The EU Just Did the Big Banks a Massive Favor

“Testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.”

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The European Union’s executive arm, the European Commission, made a lot of bank executives very happy this Tuesday by abandoning its multi-year pledge to break-up too-big-to-fail lenders. Despite the huge risk they still pose to Europe’s rickety financial system, big European banks like Deutsche Bank, BNP Paribas, ING, and Santander can breathe a large sigh of relief this week in the knowledge that they will not have to split their retail units from their riskier investment banking arms.

Breaking up the banks would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be smaller, less interconnected, and could be allowed to fail without jeopardizing the entire global financial system.

According to the Commission, such a drastic measure is no longer necessary since the main rationale behind ring-fencing core banking services from investment banking divisions — i.e. to make Europe’s financial system less disaster prone — has “already been addressed by other regulatory measures in the banking sector.” That’s right: Europe’s banking system is already safe, stable and secure. Bloomberg:

The proposal, which hasn’t progressed since 2015, was made to boost financial stability and safeguard taxpayers from the risk of future bailouts. While the commission and the conservative lead lawmaker on the file said this goal had been achieved by other laws on supervision and resolution, the socialist lawmakers backing the “Bank Structural Reform” bill disagreed.

“The too-big-to-fail financial behemoths still pose a danger to financial stability, to the taxpayer and to clients,” German Social Democrat Jakob von Weizsaecker said in a statement. “The withdrawal of the BSR file marks an unfortunate turning point in the European agenda on regulating large banks.”

The withdrawal of the proposal is a long-sought victory for the banking industry, which lobbied hard against its adoption in Brussels and said the legislation would damage the ability of lenders to help the economy to grow.

It would also damage the ability of lenders to grow; in fact it would make them smaller. And that is not in the big banks’ interests, nor that of the ECB, which hopes to breath life into a new generation of trans-European super banks by weeding out small banks to cut competition.

As Christian Stiefmueller, senior policy adviser at Finance Watch in Brussels, points out, the demise of the EU’s ring-fencing policy “is testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.” It’s the reason why one of the most obvious causes of the biggest financial crisis of our lives — the co-mingling of high-risk financial instruments with plain vanilla commercial banking assets — remains completely unaddressed, not only in Europe but just about everywhere else on Planet Earth.

There was the briefest of moments earlier this year when it seemed that the Trump administration was actually considering bucking this trend. In April White House economic adviser and former Goldman Sachs president Gary Cohn shocked the world when he said he was largely in favor of splitting commercial banks from everything else, in a return of sorts to the days of the Glass-Steagall Act.

The news that Cohn and Trump were considering reinstating Glass Steagall triggered a flurry of excited speculation that lasted a matter of weeks before Trump’s Treasury Secretary Steven Mnuchin brought everyone back to reality with an Orwellian thump. During testimony to the Senate banking committee in May, Mnuchin told Sen. Elizabeth Warren that separating investment and commercial banks “would have a very significant problem on financial markets, on the economy, on liquidity.” And that was the end of that.

One country that has gone a lot further than just about anywhere else in separating investment banking from commercial banking is the UK, where the Vickers Report of 2011 recommended that banks ring fence their investment banking activities (derivatives, debt and equity underwriting) from high street bank operations (mortgages, retail and small business loans and deposits, overdrafts…).

To make sure the banks’ operations were not unduly harmed in the process, the UK government gave them until 2019 — a total of eight years — to implement the reforms. But even that may be too soon, with some banks hoping that the financial fallout caused by Brexit might push ring-fencing back even longer.

For the moment the Bank of England is sticking to its guns, insisting that all UK banks must separate their business operations by Jan 1, 2019, with the bulk of restructuring activities planned from now to mid-2018. Let’s hope it stays that way. By Don Quijones.

Many of these banks are implicated in the biggest financial crimes. Read…  ECB Suffers from “Corporate Capture at its Most Extreme”

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  33 comments for “The EU Just Did the Big Banks a Massive Favor

  1. Maximus Minimus says:

    The banks argued that they are already sufficiently ring-fenced by other measures like the “whatever it takes” ZIRP, and the taxpayers. Besides, who wants to burden the citizens with the complexities of the banking system when they are already entertained enough with the sex scandal in the European parliament. So…?

