In May 2015, a member of the powerful Governing Council of the European Central Bank (ECB) gave confidential information about quantitative easing to a meeting of bankers and academics, with the former seemingly responding swiftly, securing an advantage over competitors. Only a few months later, the ECB adopted new rules on how and when to associate with financial lobbyists and representatives of financial corporations.
It seems a new awareness was borne out of the scandal. Yet, at the same time the ECB involvement with the powerful financial interest group G30 (Group of Thirty) has intensified, and there is no sign this has caused controversy inside the bank. In a letter to Corporate Europe Observatory, the ECB explained that its internal bodies set up to oversee the ethical rules have not even considered the closeness of the central bank's relationship with the G30.
The Coeuré scandal
The person at the centre of the scandal is Benoît Coeuré, the French member of the ECB's Governing Council. In May 2015 he spoke at a meeting in part financed by a hedge fund, Brevan Howard Asset Management, with academics, bankers, and hedge fund managers in the audience. Other speakers included Chief Economist Willem Buiter from Citigroup and Scott Bessent from Soros Fund Management. In the course of the meeting, he lifted the veil on imminent decisions to be made by the ECB on purchases of bonds. Such information was not supposed to be made public at such an occasion, and certainly not to an exclusive group of financial market operators, as it gave a special advantage to a select group. As opposed to their competitors not present at the meeting, they could act on fresh information on the ECB’s bond purchasing programme, and they did. This was made clear later that evening, when apparently the information was used by people present to steer their investments, affecting the exchange rate of the euro. The ECB itself said the incident was due to a procedural error.
As a consequence, Coeuré decided not to attend events organised by banks in the future – as can be seen in an interview posted on the website of the ECB. The ECB leadership immediately set out to revise the rules. Furthermore, the rules were strengthened in December following the revelation in the Financial Times that a series of meetings with big banks and hedge funds, such as BNP Paribas, UBS, Goldman Sachs, and Blackrock, had taken place inside the ECB itself shortly before important decisions were made.
Potentially, the new rules would impact the ways the ECB associates with all lobby groups.
The new rules
The new rules are supposed to discipline all ECB representatives when they associate with the public and with representatives of financial companies. As of December 2015, members of the decision-making bodies of the ECB must observe the following rules:
• Only accept speaking engagements “if the remarks are published on the ECB website at the start of the speech”;
• Not to offer information or personal views to anyone who could derive profit from such information, that has not already been made public;
• Strive to ensure that "acceptance of invitations is not perceived as 'giving the organizer a prestige advantage over a competitor, or allowing them to benefit financially from apparently exclusive contacts' with the members of the Executive Board”;
• As a matter of principle and “where practical” have an ECB staff member present at bilateral meeting with bankers and other industry representatives;
• Attend a “quiet period” and basically not comment on “forthcoming monetary policy decisions” seven days prior to the policy meeting – and not talk to “the media, market participants or other outside interests” during that period.
Time to revise the G30 case
This set of rules, and the increased awareness of pitfalls when talking to eg lobbyists inherent in them, bring new perspectives into a case that Corporate Europe Observatory first raised in 2012, that of the Group of Thirty (G30). Back then, CEO filed a complaint to the European Ombudsman arguing that ECB President Mario Draghi’s membership of the group involved a series of risks, bringing the bank's reputation and independence into question.
The G30 is an exclusive club of the heads of big financial corporations and central bankers. This amazing amalgamation of public officials and private bankers makes the G30 an interesting case in the world of lobbying. It is not a lobby group in the classical sense, but it is in the main run by big banks, and it always has a political agenda that doesn’t differ in any significant way from that of BNP Paribas, UBS, or Goldman Sachs, to mention a few examples.
The guiding principles of the G30 were always one of either deregulation or self-regulation of the financial sector. It has waged influence on international rules along those lines, advancing the interests of Wall Street and Europe’s biggest investment funds and banks.
In the midst of major debates on financial reform following the financial crisis, CEO found it striking and provoking that the President of the ECB was a member of the G30, a group that helped lay the intellectual foundations for financial markets for and the lax type of regulation that proved so disastrous with the financial crisis of 2008.
Following an investigation into the work of G30, CEO decided to ask the European Ombudsman to look at the case, and in August 2012, the Ombudsman accepted.
The decision made by the Ombudsman at the time, P. Nikiforos Diamandouros, contradicted the perspective of CEO. In his decision, the Ombudsman said he did not find justification for the allegation that membership of the G30 was “incompatible with the independence, reputation, and integrity of the ECB”.
New perspectives on G30
But the recent Cœuré scandal brings the case back to life. In the ECB, there should be no way around having strict rules on how the leadership associates with financial players that stand to win or lose from ECB decisions, and such rules should have a bearing on the involvement in G30. Still, as pointed out in a series of articles by journalist and economist Norbert Häring from the German business newspaper Handelsblatt, there is evidence to suggest that ECB involvement in the G30 has intensified, and in a very careless manner. And despite this, according to a letter from the ECB to Corporate Europe Observatory, the involvement of Draghi and other ECB heavyweights in the G30 has not yet been scrutinised by the bodies set up to control the implementation of the ethical rules.
Yet, the arguments put forward by Norbert Häring are compelling. He points out that in the G30, the ECB President meets chief executive officers from financial corporations on a regular basis – at confidential meetings. Clearly, the Cœuré scandal gives reasons for closer scrutiny. Also, Häring notes that the practice of the G30 of portraying its reports as statements of the G30 as a whole – including the public bankers in the group – is highly problematic, and increasingly so, as the G30 makes even less effort than a few years ago to pretend its reports have received a seal of approval from members such as the ECB President.
