By Francesco Canepa

FRANKFURT. (Reuters). – If the European Central Bank wants to stay clear of controversies, such as that plaguing the Federal Reserve and academics, the European Central Bank must tighten rules governing personal investment by its policymakers.

The proposals included requiring that euro zone rate-setters would only be able to invest through wealth managers. They also published the times of personal trades and preventing them from touching securities which directly benefit from asset-purchase programs.

The Fed on Thursday banned individual stock purchases https://www.reuters.com/world/us/fed-ethics-office-cautioned-policymakers-last-year-about-personal-securities-2021-10-21 by its top officials and unveiled other restrictions after an uproar over trades made in 2020, when the U.S. central bank intervened to stop a collapse in financial markets as the pandemic raged.

The ECB’s own disclosures https://www.ecb.europa.eu/ecb/access_to_documents/document/declarations/shared/pdf/ecb.dr.dec210930_declarations_of_interest.en.pdf for last year show 13 of the 25 members of the Governing Council picked their own funds, stocks and bonds – in some cases including government bonds the ECB is hoovering up under its stimulus programmes or shares in companies whose debt it buys.

Ten rate-setters made no, or very little investments; two of them had an outside manager to look after their assets.

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.

However, 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 of Positive Money Europe and Alessia De Vasto, campaigner with Positive Money Europe, supported the idea.

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

Prior to the end of the year’s review, however, she refused to discuss any 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 (French central bank governor) and Gaston Reinesch (Luxembourg’s Gaston Reinesch) already do it, but many of their counterparts make their own investments.

All of this is allowed by ECB regulations and every investment has been reviewed and approved as per the requirements.

ECB regulations prohibit staff from investing in financial companies, but permit most types of investment with certain checks.

Contrarily, top Fed officials won’t be able to trade. Instead, purchases will only be restricted to mutual funds or investments and transactions are vetted beforehand by the U.S. ethics officer.

Del Vasto stated, “The ECB needs to also make it clear that active investment is not allowed.”

FUNDS, STOCKS, AND BONDS

A Reuters analysis of the ECB disclosures shows that nine of its members owned units of investments funds. This is permissible by 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.

There were four investments in stocks listed, which included bonds from companies that are part the ECB Corporate Sector Purchase Programme (CSPP).

Although this conforms to ECB guidelines, Corporate Europe Observatory’s Haar says 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 is the author of a 2017 Report on ECB independence and accountability.

HOLDING THE PERIOD, SEE CHECKS

Also, the Fed is now requiring policymakers that they hold investments for at least one year – a rule Positive Money’s Del Vasto suggested the ECB adopt.

Currently, the ECB requires that policymakers request authorisation for a trade to be closed less than a month following its opening.

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 two members of the Ethics Committee. They are Erkki and Patrick Honohan. Virginia Canter is formerly an ethics adviser for the U.S. presidents.

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 stated that there is tension when rich people decide policy. But what is the alternative? They believe that only the poor can be policymakers and they should give their entire wealth away to charities. This is not a solution I believe in.