German ban shows danger of unilateral action

FOR many months I, along with everyone else in the financial services industry, have been warning the UK government that we should not lead on regulatory reform without a clear idea of what is to be achieved and what is being planned elsewhere.

The dangers of unilateral action were clearly demonstrated when Germany decided to ban the “naked” short selling of certain financial products and then extended the ban to cover all German securities.

No doubt the decision was meant to appease parties in the coalition who have been hostile to the idea of European financial bailouts, but the result was more market turmoil.

Germany’s actions sent out a message that Europe was fragmenting on policy and that the German government was still in denial, blaming the market for creating the crises rather than accepting that markets simply react to events such as the Greek budgetary problems and the potentially serious impact a Sovereign default could have on European banks.

Meanwhile, European regulators have been left playing catch up.

And whilst Germany may want fellow EU member states to follow suit, the outlook is far from clear cut.

The only thing that is clear is that Germany’s European partners are angry that one of their most powerful members has chosen to act in such a way – countries such as Britain, France, Sweden and Finland have all already signalled they will not introducing such reforms.

Even those countries such as Belgium who have expressed an interest in following the German lead are sensibly waiting to see what might be proposed at a pan-European level.

Nor will the European Commission be pressured into hasty action. “I won’t be improvising, that is my message today,” said Michel Barnier when asked whether he would shift forward the timing of his derivatives proposals.

However, Germany, unlike the UK, does not have a large share of the derivatives market and thus does not have much of a competitive position to defend. If we were to introduce similar measures without building a global consensus, our position as a world leader in this sector would not only be jeopardised, it would be decimated.

Perhaps that is why the German government felt able to act in such a way.

Sovereign market default swaps – the kind of trading the German rules restrict – have been made a scapegoat in the Greek sovereign debt crisis even though studies by regulators, including the German regulator Bafin, showed they were not at fault.

With the German government committing $28.4bn (£18bn) of taxpayers’ money to the bailout fund, it needs to be seen to be taking quick, decisive action to justify such massive commitment at a time of financial austerity.

I can understand the reasoning and I hope that now the package has been agreed we can move on to tackling the root cause of this Euro crisis.

Stuart Fraser is chairman of the City of London Corporation's policy and resources committee