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NGO ACTION: "Bank to the Future” by BankTrack has followed ECRC’s example of putting forward some potential solutions to improve the responsibility of financial services.
Madrid, November 6 2008

BankTrack today released "Bank to the Future: El Escorial Statement on Banks and the Financial Crisis" at a press conference in Madrid.

The statement was drafted at BankTrack's annual strategy meeting, held in El Escorial de San Lorenzo earlier this week. It contains BankTracks´ current position on what is needed to deal with the unfolding financial crisis of today so that it will lead to a sustainable, robust and just financial system in the future.

The statement recognizes that the world financial system is at the brink of collapse. It characterizes the current crisis as not only an economic and financial crisis, but one of governance and sustainability.

It then streses the need for a ´New Green Deal´. Such a deal would not seek to stabilize the economic system as it is, but also aim to transform it into one that helps solve the pressing social and environmental problems the world is facing.

The fiscal spending that is necessary to stimulate crisis-affected economies entering recession should be directed at achieving social justice, the promotion of sustainable production and consumption systems, and the transition of the world’s economies onto a low carbon path.

The statement outlines a number of steps to deal with the crisis in each of these dimensions, including:

- eliminating the influence of banks in the political process
- ensuring democratic participation in the design of a new global financial order
- putting a "sustainable twist" on international banking rules (such as including environmental and social risks into capital adequacy
requirements)
- ensuring complete bank transparency regarding risk assessment processes and transactions
- eliminating the shadow banking sector by introducing regulations and reporting requirements
- prohibiting speculation in the derivatives markets, particularly those related to food and energy
- reducing incentives for excessive risk taking, such as eliminating short-term, volume-driven bonuses

The Statement concludes, "We face a time of dramatic change that presents unique opportunities. Now that the once-dominant forces of market fundamentalism have been discredited, a new, equitable, and sustainable future can be built on the rubble of past excesses."

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BankTrack is the international network of non-governmental organizations monitoring
commercial banks. BankTrack advocates for a banking sector that is socially and
environmentally sustainable and which provides services that benefit society as a whole.
Rooted in this perspective, and in light of the financial crisis, we call for fundamental
reforms in the global financial system, particularly in relation to the role and regulation of
banks.

This statement was drafted at the BankTrack annual strategy meeting which took place in
San Lorenzo de El Escorial, Spain on 6 November 2008. As the economic crisis is
constantly changing and further unfolds, BankTrack will continue to collaborate with other NGOs, social movements, trade unions and civil society at large to refine our analysis and to develop a common approach. BankTrack’s vision for sustainability and accountability in the financial sector is elaborated in the Collevecchio Declaration (2003): www.banktrack.org


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BANK TO THE FUTURE - EL ESCORIAL STATEMENT ON BANKS AND THE FINANCIAL CRISIS

The world financial system is on the brink of collapse. The crisis that is pervading
the banking system has increasingly spread to other sectors of the economy,
affecting the lives of millions of people living in both developed and developing
countries.

Irresponsible and unsustainable behaviour of banks, driven by greed and kept
unchecked by a failing regulatory system, has been at the core of the crisis. In
our view, the crisis has three main dimensions:

A FINANCIAL AND ECONOMIC CRISIS: The financial meltdown has been
characterized by a collapse of trust among banks, bank insolvency, and
deleveraging. More importantly, it has led to a severe crisis of confidence
in the banking sector overall, confidence on which the sector ultimately
depends. As distrust takes over and money flows dry up, credit has
tightened, and the world is heading into a recession whose depth and
duration no one can predict.

A SOCIAL AND ENVIRONMENTAL CRISIS: The reckless, speculation-driven
expansion of the financial markets has led to a staggering disconnect
between the amount of capital at play in the “casino” economy (where
money is solely made off money) and the real economy. That same capital
could have been deployed to investments that would help meet both the
basic needs of millions of people, as well as finance the global energy shift
urgently needed to avoid a global climate catastrophe. Unfortunately,
banks’ financing activities in the real economy usually fall far short of this
potential, and instead often harm local communities and ecosystems
around the world.(see for example, BankTrack’s Dodgy Deals: www.banktrack.org)

The financial crisis has also diverted international attention, support, and
financial resources from addressing urgent issues facing the world’s poor,
such as the continuing food crisis. Humanitarian groups stress that the
suffering of the 290 million people hit hardest by today’s food crisis could
be relieved if the G8 countries could give just two extra cents for every $1
they have spent so far on bailing out the banking industry.

