Nicollas Hirst writes:  MEPs will revisit the causes of the 2008 financial crisis on Wednesday (21 January) as they debate new rules that could lead to some of Europe’s largest banks being broken up.

Centre-left and Green members will accuse the centre-right of being unwilling to take on banks that they describe as “too big to fail, too big to save and too big to resolve”.

Many MEPs believe that the revision of the law advanced by Gunnar Hökmark, who is the European Parliament’s lead rapporteur on the matter, ignores the lessons of the financial crisis, namely that risk-taking universal banks – like Royal Bank of Scotland was in the UK, or Bankia in Spain – pose a systemic risk to European economies.

By contrast, Hökmark, a Swedish centre-right MEP, argues that universal banks ought to be cherished rather than broken up. Would this levae us with “ineffective shell regulation”?

Perhaps the MEPs’ first priority should be to ensure investment and growth for the real economy.  But the landscape of the banking sector has changed considerably since Erkki Liikanen, Finland’s central bank governor, recommended that all banks over a certain size be broken up in a 2012 report for the European Commission.

Michel Barnier, the European commissioner for internal market and services 2010-12, rowed back from this, proposing a year ago that the European Central Bank should have the power but not the obligation to break up banks over a certain threshold.

Hökmark , who was also the rapporteur for the proposal that set out last year how member states should restructure failing banks, in the wake of several costly bank failures, is adamant that the EU should concentrate on reviving investment in the economy and not making it more difficult for big banks to provide it.

He warns against attempting to imitate the banking model of the United States when the European system has developed over hundreds of years.

Christophe Nijdam, secretary general of Finance Watch, disagrees. “‘Too-big-to-fail’ banking […] distorts incentives so that Europe’s megabanks are more focused on financial trading than on financing commercial investments,” he said in a statement.

Hökmark’s EPP does not have a majority on the committee for economic and monetary affairs, with 18 MEPs out of 61. The S&D has 16 MEPs on the committee, the Liberals have five, the Greens have four and the European Conservatives and Reformists have five. Hökmark expects a committee vote on the proposal at the end of March or in April.

Munich-based economic journalist Markus Schulze Wehninck writes:  Money laundering has been an international issue since the end of the 1980s but its career on the global agenda did not start until September 11, when it was connected to the fight against terrorist financing. After the attack on the World Trade Center, a global Counter Terrorist Financing (CFT) regime was built up by the United Nations and pre-existing anti-money laundering (AML) measures were expanded. It was believed that the expertise of AML professionals could be used for the fight against terrorist financial flows. The main task of the Financial Action Task Force (FATF) – an OECD-based international body established by the G7 in 1989 – was extended to the combined ‘label’ of anti-money laundering and counter terrorist financing (AML/CFT).

The connection of these two phenomena has had significant consequences. The ‘dirty money’ to fight is no longer only affiliated with crimes already committed, as money laundering only concerns funds from illicit activities, but as well with future terrorist activities. This boosted the international efforts to fight dirty money flows and new obligations for the private sector.

With its ’40 recommendations’, the FATF had already published an extensive blueprint for financial institution regulation to fight money laundering in 1990. The recommendations, which are implemented – at least in part – by most states, commit banks and other institutions to analyse their customers and financial flows, keep records and report suspicious activities to the authorities.

In 2003, the FATF published nine special recommendations for counter terrorist financing and included “designated non-financial businesses and professions” like (internet-)casinos, real estate agents, dealers in precious metals and stones, and lawyers or notaries. Furthermore, alternative remittance systems, like the informal value transfer system ‘hawala’, and non-profit organisations have been taken into the regulatory focus of the international expert body.

At the same time, other standard setters like the Basel Committee on Banking Supervision or the private sector initiative Wolfsberg Group have expanded and further specified the duties of banks in analysing customers and their financial behaviour. A global system of financial surveillance has emerged which obliges the everyday customer’s local bank to act as a financial watchdog. This surveillance system has merits, as it makes tracking dirty money flows more easy and efficient. But, nevertheless, it creates problems which did not exist before 9/11.

Firstly, the global financial surveillance system clearly violates the banking secrecy provision. The FATF recommendations point out, the secrecy laws of financial institutions are to be constrained where they may “inhibit the implementation” of the recommendations. States get what they wanted for a long time – access to private sector financial data. This data is not only supposed to be shared among domestic state agencies, but in cooperation with their foreign counterparts on a global scale..

The financial surveillance system has its weak points and carries the risk of customers beinging suspected by mistake, a ‘false positive’. Private sector institutions use IT-tools to trace suspicious money flows within the huge amount of financial data. A whole industry sector has evolved to commercially exploit the needs of financial institutions, that is, to find the ‘needles in the haystack’. Data management software develops ‘patterns of normality’ in order to identify abnormalities in financial transactions – an error-prone system.

The best strategy of blame avoidance is thus: reporting, reporting, reporting. How many transactions, banking accounts or credit cards are audited by this surveillance system is not known. However, a 2004 evaluation of the private sector reporting behaviour in Germany notes that 6400 suspicions had been reported the year before, from which about 900 had been false alerts, or just a little over 1 in 7 reports.

Another negative effect is that the fight against dirty money threatens to exclude poor people from financial services. Before 9/11, AML measures were merely associated with rather high sums and certain transaction thresholds, while the relatively small amounts of money used for 9/11 have refocused the dirty money chase on daily retail banking.

Their obligations force banks to prove identity and residence of their customers, which might be a minor problem in developed countries, but is of extreme significance in the developing world. As evaluations of the impact of the FATF-recommendations on the access to financial services show, ‘know your customer’-rules pose problems in countries where many households do not have formal addresses. This adverse impact has been shown in South Africa, Indonesia, Kenia, Pakistan and Mexico. 

