BANKING AND FINANCE SECTOR

So far, all the European reforms regarding the banking and finance sector have been unable to protect the citizens from the ongoing and future banking crises and the risk of new public bailouts. The current rules aimed to build a tighter banking union - by introducing a single system of supervision and the transition to the so-called bail-in resolution regime - destabilised the markets by causing panic and loss of confidence among investors, savers and depositors.

QUESTIONS

The ECB's role of banking supervision and resolution is not impartial and generates conflicts of interest. The valuations of financial statements and the stress tests on the major eurozone banks conducted together with the European Banking Authority focus exclusively on credit risk associated with loans to households and SMEs. These controls ignore the major sources of systemic risk, originated from exposure to the large amounts of toxic assets and derivatives owned by the northern European banks.
Today's banking regulations regarding the capitalization conditions (these guidelines are drawn up by the Basel Committee, which consists of regulators of the G10 plus Luxembourg) requires banks to set aside a small capital percentage to cover for all the risks associated with their business. The Basel Agreement is pushing the Banks to close the investment taps to the real economy and to move on speculative activities that grant greater revenue. This result in the damaging of SMEs, family business and families.
For what concerns banks bailout the EU is applying a double standard, which is damaging Italy. Between 2008 and 2014, countries such as Germany, Spain, the Netherlands and Ireland have been allowed to spend tens of billions of Euros of public resources to bailout their banks by clearing their balances from junk bonds and hiding opaque situations regarding issued loans. Of a total of 800 billion euros of public aid granted to the banking sector to face the crisis, Germany alone has spent over 200 billion. Yet Italy, which is currently experiencing the peak of its banking sector's crisis, is not allowed to bailout those banks facing a crisis, as other countries are allowed to, in order to avoid a bail-in and to protect the savers (in the meanwhile the rules on state aid have intervened).
So far, nothing has been done to deal with the causes of instability within the financial sector. Rather than focusing on a radical and severe reform of high finance to prevent new crises, Europe has proceeded deliberately in the opposite direction. The recent financial market reforms point to an increased financialization of the economy through a deeper liberalisation and integration of capital markets. Paradoxically, the EU wants to restart the economy by using the same tools and mechanisms that have caused the crisis (securitization, large investment banks, liberalisation). Financial speculation removes valuable resources from the community. Money that could be used for productive, sustainable and long-term investment in support of the real economy, instead of using them to fueling the absurd financial casinos and new systemic crises.
The ECB's mandate prevents them from directly financing the states. The wave of liquidity that the ECB has put in place, with instruments such as the Quantitative Easing, has gone only to the banking sector (which have their balances full of government bonds). Banks always prefer to reinvest liquidity in financial assets rather than in the real economy. The banks do so in order to comply with the rules on capital requirements on which the ECB itself is supervising, which paradoxically disincentives the provision of credit that should support the monetary policies aimed at restarting the real economy.
Through the bail-in practice we moved from a system where the banking sector insolvencies were covered through taxpayers money, to a system in which in addition to the taxpayers also a variegated crowd of small savers, investors and depositors found themselves involved in covering the bank losses, which most of the time cost them all the savings of a life. On the other hand, those managers directly responsible for the financial losses are not even required to repay the costs of the damages they caused but are rewarded for their performances. We cannot afford to let the small investors, which have no saying into the strategic decision of the banking institutions, to pay for unsupervised wicked decisions of a bad management.
The massive reform of the banking union does not address the real causes of the crisis. Instead, this reform focuses mainly on the symptoms and consequences of banks insolvencies, with the possible result of amplifying the crisis through a contagion effect or by triggering panic in the financial markets. Today, banks are no longer safe and resilient to insolvency risks, but behind a high level of capitalization, which is imposed by stringent capital requirements, there are hidden risks associated with financial derivatives and toxic assets. The ECB's vigilance is overlooking this situation since is focusing completely on the credit risk. In fact, the current European system does not conceive a central bank that in the event of a crisis can act as the last resort lender, and does not provide the adequate structures and funds to protect the depositors from possible bank insolvencies. Therefore, this system represents a major threat to the stability of a banking union based on the “universal bank” model. A single and harmonised deposit at European level, the so-called third pillar of the Banking Union, has not yet been achieved because of the opposition of the northern countries. Countries, such as Germany, do not intend to pay for the crisis of the southern European commercial banks. The latter is heavily exposed financially and wears out by the effects of years of austerity, the rise in unemployment, and a decrease in consumption and production activities.

OUR PROPOSAL

By adopting adequate and stringent financial regulations, we should be able to prevent future crises in the banking sector. In the event of a crisis, Member states must be able to manage directly eventual crisis in order to minimise the damage to the banking system according to their own specific needs, with the aim of protecting the interest of the community. Temporary nationalisation, subject to strict restructuring conditions, has often proved to be a cost-effective solution to the state budgets, unlike the bail-in that destroys economic values by damaging small investors and depositors. Italy should have the right to handle the problem of non-performing loans without having to comply with the dictates of European supervision. In fact, the EU imposes to banks, already in distress, unsustainable capital increases on top of a request to sell off rapidly bad debts to speculative funds, creating enormous risks for the depositors and investors facing a possible bail-in. It is necessary to allow banks to absorb the bad debts through a reasonable amount of time and by the support of the state. At the same time, we should establish a committee of inquiry investigating the possible responsibilities and the causes of a financial crisis. In this way, the community would benefit from the economic recovery rather than a few speculative private funds anxious to buy bad credits at a sale price.

• We want to create a modern Glass-Steagall Act based on the separation of commercial banks focused on traditional credit activities from the large investment banks carrying out speculative financial activities.

• Protecting the commercial banks requires the creation of a solid bank deposits and savings system based on an unlimited guarantee from the central bank, who is acting as the lender of last resort for the banking sector.

• We want to revise radically and dismantle the wicked mechanism of the bail-in with the aim of excluding its application to retail customers and depositors of a Bank. People savings must no longer be treated.

• Banking supervision should focus on the systemic risks associated with speculative financial activities. Nowadays, the latter represents the biggest threat to the financial sector. Moreover, we should improve the process of lending credit to avoid the creation of a credit patronage.

• We call for a strict regulation on speculative finance and capital flows, which includes stringent limits on the use of complex financial instruments and risky operations involving financial derivatives. We call for a trading barrier that limits frequent financial exchanges and for the maximum transparency required to countering money laundering and reducing the numbers of financial crimes. We want strong rules against financial speculation combined with a separation of commercial and investment banks. These necessary reforms can protect us from new crises and bring the financial sector to the service of our real economy and of our society.