Financial Services in GATS:
EC Requests and Offer Endanger Financial Stability
Myriam Vander Stichele
SOMO, March 2003
An analysis of the leaked requests and draft offer the EU is making to developing countries on financial services raises many alarming issues. Below follows a short analysis with questions civil society and parliamentarians can ask to the national and European negotiators. NGOs can give these questions to their European parliamentarians who can then put these questions or analysis to Mr Lamy in the plenary discussion of 10th March.
In total, the EU is requesting 84 countries to open their market for financial services according to the leaked request texts. The EU requests have asked 20 of the 29 least developed countries (69% of the LLDCs that received requests), and 30 of the 41 "low income countries" ( or 73%) to open up their financial sector.
Alarming requests to eliminate prudential regulations that stabilize the financial system
A very explosive issue is the EC's request to Chile to remove measures that have been praised in the aftermath of the Asian financial crisis, which also hit Latin America, in the late 1990s as key examples how countries can take measures against international financial volatility and instability. The EC requires to eliminate "the restriction" that paid-in capital can only be remitted abroad after maximum 2 years after being invested in Chile: this is the internationally praised "Chili tax" that is being targetted by the EC!? In addition, the EC wants Chile to remove the possibility for the Central Bank to require for one- year statutory deposit on a percentage of foreign currency remittances. Moreover, the EC wants to eliminate the "restriction" that prior authorisation by the Central Bank is required before transferring dividends from Chile abroad.
Since the discussions to reform the "international financial architecture" have not resulted in much needed rules at international level, national measures such as those from Chile are necessary. However, the EC requests to Chile show that all prudential regulations, even related to a Central Bank or to all investments, can be targeted by the GATS negotiations! Such requests are unacceptable and should not be put into practice during the bilateral negotiations between the EC and other countries the following years.
Questions:
Have these requests to Chile been discussed with representatives of Central Banks and other officials dealing with the reform of the financial system?
Why is the EC asking to eliminate measures that are considered very good prudential measures to protect a country against the instability of the international financial system?
Why does the EC not respect the Art. 2 (a) of GATS annex on financial services that countries "shall not be prevented from taking measures for prudential reasons, [...,] or to ensure the integrity and stability of the financial system"?
Could a potential tax on foreign exchange activities (a la Tobin Tax) be challenged for not being a prudential measure that ensures "the integrity and and stability of the financial system"?
In case Chile is not willing to remove its measures on remittance of capital by foreign companies and banks, will the EU challenge these measures as against Article IX of GATS that stipulates that countries should not apply restrictions on international transfers and payments of transactions, and on repatriation of profits?
Increasing instability
The EC is requesting Malaysia to eliminate many measures that were taken at the time of the Asian financial crisis to tackle the causes of the financial crisis. For instance, the EC wants Malaysia to remove limits to credit by foreign (controlled) banks, capital controls that now prohibit foreign banks to issue traveler cheques in local currency or to have access to local currency capital market.
Question:
What right to regulate does the EC accept if it wants countries to eliminate many prudential measures that were taken after a serious financial crisis?
Pension fund management has shown to be a cause of financial and stock market instability and is now in deep crisis after the slow collapse of share prices in which they made risky investments. The EC is requesting access for pension fund management to many developing countries while its efficiency and results are now being Questioned.
Question:
Is the EC willing not to push for opening of pension fund management services in developing countries?
There is evidence that foreign banks can help destabilise a national financial system for instance by taking risks to make enough profit to survive international competition or to offset losses at home. The causes of the Asian crisis were amongst others caused by speculation by Japanese banks in Thai real estate, and risky short term lending by European banks. The financial crisis in Argentina has shown that foreign banks have not been able to play an important role in avoiding the financial crisis, quite on the contrary.
The EC should not take the simplistic reasoning that allowing foreign banks to operate in developing country allows a national financial system to be more efficient and well managed. The EC should restrain itself from asking liberalisation in financial services in many developing countries and make very good analysis per country of the supervision and prudential measures in place that can limit financial instability.
Questions:
Why does the EC now push for further liberalisation while the reforms of the financial architecture are not yet finalised?
Why does the EC request Argentina to further liberalise its financial services market while the country is in the mids of a financial crisis?
The EC is requesting from many developing countries accept the home country regulations and supervision to safeguard against risky lending, if the home country applies the Basle principles: this means that higher demands than the Basle principles by the host country should not apply! The EC also requests many developing countries to allow parent's capital to meet prudential requirements. However, if that applies for a bank operating in many developing countries than there is little guarantee that the parent's capital will be sufficient and forthcoming in times of (worldwide) crisis. In general, the problem is that foreign banks are being supervised by the authorities or Central Bank from the home country who might have less insight in how foreign banks can cause instability in a developing country.
Question:
Has the EC proofs that its request to "allowing branches to use the parent's capital to meet prudential requirements" and that supervision of foreign banks by authorities from the home countries does not undermine prudential measures and supervision to avoid risky lending?
