UK, Finland scolded by EU over budget deficits
Published: 13/05/2015 – 18:19
The UK was given a new deadline to deal with its excessive deficit procedure (EDP) and Finland was warned it could be placed in EDP under the stability and growth pact today (13 May).
The news came as part of the Commission’s country-specific economic policy recommendations for 2015 and 2016.
The UK budget will remain under Brussels oversight for a further two years after it breached deficit targets. Despite widespread spending cuts Britain failed to reduce its deficit to below 3% – the maximum allowed under EU law.
“These recommendations are not about Brussels lecturing governments,” said EU Commissioner for Economic Affairs Pierre Moscovici. “They are about encouraging national efforts to deliver the jobs and growth we collectively need.”
Since the global financial crisis in 2008 the EU has increased its oversight powers to stop a repeat of the sovereign debt crisis that engulfed the continent.
Sanctions for non-eurozone Britain limited
The EU cannot impose fines or sanctions on the UK because it is not a member of the eurozone. The announcement will however be politically embarrassing for Prime Minister David Cameron, who won last week’s general election on a platform of controlling the public finances to ensure sustainable growth.
The move will also provide fodder for the right wing of Cameron’s Conservative party who want the UK to leave the European Union and will see this as unwelcome oversight from Brussels.
The Conservatives have promised an in/out referendum on EU membership by the end of 2017.
>>Read: Greg Hands given key role as Cameron mulls early EU referendum
The Commission said Britain’s deficit stood at 5.2% for the year 2014-15. This is down from 10.9% it reached at the peak of the financial crisis.
The EU has set the UK a target of reduce its deficit to 4.1% in 2015-16, then 2.7% in 2016-17.
The announcement comes on the same day The Bank of England cut its forecasts for British economic growth over the next three years.
The central bank now expects economic growth of 2.5% this year, down from a 2.9% projection in February and closer to most other economic forecasters' expectations.
Malta, Poland let off excessive deficit hook
The Commission also prepared a report for Finland, which concludes that Finland does not comply with the debt and the deficit criterion of the Stability and Growth Pact.
The economic and financial committee will provide an opinion on the report within two weeks after which a decision on whether to open the EDP should follow.
Unlike Britain the 19 eurozone countries can receive fines and other sanctions from Brussels under an EDP.
The UK Treasury Office spokesperson said: “We have made significant progress in turning Britain around: the deficit has been cut by half from its post-war peak while delivering the strongest growth of any major European economy last year.”
“But the job is not yet done and as we enter a new Parliament we will continue working through our plan to build a resilient economy and bring our budget back to surplus.”
Elsewhere the EU executive recommended the closure of the EDP for two Malta and Poland.
Croatia, Cyprus, France, Greece, Ireland, Portugal, Slovenia, Spain all remain in EDP.
The 2015 country-specific recommendations include proposals to implement the €315 billion Juncker investment plan.
The EU executive has tweaked the European Semester process, the EU's calendar for economic policy coordination, with the stated aim of making it more accountable.
External links:
European Commission
•DG ECFIN: Country Specific Recommendations 2015-1016
Deutsche Bank Hires Saltzman to Lead Stress-Test Submissions
Deutsche Bank AG, one of two foreign lenders whose U.S. units failed the Federal Reserve’s stress test this year, hired Paul Saltzman to oversee the firm’s annual submissions.
Saltzman, who was named vice chairman, previously was president of the Clearing House Association, Frankfurt-based Deutsche Bank said Tuesday in an e-mailed statement. He also served as general counsel of Clearing House Payments Co.
Deutsche Bank said Saltzman “will oversee all regional and global” efforts related to the firm’s preparation for the annual review, which tests whether the biggest banks can withstand financial distress. U.S. units of Deutsche Bank and Madrid-based Banco Santander SA failed this year’s exam because of qualitative concerns about their processes. As a result, neither was able to pay dividends to their corporate parents.
