Always Think Critically

Take a look around at my subjective thoughts and some objective data

[patbeckii]

The secondary vertical axis is a percentage corresponding to the ratio between foreign and domestically controlled bank assets. The yellow line (n.b. not a continuous line) indicates that a greater concentration of foreign control over domestic bank assets may have been a decisive criteria for ECB SSM oversight of Significant banks in the Eurozone at the formation of the banking union in 2012.

[patbeckii]

The share of Eurozone domestically held bank assets compared to share of significant banks under supervision by the ECB and the share of the Eurozone’s capital deposits at the ECB by member state as of 2012.

[patbeckii]

The share of significant banks under supervision by the ECB and the share of the Eurozone’s capital deposits at the ECB by member state as of 2012.

[patbeckii]

Panama Papers Pandemonium

The ICIJ’s recent bombshell reporting on the leaked Panama Papers has provided evidence for what everyone has already known: the rich global elite will do whatever they can to evade tax payments. The public outrage over these allegations in Iceland, France, the Netherlands, Austria, and Australia have already spurred formal investigations while the elites in China are taking measures to suppress information to contain the potential fall-out. Azerbaijan has already imprisoned a journalist on trumped up charges following her prior investigation of President Aliyev’s family involvement with Mossack Fonseca. In response, a multitude of press releases by the accused in Pakistan and Ukarine, among others, feign innocence about the true nature of secretive offshore tax havens by claiming that the banks merely offered a legal service.

The leak is, however, nothing more than confirmation of what was implicitly understood to be going on in the international financial system for decades. All of these revelations about secretive shell corporations point to problems in global finance related to crime, money laundering, and good old fashioned tax evasion. Although investigations, prosecutions, fines, and potential jail time will likely cost a few people their jobs, claw some funds back to government coffers, and end up in the seizure of some illicit criminal assets, the root cause of the problem will still remain largely unaddressed. Finance is truly global while regulation is largely still in the purview of national authorities. Intergovernmental cooperation and information sharing has been a strategy employed to try to deal with this international problem, but the most comprehensive reform to an outdated national approach to oversight and regulation can be found in Europe with the banking union.

Recently, the ECB has withdrawn a banking license for Latvian bank Trasta Komercbanka for repeatedly violating regulatory capital requirements while off-handedly stating that that the bank has failed to enact adequate measures to avoid money laundering and terrorist financing. Although Trasta Komercbanka is not a major European bank, this demonstrates the potential effectiveness of the ECB’s Single Supervisory Mechanism (SSM) in combating international financial crimes. The debate surrounding the banking union was contentious from the start but came about in 2012 amidst popular discontent about banking malfeasance during the financial crisis and subsequent tax payer bail-outs of large financial institutions. Eventually, the European Parliament and Council passed Regulation (EU) 1024/2013 establishing the European Supervisory Authority, in the form of the European Banking Authority, spelling out the role of the entity within the structure of the ECB in regards to supervision.

Any arguments that the newly conferred supervisory power itself or Council Directive 2003/48/EC which established the ability to tax interest payments on savings income – similar to proposals for capital gains tax reform in the USA – are to blame for this rush to foreign tax havens lack merit. Recall that the Panama Papers elucidate that this type of tax avoidance has been going on for 40+ years, long before these regulatory measures were enacted. The regulatory action at the EU level was an attempt to rectify tax inequalities and clamp down on tax cheats, not the prima facie reason why the taxes were evaded in the first place.

Instead, the European Banking Authority is an indication of how effective regulation of international finance requires supra-national institutions. It is true that the banking union is still flawed. Yet, it has proven capable, even in current form, of fighting illicit financial activity and curbing terrorist financing. Albert Einstein is oft-cited as saying that, “We cannot solve our problems with the same thinking we used to create them.” This unprecedented step taken at the European level is precisely a new type of thinking. The old thinking, indicative of the present debate over national sovereignty relating to the Brexit campaign, is an example of the type of thinking that created our present problems. Arguing for national sovereignty in the face of international financial crimes is a losing strategy. The free movement of capital has moved freely beyond a national scope. It is of no wonder that many of the Eurosceptics who are intimately entwined with the Panama Papers leak, like Marine Le Pen, are anxious to avoid supra-national regulatory powers. The question remains whether a new thinking, more cosmopolitan in nature, will take hold to resist the inflammatory, nationalistic rhetoric employed by Eurosceptics in an effort to retain the privilege of national elites at the expense of the many.

[patbeckii]

Economic progress, in capitalist society, means turmoil.

Joseph Schumpeter

[patbeckii]