Final-Magazine-Finance

Stressing the markets MOVING TOWARDS CENTRALISED REGULATED MARKETS MIXING ETHICS AND BANKING TO WHOM WILL BANKERS SELL IN THE FUTURE?AlpbachNews MagazineFinancial Market Symposium28. - 29.08.2014www.alpbach.org@forumalpbach #efa14www.facebook.com/forumalpbach

This magazine is presented to youby the Alpbach Media Academy.Sixteen young journalists from 14 countriesproduce the Academy's daily newsletters,Alpbuzz website and magazines.luiza puiucoverphoto apa picture desk, boris roesslerPUBLISHER: Europäisches Forum Alpbach, Alpbach Media Academy, A-6236 Alpbach in Tirol, Tel. 05336/600-702,mediaacademy@alpbach.org EDITORS-IN-CHIEF: Michael Fleischhacker, Anke Plättner EDITORS: Silvia Amaro, Conor Campbell,Luigi Caputo, Maria Danmark Nielsen, Oleksandr Guzenko, Εlvira Krithari, Slobodan Maricic, Natalie Marsh, Gesbeen Mohammad,Stella Nikolova, Katrin Nussmayr, Manuela Ringbauer, Jan Schacht, Aida Skirmantaite, Maialen Torres, Elena VershininaMANAGING EDITOR: Georg Renner SUB-EDITORS: Mark Meredith, Aida Skirmantaite LAYOUT: Willem van der VlugtVIDEO: Lukas Wagner PHOTO: Philipp Naderer, Luiza Puiu PRODUCTION: Christian Steinbrecher MOTHER HEN: Marianne PetersSupporting PartnersMain Partner

EditorialGesbeen MohammadUKSilvia AmaroPortugalThe European Central Bank is assuming new regulatorytasks in an attempt to make the European banking systemsafer and, at the same time, to enlarge financial integration.The harmony between banks, clients and regulators is hardto achieve. On the one hand, clients demand moresafeguards and transparency in the banking system.On the other hand, banks claim that confidentiality is keyto the business. Accommodating these differences is thechallenge facing the European Union.Despite the EU’s aims to reform the banking sector, theLibor rate-fixing and the Hypo Alpe Adria moneylaundering scandals show that white-collar crime carries on.We talk to a former investment banker who exposes the cutthroatand profit-hungry world of finance and trading. Thepublic is still out of the loop about the financial crisis. Buteven in the complexity of finance there’s the most simpleequation: there needs to be losers for there to be winners.At the same time, fuzzy terms have been added to the jargonof a common European such as stress-tests, dark poolsand Basel III. Consequently, forming an informed opinionbecomes harder. This magazine intends to shed light onsome of these terms and issues: we discuss the Europeanmove towards a more centralised financial market and wefind out who the future client is.We hope this magazine will lead to a better-informeddebate.Gesbeen MohammadSilvia Amaro

ALPBACHNEWS MAGAZINEapa picture desk, daniel reinhardta centralised financial marketMaking banks behaveThe damage caused by the2008 financial crisis to thelives of European citizenswill be felt for a long time:There are about 25 millionpeople unemployed acrossthe Union, countries such asGreece and Italy registergovernment debts to GDPabove 130 percent and forthe first time, it is predictedthat the young Europeanswill not be richer than theirparents. The situation hasresulted in a great deal ofpressure on banks and sevenyears after the start of thecrisis, Europe is making thefirst steps towards more regulationof financial markets.Written by Sílvia Amaro EU movestowwards acentralisedregulation onfinancial marketsSince the 1980s, the marketshave been largely deregulated,without any rules,and this has frequentlycaused severe problems,most notably, when it contributedto the 2008 financial crisis.Markus Marterbauer, Head of theDepartment of Economics and Statisticsat the Austrian Federal Chamberof Labour, participating at the discussionon Hayek and Keynes at the EuropeanForum Alpbach, said: “TheKeynesian view has succeeded oncemore.” Keynes said that a decentralisedfinancial market is characterisedby herding, which creates huge volatilityand inefficiency. To avoid this, DrMarterbauer believes that the Europeanfinancial market should becomeregulated centrally, but the marketitself could be decentralised.Andreas Ittner, the Vice-Governorof Österreichische Nationalbank, whoparticipated in the main discussion ofherding givesroom tospeculation,which driveseconomy downthe Financial Markets Symposium atthe European Forum Alpbach,expressed a similar view. He says thata centralised system means that onlya few centralised banks would beallowed to offer financial instruments.Thus, he believes that it is an advantageto have “a more colourful systembut this needs centralised supervision”.The European financial market ismoving towards a centralised regula-4