Saltzman will report to Jacques Brand, chief executive officer of Deutsche Bank’s North America unit, and Chief Financial Officer Marcus Schenck, the company said.
“Paul’s leadership skills, deep knowledge of the U.S. regulatory environment, and highly relevant experience at the Clearing House will enhance our robust global effort to succeed within the dynamic regulatory environment,” Schenck said in the statement.
UBS Guilty Plea for Libor Seen Opening Door to Political Battle
UBS Group AG faces the prospect of making a guilty plea that would require it, along with four other giant global banks, to seek U.S. regulators’ permission to keep managing Americans’ money.
Several law experts said that UBS may face a harder road than others who are expected to enter guilty pleas for currency-market manipulation, although much could change when the details of the negotiated settlements are made public. The Zurich-based bank has already gone to regulators once to seek permission to keep operating at full tilt, and a guilty plea now would require it to return to the same doorsteps, possibly opening UBS to public or lawmaker questions about whether it should continue business as usual in the U.S., they said.
“This will intensify political scrutiny on the company,” said Lawrence Baxter, a professor at Duke University School of Law.
The U.S. Justice Department is in the final stages of settlement talks with several banks that would include antitrust charges for rigging currency rates, people familiar with the situation have said. UBS, which approached the government early in the investigation with an offer to cooperate, is shielded from antitrust charges, these people have said.
Rip Up
However, UBS isn’t getting across-the-board immunity. The bank operates under an agreement with the Justice Department, which declined to prosecute the bank for its role in manipulating the London interbank offered rate. As part of that December 2012 non-prosecution agreement, UBS vowed not to commit any crimes. Now, its admissions in the currency-rigging matter could cause the government to rip up the 2012 deal and prosecute UBS for Libor violations, said a person familiar with the matter.
Karina Byrne, a UBS spokeswoman, and Peter Carr, a Justice Department spokesman, declined to comment.
The Justice Department has come under criticism in recent years for the deferred- and non-prosecution agreements it has reached with banks, with lawmakers and other critics saying the deals weren’t an adequate deterrent. The government counters that the agreements lead to oversight and cooperation that otherwise wouldn’t be possible.
So far the U.S. hasn’t torn up a deal with a big bank, and doing so would put banks on notice. The potential for fallout could be greater for banks in the future who can’t, like UBS, claim to be cooperating parties.
“The Justice Department’s willingness to tear up UBS’s NPA of course sends a message to the industry and other banks” that have entered into similar agreements, said Elliott Stein, a litigation analyst with Bloomberg Intelligence.
Parent Companies
Citigroup Inc., JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Group Plc are expected to admit guilt in coming days in settlements with the Justice Department and other regulators over allegations they worked together to manipulate currency markets, people familiar with the negotiations have said. The pleas are likely to come from some of the banks’ parent companies, people familiar with the matter have said.
In most cases, such pleas require banks to seek permission from regulators including the Securities and Exchange Commission to keep operating in certain lines of business, including managing mutual funds. The Labor Department has oversight of pension managers, which will likely make it an important stop for UBS, which had $28.2 billion in U.S. pension assets under management at the end of 2013, according to Pensions & Investments.
Guilty Pleas
The five banks are likely to take similar paths as they seek the so-called waivers that organizations with criminal convictions need to continue operations, several securities lawyers said. That could change, they caution, depending on the specific terms of the final settlements.
“Now that bank guilty pleas are becoming more common there is a real need for much clearer rules on the regulatory consequences of bank convictions,” said Brandon Garrett, a law professor at the University of Virginia who studies corporate prosecutions.
In some cases, banks request these waivers in advance, so they can have them in hand to limit fallout when settlements are announced.
The Justice Department was hoping to announce deals between the banks and regulators Wednesday but the announcements are now unlikely for another week, said several people familiar with the talks. Part of the reason for the delay is that banks are still trying to lock down waivers, one of these people said.