EC offers: further erosion of national control over financial services and no garantees for consumers
The leaked draft offer by the EC on financial services shows that the EU is willing to open up different kind of financial services to foreign companies and eliminate requests that these services should be given by national service providers or by financial service providers that have received authorisation or registered in the country, in the EU or European Economic Area. This means that risks taken by foreign companies can be more easily imported while these companies can move out. Belgium is prepared to eliminate its requirement that acquiring Belgian securities (through a public bid) should be submitted to the authorisation of the Minister of Finance.
According to the UK consultation paper, many more prudential regulations were subject to requests from other countries to be eliminated. Requests included to relax the criteria to calculate the minimum reserve amount required by the European Central Banks or to impose no quotas on pension fund management services.
Questions:
The EC is in general offering very little compared to its requests to other countries: what requests by other countries to eliminate prudential measures in the EC (e.g. the removal of specific guarantees and deposit requirements) will the EC be willing to negotiate in order to obtain more market opening in other countries?
Has the EC assessed its offers for the risk of increased financial instability?
Has the EC made an assessment in what way the GATS negotiations on domestic (pro-competitive) regulation will affect prudential measures in the financial sector and increase instability?
More competition in financial services has lead to less service to poorer clients (e.g. closing branches in rural and poor areas): what guarantees do consumers have that services will not be further eroded? Does the prudential carve out (art. 2(a) of the Annex on financial services) allow to maintain measures that protect poor consumers?
The financial services sector is increasingly concentrated: how will the EC prevent that its offers lead to further concentration to a few banks which are too big to fail?
EC targets measures that support the poor in developing countries
There is much evidence that transnational banks are not interested to provide services to poor clients in developing countries. They tend to cherry pick the rich clients in developing countries and to service their rich clients, especially multinationals operating abroad. This leaves local banks to do the less-profit-making retail banking and loans to small and riskier businesses or poorer clients. As a result, local banks have less capital to invest in technology to service poorer clients and give less small credit in order to be able compete with the big foreign banks, as evidence also shows in Central and Eastern Europe. Also, foreign health insurance companies tend to target the rich: in Kenya they do not service the rural areas and exclude poorer and risky (with HIV) patients from health care.
The EC requests targets measures that can counteract against the above described trend. It asks Malaysia to remove "unfair" advantage ("discrimination") provided on capital markets to local deposit taking companies over finance companies with foreign partners. In particular, the EC considers the requirement applied to all banks to provide quota for low-cost housing as a limitation that should be scheduled. This means that measures to provide poorer household with financial means for housing are not considered as a "right to regulate" but as a trade barrier that has to be exempted, and ultimately eliminated, from the GATS agreement.
The EC should not target any measure that can promote financing for the poor.
Questions:
Why does the EC consider measures, also applicable to foreign banks, to promote low-cost housing for the poorer households as a limitation of the GATS rules as in the case of Malaysia?
Why does the EC request from Malaysia to remove the advantage given to companies taken local deposits which could support local saving including by poorer clients?
Measures to promote transfer of technology targeted by EC
A request that the EC is making to many developing countries is to eliminate measures that limit foreign ownership of banks and insurances companies e.g. by obliging 50% local ownership of shares. However, joint ventures are an important way to transfer financial know how and technology into the country. Fully foreign owned banks tend to operate as isolated entities with little technology transfer taking place. On the contrary, in order to compete against transnational banks in their country, local bank might undermine their profit making and have less capital to invest in technology improvements.
Questions:
Why is the EC asking so many countries to eliminate measures that require joint ventures while this might be a good way to transfer technology and know how to improve banking?
How will technology and know how of multinational banks be transferred to developing countries if transnational banks can set up branches without partnerships with local banks?
EC requests only reflect the wish list of the European big banks and insurance companies
In some parts of the requests, the EC clearly mentions that the "EU industry raises this issue". At the moment, many banks and insurance companies are have problems to deal with the lowering of the share prices that leads to non-payment of loans and huge decrease in value of insurance companies' assets. The EC should not spread this instability to other countries by asking to open up their market for these European financial institutions.
Question:
Why does the EC take an industry-driven approach and agenda?
Sources:
P. Arnold, School of Business Administration, University of Wisconsin- Milwaukee, paper written in September 2002.
A. Hersh and C. Weller, Banking on multinationals - Increased competition from large foeign lenders threatns domestic banks, raises financial instability, EPI issue Brief #178, April 2002.
M. Vander Stichele, Informal discussion paper for NGO-EC meeting on services on 7th December 2000 (different issues and Questions mentioned above were already raised in 2000 but the EC never provided an answer or argued that the leaked draft texts in 2000 would not contain the elimination of the Chile tax).
UK government, Liberalising trade in services- a new consultation on the WTO GATS negotiations, p 39-41.
World Development Movement, A preliminary analysis of the EU's leaked GATS requests to 109 WTO member states (WDM website) 25 February 2002.
Copyright 2003 SOMO
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