where he was responding to an equally excellent presentation by Leke van den Burg from Finance Watch.

Jayasri raises the question of trade union interest in financial markets.

"I feel that it boils down to the “SOCIALISATION OF PROFITS”. Through all these years of privatization, all we have seen is the privatization of profits and the socialization of problems. I think that it is time that we resolve to reverse this trend and find ways and means to socialize profits for the common good of our society.

Leke van den Burg has compiled excellent data on business models and income trends of the "too-big-to-fail" banks. Looking at the trading income and interest income of the banks, it is clear that banks are turning away from their social responsibility of financial intermediation. Instead, they are increasing their high risk trading income for short term profits.

Since the collapse of Lehman Brothers in 2008, it appears that nothing serious has happened to arrest the unhealthy situation in the global finance industry except for the name change. To "Big to Fail" financial institutions are now known as "Globally Systemically Important Financial Institutions" (G-SIFI’s). But it is only a name change and not a GAME change. Business continuous as usual.

I would like to speak from my own experience, since I was a banker for 25 years, working as a compliance officer. In my bank, we never neglected our social responsibility. Our bank lent money by way of loans and overdraft, and earned substantial interest income as well. But Leke van der Burg's data indicates that European banks, especially the too-big-to-fail banks, are only interested in increasing their trading income through speculation.

How can we arrest this situation? I suggest that different tax rates should be applied such that trading-related profits are taxed at higher rate, like 35%, and a maximum tax concession should be given to interest income, in order to incentivize banks to make credit and liquidity available for the real economy.

Regarding regulations, we should learn from our past mistakes and work towards introducing appropriate regulations to develop financial markets for our future. One-size-fits-all consistent regulations have not worked in the past. And I have my doubts whether this approach can work in the future.

We need to lobby for different and appropriate regulations which take into account the diversity of development levels of financial markets across the globe. New regulations should not hurt small banks in emerging economies as they need to raise additional capital to meet their development needs. A differentiated regulatory framework, with proper coordination across regions would work better than adherence to a single standard regulatory system."

Five years after Lehman: business as usual?

Here are some of the key points from the presentation, "Five years after Lehman, business as usual?", of Leke van den Burg of "Finance Watch".

Leke asks, "what has been done five years after Lehman?"

Officials at international, European and national levels have deployed skilled resources to produce policy documents, new standards, regulations and supervisory codes. New oversight institutions have been created. These are positive developments that lay the ground for the urgent deepening and speeding up of the reform process.

But have there been enough structural changes? In reality, the only structural component of the system that has improved is the ratio of bank capital to risk-weighted assets. But the reliability of this measurement has been challenged by regulators (through the Financial Stability Board), warning that there are still significant discrepancies in the way banks calculate risk.

In short, five years after the Lehman shock, fundamental problems remain, because the system has not fundamentally changed.

Why do we say this? Here some facts:

Size of EU banking sector. The EU’s economy is more ‘financialized’ than ever. The total assets (=size) of EU banks stood at €46 trillion in 2011 versus €42 trillion in 2007, an increase in the share of EU GDP from 340% to 368%.

Size of global derivatives market. There are more derivatives traded now than before the crisis. The size of the derivatives markets has increased to $700 trillion in 2012, equivalent to twelve times world GDP.

Bank leverage is historically high. It is on average between 30x and 35x when most experts agree that in a safe financial system, banks should be leveraged no more than 20x (leverage = total assets vs. own capital).

Banks are still too big to fail. The Financial Stability Board counts 28 global systemically important banks on its list and urges the G20 to take action.

Why? Because financialization brings power and politics to the financial sector. Policy makers are hemmed in by fears of hurting the economy and dependence on industry expertise. Thus, five years after the crisis, the financial sector continues to be very strong in fighting regulation

In conclusion, we need new thinking. The current thinking gives too much power to the financial industry and makes politicians afraid of fundamental reform. New thinking is needed for society to break free from the cycle of financial crises.

There is a clear alternative with two opposite consequences.

Either:

More of the same: the next major financial crisis could be around the corner. We know what that would mean for social and economic conditions, and trust in the financial sector. It could also feed euro-scepticism and political extremism.

Or:

Change the rules to put society in charge. Imagine if we had a stable financial system that genuinely served society’s needs, if the EU’s citizens trusted their leaders always to prioritise them ahead of the financial industry, if the public started to trust and respect the financial sector again, if finance started to fulfil its potential to be one of the great tools for solving the problems of the 21st century.

This is what Finance Watch is working for!

Finance Watch

Finance Watch is seeking to be a counterbalance to the financial lobby, by tipping the lobbying balance, providing counter-expertise, and pushing for legislation that reflects the public interest.

What does Finance Watch do?

-- Analyzing European legislative proposals from a public interest perspective, preparing responses and positions.

-- Sharing expertise between and among our members.

-- Communicating through press and broadcast coverage.

-- Engaging in dialogue with legislators, elected officials, and regulators.

Who are Finance Watch?

-- Members. 70 members (as of 1 January 2013), with 42 organizations, and 28 individuals, including trade unions, consumer organisations, NGOs, academics.

-- Structure. General Assembly, Board of Directors, Committee of Transparency and Independence.

-- Staff. Team of 12, mainly experts with a financial sector experience of 5 to 20 years.

-- Financing. No contributions from the financial industry or its lobby organizations. Any donation over €10,000 is verified by the Committee for Transparency and Independence. Finance Watch depends on donations from individuals and foundations.

What is Finance Watch proposing?

It proposes what is missing in the reform agenda:

-- going back to the social purpose of the financial system.

-- challenging the current business models.

-- measuring the effectiveness of the current financial industry in serving the real economy and the general interest.

-- ensuring broader stakeholders’ influence.

Finance Watch has four demands to make finance serve society:

1) Put society back in the driving seat.

Restore purpose and democratic accountability to financial institutions and financial regulation.

• Build a citizen dashboard of financial institutions, measuring risk, costs and benefits to society.
• Build a citizen dashboard of financial reform, measuring progress against objectives.
• Increase the democratic accountability of and influence of non-industry stakeholders on financial regulators and supervisors.
• Proactively engage civil society organizations, trade unions, consumers and investors in the steering of financial governance and reform.

2) Slim down mega banks.

Put an end to too-big-to-fail (TBTF) financial institutions.

• Impose losses on private creditors when a bank fails.
• Apply hard limits to bank leverage.
• Separate investment banking from deposit-taking banking.

3) Stop subsidizing speculation.

Limit the speculative use of derivatives, regulate securitisation, end manipulation and align individual incentives with social returns.

• Stop subsidising and secure the derivatives market.
• Regulate securitisation.
• Regulate benchmarks.
• Regulate and supervise shadow banking.
• Reduce interconnectedness and systemic risks.
• Align pay incentives better with society’s needs.

4) Incentivize sustainable investing.

Make financial markets serve the economy.

• Require the full disclosure of intermediation costs along the chain, both to institutional and retail investors.
• Label financial products based on a ‘social usefulness scale’ (e.g. whether it is investing or betting; whether it discloses environmental, social and governance (ESG) criteria, etc.).
• Align the incentives of asset managers with metrics linked to their long term performance.
• Provide tax a/o other incentives for long term, sustainable investment.
• Introduce product design rules and product approval procedures to protect retail investors and occupational pension schemes.
• Align the incentives of financial sales staff with the interests
of their customers, ban 'inducements'.
• Regulate and restrict high frequency trading.
Tags: asia, financial market reform, too-big-too-fail, UNI Apro, financial regulation, Lehman shock, Finance Watch

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