Waiver Process
In addition to UBS, Barclays is operating under a non-prosecution agreement from its 2012 Libor settlement. Last year, that agreement was extended to June to allow the Justice Department to determine whether the bank’s conduct in the foreign-exchange market following the Libor settlement was criminal, according to a regulatory filing. RBS’s deferred prosecution agreement from its Libor settlement expired this year.
The waiver process has gained more attention as more banks seek them. The Labor Department has twice asked for additional time to consider Credit Suisse Group AG’s bid to keep managing Americans’ pensions. SEC chief Mary Jo White has said she’s against using waivers as an enforcement tool, but the two Democrats on the five-member commission have said the agency shouldn’t award them too readily.
Granting waivers, but with conditions attached, “might have actually more deterrent value at the end of the day than a large penalty,” Commissioner Kara Stein said last week at a panel discussion at an Institute for New Economic Thinking seminar in Washington. “A large penalty sometimes for a large firm is sort of a speed bump.”
Even so, until now the SEC and Labor Department haven’t struck down big banks’ waiver requests. Said Duke’s Baxter: “My guess is that UBS and the DOJ think they can ride this out.”
Does Anybody Want $3 Billion in Cash From Pot Sales? Big Banks Say No, Thanks
'By'Keri Geiger, Jesse Hamilton and Elizabeth Dexheimer
12:00 PM EEST
May 12, 2015
The U.S. government has opened a new line of business for America’s biggest banks, and for once they don’t want it. Little wonder: it’s cash from legalized marijuana.
The financial-crimes arm of the Treasury Department is making it easier to deposit the fledgling industry’s growing revenue, at last count nearly $3 billion annually and almost all in cash. The government wants to tax the revenue and keep it away from organized crime. And it figures banks with strong compliance departments can best help it track the money.
At the same time, federal bank regulators have remained silent on the issue, raising the specter that banks could run afoul of federal drug laws if they accept the cash. That’s left the banking industry dazed and confused about what to do even as legal marijuana sellers in 23 states and the District of Columbia are faced with mountains of cash piling up in warehouses and basement vaults.
“More than 200 million Americans live in states where there is some form of legal marijuana,” said U.S. Representative Earl Blumenauer, an Oregon Democrat, who is pushing a bill on marijuana taxation. “It’s a disservice to these business people to deny them normal access to banking services.”
Marijuana Cookies
It’s been just over one year since the Financial Crime Enforcement Network, also known as FinCEN, first provided instructions to banks on how they can both accept marijuana business dollars and still comply with the law. Since then, the industry has been surging. It’s getting financing from investment funds and pot icons like Willie Nelson and the estate of Bob Marley are pitching new products. Yet few banks have opened their doors, prompting some 100 business people from the cannabis industry to descend on Washington last month to lobby Congress for greater access to banking.
The pressure couldn’t come soon enough. With billions in cash from lawful sales of weed and marijuana cookies and sweets stranded outside the banking system, cash can’t be monitored by banks for possible illegal activity. Local officials in communities where marijuana is legal are also concerned that large stashes of cash in warehouses, businesses and homes could create public safety issues, possibly leading to violent robberies or worse.
To minimize those risks, FinCEN officials, in meetings with bank executives to discuss a broad array of business activity outside the banking industry, are reminding them about the marijuana directive, according to a person familiar with the matter.
FinCEN Directive
In a nutshell, FinCEN’s directive provides a workaround of federal drug laws, requiring banks to file compliance reports, also known as suspicious activity reports, or SARs, on each customer. In the SARs, banks must categorize those businesses in one of three categories: those in good standing, those that warrant closer monitoring and those on customers whose accounts the banks have cut off.
FinCEN said that it isn’t encouraging banks to use its marijuana directive, but simply seeks to make banks aware that it’s out there should they want it. “We recognized the potential public danger” of unbanked billions in cash, said Steve Hudak, a FinCen spokesman. “We exercised the limits of our authority to do what we could to address the risks. We’re not advocating, nor discouraging banks to take this business.”