FINANCIAL MARKET SYMPOSIUMtory system. Practically speaking, thismeans that most of what banks dowill be overseen by the EuropeanCentral Bank (ECB) and by nationalregulatory institutions. This willimpose a common framework acrossthe European market. The “BankingUnion” will compromise of two mechanisms,which will provide the ECBwith information to show where problemsof the banks are, and, consequently,to avoid the herding behaviourthat can lead to a financial crisis.luiza puiuwe have toregulatefinancialmarkets fordemocracyHerding gives room to speculation,which can drive the economy down,creating unemployment and crises, asdemonstrated in 2008. In other words,information in a decentralised marketis not worked out efficiently in a macro-economicsense and this is wherethe problem still lies.no agreementImplementing banking regulationnaturally generates conflict andagreement is hard to achieve. Forexample, the European CommissionMarkusMarterbauerwas a keynotespeaker at theKeynes vs Hayekdiscussion.Read more aboutKaynes vs Hayekin our EconomicMagazine AndreasIttner supportsdecentralisedmarket withsome centralisedregulationmade a proposal for a financial transactiontax which would affect transactionsbetween financial institutionsstarting in January 2014, but the“banking industry was able, withinweeks, to destroy the whole concept”,Dr Marterbauer claims.He adds that a centralised regulatedmarket is better “for the macro-economicsand for the average person,but maybe not for the speculators orfor the wealthy. Banks and thewealthy people are in favour of amore decentralised system, but thewhole economy will profit from amore regulated financial market system.”Andreas Ittner, says that financialregulation involves a rather complexsystem and regulation should bebased on principle.In any case, a centralised system isnot problem-free. Regulators can alsofail and this can have costly repercussions.But as Dr Marterbauer claims: “Ithink if democracy wants to survive,we have to regulate the financial markets,not that I am saying there will beno failures, but it’s a more democraticallyorganised thing.”Within three months, the ECB willstart performing stress-tests on 128European banks. The banks, not regulatedby the ECB, will be supervisedby their respective national supervisoryauthorities. In total, the ECB willdirectly oversee nearly 85 percent oftotal banking assets in the Euro Area.luiza puiuslow processHowever, Dr. Marterbauer says:“Steps are done very slowly, and notstrong enough and not accurateenough. So I am not very optimisticthat the next financial crisis will nottake place within the next 10 years.”Introducing a centralised regulatoryfinancial market is not enough. DrMarterbauer adds that financial marketsshould also become smaller.Through taxation, specifically a financialtransaction tax and activity tax,the financial markets would becomesmaller and encourage investmentsin the real economy. 5

ALPBACHNEWS MAGAZINEChroniclinginstitutionalised amoralityImagine betting the stockmarkets will crash. Itdoes and you are rewardedwith enough money formany lifetimes. Yes,investment bankers makemoney, just at the press ofthe button, while some ofthe population languish ina recession. When thecurve of the graph isheading up and suddenlythe bear dragsthe markets down –the investors whopredict the crashtake home big bucks.But it’s never enough.Written byGesbeen Mohammadluiza puiuformer banker:‘the bankingsystem is so sick’Rainer Voss explainswhy staggering profitseliminate morals. Heis a former investmentbanker, who spoke inthe “Europe WithoutBanks? The Future of the Banking Sector”panel discussion and Master of theUniverse documentary (produced byMarc Bauder) screening held at theEuropean Forum Alpbach 2014.“We’re talking about markets asgod-like creatures that come upon uslike a medieval plague. It’s institutionalisedirresponsibility,” he says, referringto society’s notion of financialmarkets and industry. He believesindividuals should be held accountable.Voss and other economic expertsexplain that institutionalised amoralitybegan in the 1980s in the US and UK(thanks to Reagan and Thatcher) and1990s in Germany when deregulationproduced a mass of white-collar stockmarket traders and investment bankers.Just like in Wolf of Wall Street, theprofiteers were free and untouchable.“Send wrongdoers to jail and peoplewill become really cautious,” hesays. But what made him quit thegame after nearly 20 years as a Debt Rainer Voss:"Send wrongdoersto jail"Capital Markets Specialist in variousleading European investment banksand feature in the Master of the Universedocumentary?As a moral ‘bourgeois’, Voss says,“the standards of the industry movedaway from my standards in the 1990s.”When he started as an apprentice in abank, he saw welfare characteristics.“You would carry the shopping bagsfor the old ladies.”More importantly, he believes businessshould be based on a give andtake model. Back in the day, heexplains, the bank would get 51 percentof the profit for each investmentand you askyourself:'why am idoing this?'and the client would receive theremaining. Nowadays, the pie sharingis 90 to 10. He says, “You sit in a meetingand you say things like I think inthe interest of the client we should…”He finally quit in 2008, when thefinancial markets crashed. “Realisation[of the behaviour] is a process thattakes years, there’s a certain pointwhen you’re shaving in front of themirror and ask yourself ‘why am Idoing this?’”serious moneyYet protecting and ensuring growth inthe financial sector remains one of thepriorities in both – the UK and Germany– the EU’s two financial capitals.More and more young people completea degree in economics, financeor business in hope of some seriousmoney. In the EU, about 33 percent ofstudents do social sciences, businessor law. Are we creating more investmentbankers in an inflated marketand will they inflate it more?“You go in having morality but it’sdifferent to the systems – and youbecome a different person. The questionis: do you have to be the master ofthe universe in order to sustain andthrive in finance or does this businessmake you the master of the universe?”Generally, bankers and tradershave been compared to psychopaths –a notion supported by Kevin Dutton, a6