A GOVERNANCE CRISIS: Through widespread political engagement over the
last decade, the financial industry has effectively usurped the power and
role of financial regulators and supervisors.4 Banks’ successful
deregulatory efforts have allowed them to engage in excessive risk-taking
in the pursuit of short-term profits, at the cost of more prudent valuecreating
strategies. As a result, between 2000 and 2006, the net profits of
banks have more than doubled.

To deal with the serious problems that have now arisen, and to prevent their
future reappearance, BankTrack believes that these three dimensions of the crisis
need to be dealt with at once.

STEPS TO SOLVE THE GOVERNANCE CRISIS

As the crisis has demonstrated, self-regulation is no regulation. For years,
governments have taken a hands-off approach to the sector which has allowed
risky activities to go unregulated, and banks to easily circumvent existing rules.
Weak regulations led to the creation of the massive “shadow banking system,”
which was largely responsible for the expansion of unregulated, exotic securitized
products and credit derivatives. For example, in 2007 the notional value of overthe-
counter derivatives amounted to about US$596 trillion, which is almost 10
times larger than world GDP.5 This huge unregulated part of the financial sector
increased systemic risks and played a key role in creating the financial crisis.
Largely operating out of tax havens that have been left equally undisturbed by
the world community, some shadow banks are actually non-bank institutions such
as hedge funds. However, other such operators have been established by banks
themselves (for example, structured investment vehicles) to avoid regulations
such as capital adequacy requirements.

It is also clear that under a system of self-regulation, banks were not able to take
any meaningful coordinated action to stem the crisis in which they found
themselves, forcing governments around the world to bail them out with massive
amounts of tax money. To avoid this situation in the future, BankTrack believes
that it is necessary to:

GET BANKS OUT OF POLITICS: Decreasing the political influence of banks (and
all corporations) is critical. According to Nobel Prize winner Joseph Stiglitz,
“Much of the inadequacy of current regulations and regulatory structures is
the result of financial markets’ political influence, in many countries
through campaign contributions. These deeper political reforms, including
campaign finance reform, are an essential part of any successful
regulatory reform.”

REQUIRE BANKS TO SEEK A SOCIAL LICENSE TO OPERATE: Society must regain the
means to control and correct banks, and redefine banks’ primary role as
investing in the real economy and advancing environmental sustainability.
Banks need to earn their social licenses to operate and provide products
and services which serve, rather than harm, the public interest.

ENSURE DEMOCRATIC PARTICIPATION IN DESIGNING A NEW GLOBAL FINANCIAL ORDER:
BankTrack strongly supports the development of a new global financial
order to prevent future financial crises. However, new policies and
institutions must be developed in a manner that is participatory and
democratic, and ensure strong participation and support from developing
and emerging countries. Large segments of their populations are being
badly affected by the present crisis, even they had no responsibility in
creating it.

STEPS TO SOLVE THE ENVIRONMENTAL AND SOCIAL CRISIS

Today the world is in need of a “Green New Deal.” Such a deal would not seek to
stabilize the economic system as it is, but aim to transform it into one that helps
solve the pressing social and environmental problems the world is facing. The
fiscal spending that is necessary to stimulate crisis-affected economies entering
recession should be directed at achieving social justice, the promotion of
sustainable production and consumption systems, and the transition of the
world’s economies onto a low carbon path.
Banks, particularly those that are now bailed out with tax money, have an
important role to play in this economic transformation. It must be a role based on
serving the public interest, rather than safeguarding the profits of the few. Given
their power and important role, banks can and should deploy capital in ways that
promote the restoration and protection of the environment and help create
sustainable economies.

For example, banks can play a pivotal role in funding the transition to a lowcarbon
economy by moving away from fossil fuel-based energy projects into
low/no carbon options and by accounting, reporting, and committing to reduce
the greenhouse gas emissions in all their financing portfolios.
Policy makers too have a critical role in establishing a new bank regulatory
regime that proactively stimulates this economic transition. For example:

BANK SUPERVISION: Sustainability-oriented standards should be incorporated
into all bank supervision, including the granting of licenses, and the
extension of central bank-provided credit and insurance.

A SUSTAINABLE BASEL CAPITAL ACCORD: Banking regulators should mandate
the inclusion of environmental and social issues into risk assessment
processes for bank financing activities. One possibility is to include a set of
sustainability criteria into the Basel Capital Accords capital adequacy
ratios.

GREEN SCREENING OF CUSTOMERS: Know Your Customer (KYC) guidelines are
anti-money laundering (AML) mechanisms used by banks to screen
potential depositors. In a similar vein, “Green KYC” guidelines should be
developed, which would require banks to conduct environmental and social
due diligence for both commercial depositors and borrowers, with the aim
of prohibiting lending to corporations that do not comply with
environmental and social laws. In addition, existing AML requirements
should be tightened to halt the proceeds of corruption, illicit natural
resource deals and tax evasion from entering the financial system.