  2. d says:

    “During testimony to the Senate banking committee in May, Mnuchin told Sen. Elizabeth Warren that separating investment and commercial banks “would have a very significant problem on financial markets, on the economy, on liquidity.” And that was the end of that.”

    “would have a very significant problem on financial markets”

    Is that what you actually meant to write.??? or is that a direct quote of some trump speak (AKA very poor English) from his secretary?????????

    • Wolf Richter says:

      It’s a direct quote of what Mnuchin told Warren during the Senate hearings.

      • d says:

        Thank yopu I

        I didnt think D Q’s English was that bad.

        Hence it struck me a Strange/Garbled/Unclear.

        Very p 45 speech.

        Maybe that’s why P 45 chose him, they speak the same gibberish..

      • Tom Welsh says:

        In my experience, both as a Web user and as an editor of books and other material, writers whose first language is English – and who were educated in English – are at least as capable of committing solecisms in spelling, punctuation, vocabulary and grammar as “foreigners”.

        I think it’s something to do with the 60s spirit of freedom from repressive rules.

        • d says:

          The piece in question moves way beyond “solecism” when coming from a Govt Official.

      • Cynic says:

        ‘The English language went to North America, went mad there , and died. ‘

        But not, of course, on Wolfstreet.

      • RINO_Hunter says:

        It’s also nothing less than an implicit admission that the current system can’t be fixed without a failure of civility.

        The government officials asking the questions haven’t worked in finance and therefore don’t know the right questions to ask to get the truth spoken in plain English.

        The elite know how fragile it is, but they also think they can come up with some kind of fix tomorrow or the next day. All they have are temporary patches, and one day there are none left in their toolbox.

        The banking system in the EU is very similar. Although it would be nice to start reforming it slowly, reality and human nature do not work that way. “What should be” is a waste of time. We live in “What actually is” and should navigate it as such.

        It needs to run its course and fall apart like so many societies before it, so it can either be resurrected as something better, or burn completely and send the West into another round of the Dark Ages.

    • Maximus Minimus says:

      Proof that senators did not understand it either since none dared to ask the stupid question: “Why”?
      Reminds one of the answers of the maestro.

      • d says:

        “Proof that senators did not understand it either since none dared to ask the stupid question: “Why”?”

        Or ask for clarification of the true meaning.

        You can generlise a meaning from it.

        However It is not wise to create “generalisations” from the speeches of such officials when you have the ability to demand clarification.

        Perhaps it was close to lunch, or market session, opening time.

        • Maximus Minimus says:

          To clarify, the maestro had a way of speaking during the hearings which I would describe as a student who didn’t prepare for the class, and engaged in high-minded generalities which noone could understand or dare challenge, lest expose him/herself to look silly. Of course, when it all came down, those silly questions got asked.

    • Petunia says:

      Mnuchin was reminding Warren that Dodd Frank protects the banks by using equity and deposits to cover losses. How could she forget, she was there when they were coming up with it. I’m not surprised by her rhetoric now.

      • Maximus Minimus says:

        Now, let’s be fair; it’s only 10,000 pages of regulatory framework, and one has only one life to study it. You can easily decriminalize theft of deposits in that pile.


    That one was BB, now we are AB (before and after Brexit). The savers wanna gamble-not to invest, so be it.

  4. Stevedcfc72 says:

    Great article DQ.

    The ECB have let everyone down in Europe by not following this through.

    As everyone on here knows the European Banking system even nine years after the Crisis is still in a mess, drip feeding the loan losses each quarter so that things don’t look as bad as what they actually are. Still being massively supported by ECB monies also.

    Today should be interesting as the ECB are going to be talking about tapering QE but extending the program. Its also been said that interest rates in Europe will not be going up until at least 2019.

  5. Gershon says:

    All central banks exist for the same reason: to concentrate all wealth and power in the hands of their bankster-oligarch cohorts and facilitate the looting and asset-stripping of everyone else.

    • Petunia says:

      I think we have left the oligarchy stage and are now living in a full fledged plutocracy. The congress is completely captured.

  6. pinkfish says:

    ECB could easily take down the global system.

    Where is the proof ECB actions (or lack thereof) improve resilience and reduce risk?

    The more I read and watch the more manipulative the whole ECB/EURO/EU set-up appears.

