Regulation of the financial sector painstaking

The financial crisis in Europe is inextricably linked to the reforms of the banking sector. SOMO is in favour of higher financial buffers for banks and of measures against food speculation by financial traders. Papers about international and Dutch players on the commodities futures markets and about the ‘gutters’ of the financial world (shadow banking) are scheduled for publication. ‘It is a real concern that regulators and supervisors are still heeding the financial sector,’ says senior researcher Myriam Vander Stichele of SOMO.

‘Spain, Ireland and the Netherlands had reasonably sound budgets before the crisis arrived. But because they went and saved the large banks, they got into trouble and are now stuck in a vicious circle,’ states Vander Stichele. ‘If stronger regulation of the financial sector had been initiated rigorously and quickly in 2008, the Eurozone crisis would not have become so huge.’

Resistance to banking reforms

The European Union is currently preparing legislation that will set stricter capital requirements for banks. Vander Stichele: ‘The point is that banks have to be able to absorb setbacks in hard times without having to be saved by the taxpayers’ money. The banking lobby has resisted efforts to enforce this with success so that there are still no short-term prospects of improvement.’
Other discussions regarding banking reforms concern too-big-to-fail banking and shadow banking. ‘Banks that remain too big know that they will be saved by the government when push comes to shove. This also results in more positive credit ratings and they can borrow money at a better rate, so they have a cost benefit too. In fact they are being subsidised by the government. We are currently researching what this means for the financial sector in the Netherlands.’ Shadow banking involves financial practices that aim to circumvent regulation and taxation. Vander Stichele: ‘We are investigating what the exact reasons are that so much money which is not subject to financial regulation is circulating in the Netherlands. For example, loans by hedge funds. Hedge funds are not official credit institutions!’

Restricting food speculation

Vander Stichele is also advocating that banks should arrange their own improved protection against risks when they operate in commodities markets. Moreover, transactions should be made more expensive to slow down financial speculation. SOMO has been fighting for European regulation against food speculation for a long time now. Today there is a proposal for reform of the current Guideline regarding regulation of markets in financial instruments (Markets in Financial Instruments Directive – MiFID II), which also regulates the futures markets in commodities. SOMO and many other organisations want the new law to establish a restriction on the number and scope of futures contracts per financial trader.
These so-called position limits must contribute to a smaller impact of financial speculators on futures markets that determine the international food prices, such as grains and soy. ‘The German rapporteur and European Parliament member Ferber have proposed changes that were moving in that direction, but they seem to have been called off by a fellow country and party member as well as by the financial lobby. The Council of Ministers, who also need decide on this matter, are in favour of standardisation of these position limits, but the market parties are pressuring them into allowing all kinds of exceptions. The way the proposals look now, the new measures create insufficient clarity, also towards the market parties. But the final meetings and vote will not take place until the autumn.’

Supporting other NGOs with research

Vander Stichele is continually ‘fighting the financial lobby that is influencing the European parliament’, and to this purpose writes analyses to support the campaigns and lobbies of other NGOs who are actively raising public awareness. What’s more she is researching which large international players (e.g., hedge funds) are operating on the derivatives market for commodities. This briefing will be published this summer following the Food Markets in Dutch, in which the role played by Dutch banks and pension funds in the futures market for agricultural commodities is examined. Vander Stichele: ‘Regulators are always talking about limiting the risks. We should really be steering towards downsizing. By restricting the position limits for financial speculators in commodities that’s what you would achieve!’