TRANSPARENCY: Banks should be completely transparent about their risk
assessment processes, decision-making procedures, clients, and
transactions. For example, banks should fully disclose their financing
activities in the extractive industries and infrastructure sectors, which
often have high environmental and social impacts. In light of widespread
public distrust about banks’ intentions, the issue is no longer how much
transparency banks can allow, but how much secrecy they can afford.
Such transparency is already best practice among some ethical banks.

STEPS TO SOLVE THE FINANCIAL CRISIS

Current efforts to reform the financial markets must include clear prohibitions
on certain financial practices and structures.

ELIMINATE THE SHADOW BANKING SYSTEM by regulating all unregulated
financiers and financial products. In addition, some financial practices
simply should be forbidden. It does not make sense to establish regulatory
frameworks and reporting standards, while at the same time allowing
financiers to circumvent them through off-the-book transactions. For
example, banks should not be allowed to create any structured investment
vehicles and/or special purpose entities which allow them to avoid
regulations.

ABOLISH TAX HAVENS: Secrecy jurisdictions are established not only to allow
companies, financiers and individuals to evade taxes, but to avoid
regulations as well. With tax havens resulting in capital flight of some
US$500-800 billion per year8 from developing and emerging market
countries alone, severely eroding the tax base of these countries, they
have significant impacts on the world’s poor. No jurisdiction should be
allowed to continue with its tax haven status. As part of the effort to
eliminate such havens, banks should be explicitly prohibited from
establishing or conducting transactions with entities based in these
jurisdictions.

In addition, financial regulations should be dramatically strengthened:

REGULATE ALTERNATIVE INVESTORS, such as hedge funds and private equity
funds, and introduce significant new transparency and reporting
requirements. For years, alternative investments were lightly regulated,
under the rationale that only wealthy, sophisticated investors participated
in such funds, which often employ risky and speculative investment
strategies (and which we now know, also create systemic risk and foster
instability). Today, however, pension funds, university endowments as well
as public and private financial institutions have significant exposure to
these funds, greatly magnifying their impacts on ordinary citizens and the
global financial system. This requires much stronger regulation of the
alternative investment space.

LIMIT LEVERAGE: The crisis has made clear that extraordinarily high returns
often are linked to an excessive amount of borrowed money (leverage)
and/or temporary wealth associated with inflating bubbles. As overborrowing
and the subsequent deleveraging are drivers of the current
crisis, the use of leverage in investments and lending should be limited.
For example, banks should have a leverage ratio in addition to stricter
capital adequacy standards, and non-bank institutions should also have
capital and leverage requirements.

CURB DERIVATIVES: It has become clear that derivatives are potentially
dangerous products. As with other potentially dangerous goods -- for
example pharmaceutical products -- regulators demand robust testing
before a product can be sold. Equally, derivatives should be checked for
their long-term impacts and whether they serve a legitimate hedging
purpose (i.e. help producers to anticipate and adapt to price fluctuations).

Only legitimate hedging instruments should be allowed, and they should
be standardized and traded in regulated exchanges.

The need to curb speculative derivatives trading is particularly critical in
food- and energy-related commodities markets. Huge swings in
commodity prices and speculation-fueled spikes in food and energy prices
hurt the world’s poor. Food and energy should not be treated like chips in
a casino.

REDUCE INCENTIVES FOR EXCESSIVE RISK TAKING: Banks’ perverse incentive
structures, like stock-options and short-term, volume-oriented bonuses,
stimulated excessive risk taking and effectively led to greed-oriented
decision-making at banks. For example, CEOs and bankers have
compromised lending standards (including environmental and social
policies), taken on too much leverage, and unscrupulously pushed risky
products onto the public. Not only should bankers’ executive compensation
be drastically limited, but the role of bonuses in remuneration systems
should be changed so as to reward long-term financial success and the
implementation of environmental and social policies and programs.
We face a time of dramatic change that presents unique opportunities. Now that
the once-dominant forces of market fundamentalism have been discredited, a
new, equitable, and sustainable future can be built on the rubble of past
excesses.

El Escorial, Spain
November 6 2008

ID: 42056
Author(s): iff
Publication date: 07/11/08
   
URL(s):

Link to ECRC Conference website (run by Inclusion)

Link to BankTrack Statement

Link to BankTrack website on the crisis
 

Created: 10/11/08. Last changed: 21/11/08.
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