These questions about the inappropriate closeness between the central bank and those it oversees and regulates become even more pertinent due to the fact that as of November 2014, the ECB is the top supervisor of the biggest banks in the EU, many of which are also represented in the G30. That was not the case when the European Ombudsman reviewed the G30 case three years ago.
G30 incites more Cœuré-style scandals
One quote from a report, highlighted by Häring, brings it all together. In the 2013 publication “A New Paradigm – Financial Institution Boards and Supervisors” the G30 makes a recommendation that, when considered together with the Coeuré-scandal, is an eye-opener: “Assessment of strategies, business model, and risk vulnerabilities: Boards are increasingly focusing on helping to shape strategy, and on understanding how strategic decisions and risk appetite affect the firm’s sustainability, prudential standing, and ability to recover in a crisis… They are also areas where supervisors can bring unique perspectives derived from their experience and analysis of peer situations and emerging trends within financial markets.”
In other words, supervisors are encouraged to provide all information available to the banks they supervise. If applied to the ECB, it would push the door wide open to incidents similar to the Coeuré-scandal. Particularly when we consider that the banks supervised by the ECB compete with a plethora of smaller banks in Europe. The latter would clearly be disadvantaged, if the big banks could count on the private and confidential advice of the chief supervisor.
This would not be impeded by the new ethics rules adopted, as supervisory dialogues have been exempted. Also, confidential talks of this nature under the G30 umbrella would probably not be excluded either, as the rules only restrict public speaking and bilateral meetings. G30 does not seem to fit the description here.
Plenty of customers in G30
There are ample opportunities for ECB representatives to spill the beans in the G30. When the ECB rules were tightened again – only two months after the first round – following a November 2015 report by the Financial Times on bilateral meetings in the bank shortly before major decisions were made, the hedge fund Blackrock was one of the key examples highlighted in the paper. Blackrock is an example of a financial giant that could make major gains if information on imminent decisions is leaked. This is why it is interesting that on 11-12 October 2015 the ECB participated at the annual International Banking Seminar organised by the G30 in Lima, and with Philip Hildebrand, CEO of Blackrock as a participant. This was ten days ahead of a decision making meeting in the ECB - within the limits of the new rules, but still too close for comfort.
Also, while the incident with the French ECB leader Coeuré had to do with monetary policy, there should be plenty of firewalls in the matter of the ECB's supervision of financial entities as well. For instance, it can be necessary to make the nature and timing of stress tests, which measure the financial health of a bank, confidential for them to work. If, for instance, banks know all about the methods used by the financial authorities, they may develop methods that allow them to appear more resilient than they really are.
These major concerns should mean the ECB takes special precautions when interacting with the G30. The group includes many representatives from banks supervised by the ECB, including Axel A. Weber (UBS), Gerd Häusler (Bayerische Landesbank), Jacob Frenkel (JP Morgan), Tidjane Thiam (Crédit Suisse), E. Gerald Corrigan (Goldman Sachs), and Guillermo de la Dehesa (Grupo Santander). Yet these special precautions are not even being considered.
Closer and closer
Indeed, quite the opposite. Over the past years, the ECB seems to have come even closer to the G30, due to actions taken on both sides. As for the ECB, participation has been stepped up, in that executives other than Mario Draghi have started appearing at G30 meetings. Draghi participated at the 73rd annual meeting of the G30 in June 2015, but he is no loonger the only participant at such meetings. At the annual International Banking Seminar in October 2015, organised by the G30, the German member of the ECB Executive Board Sabine Lautenschläger participated. The seminars are invitation-only forums for bankers and central bankers to “discuss issues of common concern in off-the-record settings conducive to frank exchanges of views and positions".
The G30 for its part is not very keen on asserting that reports and recommendations stem not from the G30 as a whole, but from its working groups, and even less so than at the time of the decision on the G30 of the European Ombudsman. Norbert Häring found that recent reports did not contain the disclaimers used in the past, that could be used to argue that Draghi had not given them his seal of approval. This shows an increasing lack of interest in these disclaimers, or perhaps a clear political interest of the G30 to deliberately downplay them – though after Norbert Häring’s article, some or all have been reinserted.
In addition the ECB has taken a step closer to the working groups of the G30. When preparing a recent report on banking supervision, “Banking Conduct and Culture”, the member of the supervisory board of the ECB, Julie Dickson – who has formerly called the G30 “a private sector group” – was present as an observer. This could be read as a further indication that the ECB has endorsed the report. Also, Julie Dickson latter referred heavily to the report in a speech. And considering the way the report was launched, few ordinary spectators would doubt this. On behalf of the full G30, the Chairman wrote that with the findings “we” – the G30 – “call on the leaders of the financial community… to draw on our recommendations”.
Time for a review
Moreover, the G30 chairman in question is not just anyone. He is Jean-Claude Trichet, the former President of the ECB, and incidentally the chairman of the newly formed ECB Ethics Committee. He has put ECB’s name all over the G30. It is explained in the letter to Corporate Europe Observatory that the Ethics Committee he chairs has not addressed the involvement of Draghi and other ECB officials in the G30 so far. And it seems unlikely, should it come to it, that Jean-Claude Trichet would offer the matter much critical thought.
Generally, it seems unlikely that the ECB will take precautionary steps to put more distance between itself and the G30 without pressure from some outside party, be it from the Ombudsman or from elected bodies such as the Council and the European Parliament. To make things right, and dissociate the ECB completely from the G30, action must be taken now.