How in the world could the European Central Bank (ECB) – who is becoming more powerful by the day as the eurozone lead-bank supervisor – has given away a big part of its new authority to a single consultant subsidiary of a U.S. financial service conglomerate in an age where U.S. and British spy masters rule the new cyber world in the interest of its commercial and financial interests?
When Continental Europe´s political and bureaucratic elite established European Monetary Union (EMU) they ignored all economic arguments that a monetary union could not work without a fiscal union. They ignored almost completely the banking and financial market implications of a single currency on sovereign debt and private banking capital flows. And when the financial crisis exploded they disregarded the “no-bail-out” provision of the Treaty on the Functioning of the European Union and forced the creditor member countries into the biggest debt metallization that the euro area has ever seen.
But when the banking and sovereign debt crisis threatened the monetary union´s break-up a new generation of politicians and bureaucrats almost succeeded to put the blame for the economic downfall and more state and private debt and employment losses on greedy bankers and penny wise and pounds foolish national bank supervisors.
As often in post-war European history the political and bureaucratic elite is telling their citizens that transferring important national task to the European level will work and prevent new a new financial crisis. In the case of Germany, systematically preventing any independent analysis of the real causes of its banking crisis was part of the domestic political game.
When at the 2012 June EU summit, Eurozone leaders, supported by a power-hungry European bureaucratic elite and pushed by hopelessly indebted Club Med countries, embarked on the second biggest integration step after introducing the euro: the transfer of authority for bank supervision from national to the European level under the new Single Supervisory Mechanism (SSM) Legislation.
The explanation to their 333 million citizens was, that quickly transferring bank supervision authority from the national to the European level and entrusting this to the European Central Bank (ECB) would “break the vicious circle between banks and sovereigns”. If the SSM has been created, so the June 2012 EU commitment, this would provide the European Stability Mechanism (ESM) with the possibility to inject funds into banks directly.
No one could have imagined that a year later the European Central Bank (ECB) would hand over the rulemaking for the Comprehensive Assessment (CA) of supervised systemically important banks in the euro area to one single – highly controversial – consultancy firm, Oliver Wyman, a subsidiary of the U.S. financial services conglomerate Marsh&McLennan Companies (MMC).
As explained later in the ECB´s note “Oliver Wyman, an international consultancy group, will support the ECB by providing independent advice on the methodology, while assisting in the design and implementation of the execution, including the implementation of quality assurance measures. Its services will also be available to national competent authorities (NCA´s), to support national project organization and to advise them on implementation.
When conducting the comprehensive assessment, all NCA´s will call upon the services of private sector experts (consultants, auditors and/or others) to assist with tasks including on-site file reviews appraisals and valuation”.
As the systemically important credit institutions in 18 member states covering about 85 per cent of euro area banking assets are laboring under the preparations for the three CA components, the monopolistic conceptual and advisory role of Oliver Wyman for the largest and most ambitious financial supervisory and regulation project of modern times is more and more questioned.
As Nicolas Veron, an internationally recognized expert who works for Bruegel and the Peterson Institute on both sides of the Atlantic, reminds us that the ECB who lacks prior experience in bank supervision considers the Comprehensive Assessment “as largest such exercise ever undertaken in terms of the number of banks, their overall size, and geographical reach”.
This is particular the case in Germany where insiders in the commercial banking as in the official sector are pointing to the controversial role that Oliver Wyman played in the run-up to the US subprime banking crisis that also caused havoc to European banks.
As it is spelled out in Wikipedia, Oliver Wyman was the unnamed consulting firm that in 2005 recommended to Citigroup´s senior management to expand parts of its fixed income business, including in collateral debt obligation (CDO), which led to more than US $ 50 billion in losses and ultimately a rescue by the U.S. government (see the article in the London Financial Times). What is now the dominating consultant firm preparing the ECB´s eurozone lead role in banking supervision also recommended to UBS the large growth potential in structured credit and securitized products. Also UBS suffered heavy losses and had to be bailed out by the Swiss government. Oliver Wyman, in 2007, named Anglo Irish Bank as the best-performing bank in the world over the prior five year in a piece of research published to coincide with the World Economic Forum in Davos, Switzerland. The next year the Irish Government was forced to nationalize the bank at a cost of €25 billion.
What is causing another bout of concerns among finance officials, legislators and bankers is a March 18, 2014 article in the London Financial Times, almost totally ignored by the German financial press that lacks sensitivity for the abyss of governance failings of the ECB and banking union: “City of London urges ´muscular defense against EU regulation” . It reports on the main lobby group of the City of London´s banks urging the British government to develop stronger defenses against the new eurozone regulatory architecture, in which the ECB as lead-banking supervisor is at the center. “There is a “credible fear” that the new mechanism to support the eurozone´s single supervisory mechanism, part of the post-crisis “banking union”, will damage the City´s role in Europe. According to the report, more than three-quarter of Europe´s 58 billion British Pounds of total investment banking and capital markets revenue is transacted in the United Kingdom. An estimated 55 per cent of the UK´s 45 billion British Pounds share is for continental European clients“, reports the Financial Times.
The key warning of the report: The empowerment of the European Central Bank as a single eurozone banking regulator will see banks from outside the UK come under pressure to repatriate much of that business to the eurozone “The focus of concerns contrast with the City´s generally enthusiastic view on the UK´s continued membership with the European Union“, comments the paper. The article quotes Chris Cummings, chief executive of The CityUK: “The status quo is a dangerous place. The UK needs to develop a more muscular approach. The Treasury and Bank of England needed to engage even more with the EU authorities to make the case that having business located and managed within Europe´s single market, rather than within the eurozone, is what matters. Europe needs to work better as a multicurrency union”.
As the Financial Times notes: “The situation sets up a potential tussle between the Bank of England, whose Prudential Regulation Authority supervises banks operating in the UK and the ECB, which later this year formally takes on its bank supervision powers from national regulators across the eurozone. The UK regulator has traditionally pressed banks to locate their global business heads and risk management functions in London, if those units are predominantly active in the UK. Most US and continental European banks have made London their European hub for the bulk of trading activity“
And guess who is in the middle of that tussle and who did the expert study exploring how Europe´s most important banking center can fight the emerging eurozone banking union project? It´s the ECB ´s trusted outsourced SSM arm Oliver Wyman, playing both sides of the ECB eurozone – London City power struggle.
This episode dramatizes the mindboggling governance deficiencies that are ignored because they happen on the non-transparent European level and causes bad blood among supervised bankers and their national supervisors.
In Germany where the political elite is concentrating on the coming European elections and where the ECB´s SSM Empowerment Legislation – the biggest give-up of national sovereignty since entering the euro was ratified by the Bundestag in 45 minutes shortly before mid-night without voting on a name basis – the smoldering Oliver Wyman scandal is not yet on the public screen. For those systemically important bankers that are presently audited by Oliver Wyman experts, says a banker “are keeping their mouth shut” – But the still suppressed calls for “Oliver Wyman go home” get louder.
Insiders in the private and public sector ask politically explosive questions like: Will the centralized Oliver Wyman role make it easier to get inside information on most of the eurozone banking assets on computer disks to the leading investment banks and the hedge fund kings in Wall Street and London? What will eventually happen with the biggest bank date treasure that the world ever accumulated? Will Oliver Wyman partners become multimillionaires on the basis of their singular consultant role? And as the recent report of Oliver Wyman for the City of London lobby showed, how much was this report already based by the insider information the company gathered in its role as the ECB ´s SSM consultant arm?