Treasury is able to offer this guidance only because the Justice Department has agreed not to go after marijuana sellers in states where it has been legalized as long as those businesses don’t trigger red flags such as selling to children or diverting cash to criminal cartels. So far, less than 200 small banks and credit unions are accepting cannabis cash across the country, according to FinCEN, which has received about 1,700 reports on companies in good standing, categorized as “marijuana limited suspicious-activity.”
‘Prohibitive Industry’
Yet at larger banks, Treasury’s overtures have fallen on deaf ears. Citigroup Inc. and JPMorgan Chase & Co. say they won’t provide services to businesses that engage in activity that is illegal under federal law. KeyCorp chief executive officer Beth Mooney, said that marijuana is still considered “a restrictive or prohibitive industry,” and said the bank hasn’t had any conversations with regulators about the issue.
John Stumpf, CEO of Wells Fargo & Co., said marijuana’s federal illegality stops his bank from even thinking about accepting the business. “That’s out of my sights right now,” he said.
It’s a view shared by some of the biggest regional lenders, including U.S. Bancorp and Huntington Bancshares Inc.
“You’d be hard-pressed to find a large bank that’s willing to take that risk right now,” said Jeff Bahl, a portfolio manager who helps oversee more than $7.9 billion at Bahl & Gaynor Inc., including bank stocks. “The rates of return just aren’t there to justify the reputation risk and the risk that five years from now banks might get in trouble for loans that regulators are now encouraging.”
On The Fence
So, Treasury is setting its sights on banks that operate in states where marijuana is legal, according to the person familiar with the FinCEN bank meetings. Yet these banks are also remaining on the fence, more mindful of their regulators than the concerns of Treasury.
“The FinCEN and DOJ guidance was intended to help banks on how to avoid criminal prosecution if they offered marijuana companies banking services,” said Don Childears, head of the Colorado Bankers Association. But “ultimately, regulators could shut them down if they don’t comply with federal guidelines.”
The Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Reserve haven’t given banks assurances that they won’t run afoul of banking regulations that prohibit such deposits under federal law.
No Guidance
The OCC, which supervises 1,620 banks in the U.S., hasn’t issued guidance on how to handle marijuana accounts because it doesn’t encourage or discourage any particular business, said Bryan Hubbard, an agency spokesman.
“We expect banks to assess the risks posed by individual customers on a case-by-case basis,” Hubbard said, adding that it’s the banks’ job to put in the protections they need to manage those ties. When it comes to marijuana banking, agencies including the OCC and FDIC direct banks to Treasury’s guidance. The problem for banks, though, is that the OCC, the Fed and the FDIC supervise them, not the Treasury.
“For banks, the consequences of getting it wrong are pretty serious,” says William Baude, an assistant professor at the University of Chicago Law School. “And all this is happening because there is an absence of statutory authority and guidance from the regulators.”
Spokesmen for the FDIC and Fed declined to comment on the marijuana regulatory situation.
Legal Risks
The cannabis industry is looking to Congress for answers. U.S. Representative Ed Perlmutter, a Colorado Democrat, introduced legislation last month with 17 co-sponsors that would remove legal risks for banks providing services to the marijuana industry. And in a first this year, senators including Kentucky Republican Rand Paul introduced pot legislation that deals with the risk of federal prosecution for medical-marijuana users in states that have decriminalized the drug. It would also relax financial regulations, allowing banks and credit unions to offer services to the burgeoning industry.
“We need a full, industrywide, sustainable fix for this crisis,” said Taylor West, deputy director of the National Cannabis Industry Association.
Until that happens, the piles of cash will keep growing. When marijuana-related accounts close in Oregon, banks are obliged to deliver cash back to customers in armored trucks because it would be difficult to find another bank to take a check, according to a person familiar with the matter.
It’s vital to let these businesses have access to banking services like simple check writing “rather than carry around shopping bags full of $20 bills,” Oregon Congressman Blumenauer said. “Forcing legal businesses to be conducted on an all-cash basis is, politely, insane,” he said.
For more, read this QuickTake: The Legalization of Marijuana
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