12/12/2013 06:59 pm ET Updated Feb 11, 2014

Is Europe Changing the Financial Sector?

The European Commission (EC) has imposed a record fine of 1.7 billion euros on some of the world's most important financial institutions. Citigroup (USA), JPMorgan Chase (USA), Royal Bank of Scotland (UK), Société Générale (FR) and Deutsche Bank (Al) are the banks being fined. EC Vice President Joaquín Almunia has declared that investigations have shown collusive agreements between some traders of the mentioned banks for manipulating the London Interbank Offered Rate (LIBOR). Let us remember that the LIBOR is a credit benchmark for credits granted to firms and households.

The manipulation existed because these institutions were operating in non-regulated markets -- "Over-The-Counter" (OTC) -- with financial derivatives over interest rates. Although derivatives have existed since time immemorial -- mainly related with agricultural products -- its hegemony in financial markets appeared in the '80s thanks to the conservative "liberalization" promoted by governments such as Thatcher's and Reagan's.

This radically transformed the banking industry. Formerly, the profits came from the difference between interest rates that banks paid for deposits and interest rates that they charged for grants. Now, profits come increasingly from their operations in the financial markets for their own account. It is not a coincidence that the banks listed above manipulated the LIBOR for preventing exposure of their positions in derivatives of interest rates in OTC markets. It is the consequence of the so-called "liberalization of capital markets." However, sometimes language can be ambiguous, and it would be better defined as a "decriminalization" of some practices formerly regulated.

All the implicated institutions have declared that the fine -- negotiated with the EC -- is due to individual behaviors that have broken their values and, in all cases, traders have been suspended. It is the theory of the "mad trader" that allows entities to discharge responsibilities from a practice that actually is a company policy. The profit targets and the transformation of banking activities are not the fault of an individual trader. Furthermore, if one or a few traders can cause such damages, then the private banking sector has a huge problem.

All this has to do with financialization -- an economic regime where profits come mainly and/or increasingly through financial sector channels -- since it undermines the classic attributes of democracy. Firstly, it weakens the legislative capacity since decriminalization has been possible because of the strong financial lobby activity in national parliaments and supranational institutions such as the European Union (EU). For example, a paper published by the Interntional Monetary Fund, asserts that those institutions that spent more on lobby, were those more exposed to subprime mortgages. In the EU, many of the expert committees advising the EC are composed by lobbyists of the involved sectors. Four of the eight persons who compose the group created by the EC for financial reform, called the "High Level Group on Financial Supervision", have strong links with the banks involved in financial crisis (Goldman Sachs, Citigroup, Lehman Brothers and BNP Paribas). A fifth person is a known defendant of financial deregulation, as an Alter-Eu report showed.

Another classic democratic attribute eroded by financialization is the capacity of implementing laws, "surveiller et punir" in Foucault's terminology. The capacity of the democratic states to look after criminal activities and punish them have been weakened by the activities of the banking industry for two reasons: first, because the capacity to risk assessment has been privatized and transferred to rating agencies; and second, because apart from exceptional cases, there hasn't been any legal consequences for the managers that precipitated financial crisis, as we show in a paper co-authored with Andrés Mendioroz about democracy and financialization. The managers of those institutions have not even suffered labor consequences!

It is not a process of five years (the time the EC has investigated for imposing the fines), it is the own structural functioning of the private banking sector that shows dangerous malfunctioning. It is imperative to have a democratic audit of the banks' balance sheets, a complete cleaning of the private banking sector by closing those banks in a collapsing situation, as well as the creation of a public banking system with democratic criteria to fill the gap left by collapsed banks.

Popular movements usually take the initiative, and this time is not the exception. In Spain, the Citizen Justice Tribunal, a working group emerged from the Indignados Movement, has already taken legal actions against banks because of the illegal overvaluation of thousands of mortgages granted in Spain. This could open the door to the identification of the managers responsible for this business strategy. It would also allow the liberation of thousands of Spanish families from the menace of house eviction and the ability to question the legitimacy of the public debt generated as a consequence of this illegal practice. This is deepening democracy.