ECB legitimate worry about governance : an open letter to Danièle Nouy

While the future of Deutsche Bank worries the ECB following the departure of the CEO John Cryan replaced by Christian Sewing, Société Générale must seek a new Deputy CEO to replace Didier Valet.

Société Générale, after its participation in the rigging of the Libor rate between 2007 and 2009  earned it a sentence transacted for nearly a billion euros in May 2017,  added three other concerns, a violation of the US embargo on Cuba revealed by Le Monde in 2014,  still unpaid,, and a charge for fraud at the expense of the Lybian LIA fund and  cheating on its refinancing rate as transmitted between May 2010 and October 2011 by its Finance Department to the Libor rate manager Thomson-Reuters…

“Negligible, peanuts, trifle , bagatelle” some will say: “our European banks are solid and irreproachable”. “Although the financial impact of litigation can not be determined with certainty, the bank has in its accounts as of December 31, 2017 a litigation provision of € 2.3 billion in accordance with IFRS. Within this provision, approximately 1 billion euro equivalent is allocated to IBOR and LIA. ”  indicated Société Générale.

The bank also confusedly admitted this March 15, 2018 that the US Justice Department had requested the resignation the Deputy CEO of the Société Générale, Didier Valet, until then likely successor of President Frédéric Oudéa and, like the latter, former CFO of the group … The “survival lies” of the bank between 2008 and 2011 in the turmoil of subprime business and Kerviel case,  allows as suggested by the bank  for  “differences of appreciation” …  Dura lex sed lex”, nothing will do, it is neither legal, nor cautious, nor undoubtedly moral, to save his bank and his bonus by abusing colleagues, customers and depositors …

Our European Central Bank, which seems satisfied with the universal banking model from the point of view of systemic risk, is rightly concerned about the governance of our banks.

This is good time since bank remunerations are expected to explode for 2017 : Deutsche Bank has paid bonuses for a total amount of 2.3 billion euros for 2017, four times more than the previous year, despite a new year of loss. net profit, amounting to 751 million euros. Ironically, the top executives of Deutsche Bank,  will have no bonus, except the departed CEO  who leaves with 8.7 million euros  including retirement, after three years of losses in a row and a annual salary of 3.4 million euros … It is true that the stock price of Deutsche Bank has fallen 60% for five years, while the stacking of its risks worries the interbank market … Several other large European bankers will personally exceed EUR 10 million in revenue, and the ECB may legitimately, as it says  , “ worry that bankers are taking undue risks to earn more.” last news is that following Mr. Cryan’s firing a handful of Deutsche Bank top executives in Frankfurt and London decided to quit.

 

It is up to the shareholders of these banks to question these remunerations, but it is also up to French and European regulators and politicians to question the origin of so easy wealth of bankers.

The market activities of universal banks such as Deutsche Bank and Société Générale are based on the low weighted credit cost granted by the explicit and implicit guarantee of the States, a guarantee clearly undue since most of these transactions, especially when they do not relate to exchange rates or interest rates, have little or nothing to do with the funding of the economy.  A surrealistic paradox is that, following the Moscovici law in France, the speculative operations for the French banks’ own account, those that generate these risky profits, should have been, according to the law,   confined to a wholly-owned subsidiary of their group: a regulatory comedy that our bankers do not even bother to play! In fact, our government and deputies have enabled the big banks, under this perfect parliamentary hoax, to keep fully their speculative trades under the invaluable guarantee of all taxpayers. In this lax general framework, which we owe to the mediocrity of successive policies, the European Central Bank is satisfied with the tools at its disposal: the stress tests on the declared risks on the one hand and the incantation to the best governance on the boards of directors of banks on the other hand.

 

La Tribune reports on April 16 that the ECB has asked the potential cost of the settlement of its trading positions to Deutsche Bank, which had been considering for several months to reduce the sails of its trading. According to the ECB this is an insignificant exercise of “review of the costs of progressive reduction” … On the governance and composition of bank boards, Mrs. Danièle Nouy, ​​President of Supervision at the European Central Bank insisted recently on the good selection of top level directors in limited number, better availability and  independence …  (see European Central Bank Conference on Banking Supervision  “Governance expectations for banks in a changing financial environment”, Frankfurt 22 March 2018,  “Good governance for good decisions”)

 

“Board members need to be independent thinkers “.

Mrs. Nouy even tells us that her services are capable of appreciating the independence of mind of the directors in their assessments of supervised banks  … “We recommend independence of mind in our fit and proper assessments, for instance. As part of the ongoing supervisory dialogue, we also assess whether a bank’s internal governance and risk culture are most relevant to such independence. ”

Let us wish you good luck!

It is touching to observe the persistent faith of the supervisors – is this naivety or cynicism? – in the highest skill and the highest integrity of the bank directors to limit the crises produced by the very complex structures of these financial groups.

But, Madam, it  is simply the underlying model that produces this uncontrollable explosive mixture of conflicts of interest and greed. The example of the very serious involvement at various levels of BNP Paribas in the formidable fraud Madoff, even though at several levels of the same group was shouting “wolf”, demonstrates the unmanageable nature of universal banks. Neither the best governance in the world, nor the intellectual capacity of the best French Polytechniciens and Inspecteurs des finances, nor the personal involvement of the most honest of them will do anything about it.

Certainly, the ECB is pushing here excellent governance ideas such as more direct contact between the directors of each bank and the control and credit functions, the alignment of remuneration with the “risk appetite” framework. “-, on better data quality and systematic aggregation of risks.

The ECB tells us that the current challenges for the banking world of declining profits, the development of new technologies and the new competition are testing the banks’ governance framework. “These current challenges put governance frameworks to the test.”

But is not this a serious error of analysis on the part of the supervisor? Is it not rather the internal model of universal banks, based on conflicts of interest, free fuel fo trading and unfair competition, which limits the effect of better governance efforts?

You concluded your presentation on the seriousness and the severity of the ECB’s risk-based mission for European banks, including numerous and costly aspects, such as the dialogue between supervisors, on-site inspections, thematic missions and deep-sea dives “, the use of the STAR portal for stress tests, and finally the severe process of authorizing new entrants …

But how will we be reassured?

Certainly governments have buried in recent years any challenge to this inefficient, explosive and unfair banking system. But it belongs to supervisors of central banks and other market regulators to question the general banking framework:  Benoit Coeuré, member of the Executive Board of the European Central Bank, did in the past  question the bank universal banking model.

Madam, as ​​supreme European supervisor you wisely ask banks’ boards of directors “to maintain a culture of debate that values ​​the diversity of points of view”.

Is it not, Madam, the opportunity to debate at the level of the ECB the impact of  a virtually zero credit cost for interbank speculation in Europe?

Respectfully.

Pierre-Henri Leroy , chairman, Proxinvest

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