By Francesco Canepa

FRANKFURT, (Reuters) – The European Central Bank needs to tighten its rules governing individual investments made by policymakers if the bank wants to avoid controversies such as those that have effected the Federal Reserve. This is according lawmakers, academics, and transparency activists.

They propose that the euro area’s rate-setters invest only via wealth managers and publish the time of all personal trades.

On Thursday, the Fed prohibited individual stock purchases by top Fed officials. It also revealed other restrictions following a commotion over 2020 trades. This was when the U.S. central banks intervened in order to prevent a financial market collapse as the pandemic continued.

Last year’s ECB disclosures show that 13 members of its Governing Board picked their stocks, bonds, and funds. In some cases this includes bonds issued by the government.

ECB disclosures – https://www.ecb.europa.eu/ecb/access_to_documents/document/declarations/shared/pdf/ecb.dr.dec210930_declarations_of_interest.en.pdf

Ten rate-setters did not make any or minimal investments, while only two managed their wealth with an outside manager.

None of the ECB policymakers have been accused of any wrongdoing. Their decisions – like setting interest rates and buying trillions in bonds – can influence financial markets.

But, some politicians, academics, and activists spoke out to Reuters saying that current regulations do not shield policymakers or central banks of the eurozone from questions about conflict of interest.

Kenneth Haar of Corporate Europe Observatory (a campaign group that focuses on transparency) stated, “There’s a need for a comprehensive overhaul of the ECB’s rules when it involves private financial transactions.”

Sven Giegold, European lawmaker and Alessia de Vasto campaigner for Positive Money Europe supported his proposal to make it mandatory that policymakers use an investment manager they cannot influence.

A spokesperson for the ECB stated that the bank has been reviewing its ethics framework since a while, primarily with the goal of harmonizing rules between the various national authorities.

Before the finalisation of this review later in the year, she declined to speak on specific changes.

The ECB’s Governing Council, which includes the six-member Executive Board and the 19 governors of the euro zone’s national central banks, are bound by a Code of Conduct https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52019XB0308(01)&from=EN.

This 2019 approved document states they must not disclose confidential information and suggests they “place all their investments under the supervision of one or several recognised portfolio managers, who are fully discretionary”.

Francois Villeroy de Galhau, the French central bank governor and Gaston Reinesch from Luxembourg do this already. However, most of their coworkers make their own investment decisions.

These are all permitted by ECB rules. Each investment must be approved by the Ethics Committee.

ECB rules prohibit employees from investing in financial institutions, however they allow for most investments with some restrictions.

Now, however, any active trading of Fed officials is explicitly prohibited. Only mutual funds can be purchased and transactions are vetted beforehand by the U.S. ethics officer.

Del Vasto stated, “The ECB needs to also make it clear that active investments are prohibited.”

FUNDS, STOCKS and BONDS

A Reuters analysis revealed that nine members on the Governing Council had units of investment money. This was allowed under staff rules.

Two-owned government bonds are the principal purchase of the ECB’s huge quantitative easing programs. This is an investment that requires approval from the Ethics Committee.

Four were invested in listed stock, some of which are bonds that form part of the ECB Corporate Sector Purchase Programme.

Although this conforms to ECB guidelines, Corporate Europe Observatory’s Haar believes it should be banned because “there should always be an arm’s distance between ECB officials & corporations that could possibly be covered by the CSPP”.

Five policymakers had stakes held in privately-held companies. These included real estate businesses and some other firms. Policymakers can buy shares under the rules and must report their purchases.

Unlike the Fed’s, the ECB doesn’t publish either the date or the value of the policymakers trades. However, these details are vetted annually by outside firms and the Ethics Committee.

Benjamin Braun, a Senior Researcher at the Max Planck Institute for the Study of Societies, said, “We need greater transparency, at minimum the same level of disclosure, as the Fed,” and was the author of a report in 2017 on ECB independence and accountability.

HOLDING A PERIOD. CHECKS

Additionally, policymakers will now be required by the Fed to keep any investments in place for at most one year – a requirement Positive Money’s Del Vasto stated that the ECB should adopt.

Currently the ECB demands that policymakers obtain authorisation from them to close a trade within a period of one month.

The ECB documents don’t point out any major changes to policymakers holdings compared with their disclosures for 2019, which means they tend to hold their investments longer than a year.

The Governing council appoints the Ethics Committee. It currently has two ex-members – Patrick Honohan, Erkki Liikanen – and Virginia Canter. Virginia Canter was previously an ethics advisor to the U.S presidents and International Monetary Fund.

Manon Aubry, a leftist member of the European Parliament, isn’t happy about this. She supports the creation a body independent to examine ethics related to EU leaders.

Giegold of the Greens stated that the proposed changes were steps in the correct direction, but did not address the core conflict. This is because policymakers are often affected by the wealth they create.

Giegold explained that rich people can create tension. But what is the alternative? They believe that only the poor can be policymakers and they should give their entire wealth away to charities. That would not be an acceptable solution, I think.”