FINANCIAL MARKET SYMPOSIUMit's not aboutgreed formoney, it'spersonalprofessor at Oxford University, whofound that the profession with themost psychopathic tendencies was thefinancial services. Voss, however, humblysays: “My observation is that theprofession attracts weak personalities.I do not exclude myself. They all speakvarious languages and have a Harvarddegree. They know how but not why.”Voss emphasises that it’s not aboutgreed for money, but it’s more personalthan that. “Money serves as a purposeto calculate your personal value as anindividual – so let’s say someone earns£3m year. If you give the same person£1.5m, he’ll still be happy, as long asthe person next to him gets £1.2m.”Adam Smith, a philosopher andpolitical economist, created a fictionalcharacter, the homo economicus. It’s adeconstructed human being, whoseonly purpose is maximising his benefits.He has no other virtues. He is asexual,apolitical and amoral.“It’s a monster and 15 years ago itcame to life. There are people whohave adopted the image of this homoeconomicus to aspire to. In this mindset,you take the attributes and all of a suddenyou become it,” Voss explains whyit’s more complicated than just hungerfor money.more debtIn the run up to the financial crisis,one way of making money was to createmore debt, creating more money.In the UK, in just seven years, theydoubled the amount of money in theeconomy by producing more debt. Open cry:market tradersin actionapa picture desk, justin laneAround 32 percent of the money wentto the financial sector, according tothe Bank of England. Yet, the samefinancial markets eventually crashed.Politicians have allowed bankers toinflate the markets, says Voss. “Peoplehave to understand money isn’t whatthe government tells us. It’s what peoplebelieve money is. It’s a problembecause as soon as you have mistrustin the monetary system, people start totake their deposits back and the wholesystem collapses.” So as long as wetrust the monetary system, we cankeep up the bubble? client needs come firstThe touchy-feely bank of tomorrowMulticultural, digitalised and 50-plus: meet tomorrow’s European bankclient. The European baby-boomer generation and the low child birthrates have left us with an older population. As a consequence, the majorityof the clients will be older and carry four generations on their shoulders:theirs, their parents, their children and their grandchildren.Eighty-five percent of thefuture clients arealready customers buttheir interests, of course,can change. Banks currentlytarget studentsand young people by offering certainservices, such as free bank accounts. AsRainer Münz, member of the AdvisoryCommittee for the Financial MarketSymposium at the Forum, says, “Banksdon’t make much money out of thembut they invest in them because theywill be part of the future client base.”Digital banking will represent agreat slice of the banking cake. As DrMünz claims: “the young generationwants apps for everything.” Severalare actually under development. Forexample: an attempt to combine digitalreceipts into one’s payment recordsis underway.advice neededNonetheless, online banking does notreplace communication between thebanks and the clients. Alois Zach,Managing Director of RaiffeisenRegionalbank, claims advice fromexperts will always be needed, forexample, for new business and forpension funds.Written by Silvia AmaroImmigration movements also contributeto a change on requirementsof the future client. Dr Münz drawsattention to the special needs of thispopulation. “They may not be totallyfluent in the language of the hostcountry, therefore banks need toaddress this by being able to speak thelanguage of those people.”The future client will look for severalopportunities for investment. He,or she, will want to invest safely and,therefore, will invest small amountsin various types of opportunities. ButDr Münz believes that real estate iswhere most investment will be concentrated.No matter who the clients are,banks will always need to communicatewith them effectively and to beable to provide a solution to theirproblems. As Dr Zach says, first comecustomer wishes and then, banks cansell solutions, not products. 7

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