    They get the benefit of not having a reserve currency, big exporter benefitting from weak Euro (manipulated Euro) vs previous DM, setting Bank regulations that appear reckless post 2007 and risking the global system whilst backing off next step Basel.

  7. raxadian says:

    Oh my the Eurozone is sinking faster! Marvelous, what’s next?

  8. MD says:

    Yup the financiers have got us exactly where they want us…and they’re saturating us with their debt as had happened before during human history. Nothing is learned from history apart from the fact that nothing is learned, and the transient, easily-obtained but illusory wealth effect of debt is far too appealing to politicians looking for easy re-election for anything ever to change.

  9. Cynic says:

    Remind me, anyone, how are all the ‘youth employment’ initiatives – announced so regularly by Brussels – doing?

    What’s that? Macron is deregulating employment, just as they did in Spain? That will solve everything?

    Thanks, Europe is in safe hands,and the Future is Bright.

    • Cynic says:

      For anyone who hasn’t seen the video yet, Macron’s dog Nemo had the right idea, and made the most appropriate comment…. :)

  10. Stevedcfc72 says:

    Interestingly DQ, Jez Staley from Barclays was on tv today and stated that they’re on track to split the Investment Banking from the normal day to day banking for 2019.

    From a European Bank perspective today all three banks who reported today Barclays, Deutsche Bank and Nordea are reducing their size of their businesses, whether that’s balance sheet, headcount Nordea 6,000 reduction, branches.

  11. Drango says:

    Bank “investment” arms don’t actually invest. They are actually “traders,” in the sense that they take something like projected future cash flows, or predicted currency hedge fund growth, or any other creation they can convince another bank is something of value, quantify it, and treat it as an asset. These “assets” can then be used to generate even more “products” that the banks can use as instruments of trade with other banks. Note that there is no benefit to the real economy in any of this. The result of all this “trading” is the creation of an alternate universe of finance that is beneficial to bank profits only, because it is mostly conducted between the “investment” units of banks. It works as long as all the worlds banks and central bankers agree to pretend that these assets are real, until they’re not. Mnuchin is not a total liar, because these creatively manufactured assets can be treated as collateral and thus increase liquidity, but as we saw in 2008, liquidity based on garbage can turn into a financial crisis very quickly. And I’m sure Draghi and Mnuchin both know that when the next crisis arrives, the banks whose interests they represent they represent will be bailed out yet again.

  12. Gershon says:

    Meanwhile, Draghi will keep mainlining financial crack cocaine into the EU’s Ponzi markets and asset bubbles.€30-billion-qe-taper-through-september-2018-or-beyond-eurusd-pl

  13. The big banks want to take exceptional risks with guaranteed taxpayer money. The effect of breaking that relationship would be akin to cancelling welfare benefits to millions of Americans.

  14. QQQBall says:

    Actually no, when you stop welfare, it ends. When the banks go upside-down, the money pit is just beginning.

    We are being ruled, not governed

  15. walter map says:

    “Testimony to the iron grip the financial industry’s lobby still exerts on governments and legislators.”

    That’s because the FIC rules the world. Governments and legislators are merely their proxies and facilitators. That’s why they were never prosecuted for the millions of frauds they perpetrated in causing the 2008 meltdown – and were instead rewarded for their reckless criminality. It’s why their fortunes are rigged to bloat, at the expense of the real economy and the general population.

    It’s nothing new. The corruption has been fully institutionalised for over a hundred years, and not just in Europe:

    “The real truth of the matter is, as you and I know, that a financial element in the larger centers has owned the government of the U.S. ever since the days of Andrew Jackson.”

    Franklin D. Roosevelt, letter to Edward House (1933)

  16. Stevedcfc72 says:

    Hi DQ,

    Hope you’re well.

    Please could you do tell me what the story is on Liberbank in Spain…the share price is going through the floor again, last time it was suspended to stop the share being shorted.


  17. Archibald says:

    Good article but it seems like you didn’t do your homework correctly this time : “It’s the reason why one of the most obvious causes of the biggest financial crisis of our lives — the co-mingling of high-risk financial instruments with plain vanilla commercial banking assets — remains completely unaddressed, not only in Europe but just about everywhere else on Planet Earth” => have you checked the La loi de séparation et de régulation des activités bancaires (LSRAB) in France ? It exactly separates the investment from the retail activity of a bank. Among other restrictions, one cannot fund the other.

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