Neil Weinberg writes: Credit Suisse Group AG (CSGN)’s bid to continue managing U.S. pensions after its conviction for helping American clients evade taxes should be rejected by the Labor Department unless the bank improves controls against wrongdoing, according to Representative Maxine Waters.

Waters, the top Democrat on the House Financial Services panel, sent a letter to Labor Secretary Thomas Perez today ahead of an agency hearing in Washington on Credit Suisse’s status as a pension manager, which Waters and two colleagues had pressed the department to hold.

“I believe that at this point, the waiver should be denied given the lack of important public facts and the insufficient proposed conditions,” Waters wrote. If regulators continue to routinely approve waivers, they will be “throwing away valuable enforcement tools and enshrining a policy of too-big-to-bar.”

Unless Labor grants a waiver, the Swiss bank will be disqualified from handling U.S. pension funds following its guilty plea last year to helping thousands of Americans evade U.S. taxes. Credit Suisse oversees billions of dollars of assets for more than 100 U.S. pension plans, according to a July court filing.

Credit Suisse has three asset management units seeking waivers to continue managing U.S. pension funds, Roger Machlis, head of Credit Suisse Asset Management’s legal and compliance unit, said at the hearing. John Popp, managing director of the asset management unit, who also spoke at the hearing, estimated more than 1 million individuals are in the pension plans it manages.

At the beginning of January, Tehran hosted the most significant economic conference held in Iran since 1979, with President Hassan Rouhani, his economic team and 1,500 economists focusing on economic hardships that have surfaced in recent years.

Akbar Komijan, the deputy governor of the central bank, implied that if the commercial banks do not provide enterprises with loans, the reason would be lack of eligibility of loan seekers, and not a lack of finances.

In the eight months ending Dec. 21, more than 60% of the granted loans were made to address cash flow issues.  The banks have been faced with a massive number of non-performing loans due to the combination of government’s lending directives to support failing enterprises and harsh depreciation of the rial in 2013 against major foreign currencies.

The commercial banks, troubled with a lack of cash, are now left with few options to meet their daily needs. The central bank is complaining that the banks have been borrowing to much from the treasury.   Komijani said at the conference that the banks’ overdraft from the central bank is “inconveniencing” and called on them to find other ways to meet their needs for cash.

A monetary expert in Tehran said the banks usually fail to pay off their debt, given the high interest rate of 32% for such loans. The banks have no choice but to borrow from either the central bank or one another.

Some struggling banks are even given one-day loans by other financial institutions. These loans would let the banks meet their immediate needs for cash. Monetary officials are fearful that they would soon face a desperate situation as the non performing loans cannot be recovered.

Another option the banks could consider to boost their lending ability is to use the money held by the public in the form of gold and foreign currency, which is estimated to be around $21.5 billion.  The amount is more than five times the estimated gold reserves of the central bank, which is nearly $3.9 billion.

Many believe that the lifting of sanctions is a shortcut to prosperity as they have so far blocked the Iranian government from tapping into the reduced oil income.

The lifting of sanctions would let Iran access $100 billion in foreign assets blocked in international banks in one go and resume economic relations with world nations, a move that would give a boost to the economy and the private sector in particular, which is heavily indebted to the banking system. But for now the negotiations are unlikely to result in a swift deal and the government can do little to shore up the stressed banks.

Among the few measures the regulator may take to help recover the sizable NPLs is create a specialized team or entity to address problems of bad debt. If a list of top defaultors connected t politicians were published, this might also improve matters.

Hugh Son writes: Jamie Dimon, grappling with multibillion-dollar legal costs and rising capital requirements at JP Morgan Chase  said overlapping efforts by U.S. regulators place banks “under assault.”

“We have five or six regulators or people coming after us on every different issue,” Dimon, 58, said today on a call with reporters after New York-based JPMorgan reported fourth-quarter results. “It’s a hard thing to deal with.”

JPMorgan, the largest U.S. bank, posted a drop in fourth-quarter profit amid $990 million of legal expenses, about double what some analysts predicted. The legal costs, mostly tied to probes into currency rate-rigging, follow even bigger payments in 2013 related to mortgage bonds sold before the 2008 crisis by JPMorgan and firms it acquired.

Dimon, who previously blamed regulators for stifling economic growth, struck a more conciliatory tone last year. The bank had a “tin ear” when dealing with overseers before settling probes into mortgage lapses and trading losses, he said in an April letter to shareholders.

New Federal Reserve rules that exceed the global standard also could mean JPMorgan needs more than $20 billion in additional capital by 2019.

“The regulators clearly want even more capital,” Dimon said today. “We’ll meet those requirements. But those measures aren’t a measure of risk at all. It is simply a measure of size. This company is as sound as it gets.”

Dimon, who was lauded during the crisis for JPMorgan’s role in buying Bear Stearns Cos. and Washington Mutual Inc.’s banking operations, has criticized the government for penalizing JPMorgan for those firms’ actions.

In 2013, Dimon settled a litany of disputes, including government probes of mortgage-bond sales, energy trading, oversight of a trader known as the London Whale, and scrutiny of services provided to Ponzi-scheme operator Bernard Madoff.

The bank settled foreign-exchange investigations with three regulators in November, paying about $1 billion, and still faces a Justice Department probe.

“In the old days, you dealt with one regulator when you had an issue, maybe two,” said Dimon, 58. “Now it’s five or six. It makes it very difficult and very complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”

Dimon’s bank, of course, does only 20% of its business as a conventional commercial bank.  It is in the derivatives market, the commodities market and has already gotten spanked for its involvement in LIBOR.  Maybe Dimon should listen to Goldman Sachs, who has suggested the company should be divided up.  Then each section could deal with its own regulators.