The European Central Bank’s staff union is taking the bank to court, accusing ECB management of trying to silence and intimidate its representatives in violation of the principles of European democracy. The case, lodged with the European Court of Justice on Oct. 13, marks the latest escalation in a battle between union representatives and management, where relations have deteriorated since Christine Lagarde took over as ECB president in 2019. The action contests a series of letters the bank addressed to the International and European Public Services Organization (IPSO) union and one of its senior representatives “restricting staff and union representatives from speaking publicly about workplace concerns, such as favoritism and the ‘culture of fear’ at the ECB,” the union said in a statement. These letters constitute “an unlawful interference” with basic freedoms guaranteed by the EU Charter of Fundamental Rights and the European Convention on Human Rights, the union said. “Freedom of expression and association are not privileges; they are the foundation of the European project.” An ECB spokesperson said the bank does not comment on court cases, but that it “is firmly committed to the freedom of expression and the rule of law, operating within a clear employment framework that is closely aligned with EU Staff Regulations and is subject to European Court of Justice scrutiny.” The first letter, signed by the ECB’s Chief Services Officer Myriam Moufakkir, came in response to an interview given by union spokesperson Carlos Bowles to Germany’s Boersen-Zeitung daily paper, published May 7. In it, Bowles had warned that a culture of fear may contribute to self-censorship, groupthink and poor policy decisions. The interview came at a time when the ECB’s failure to anticipate the worst bout of inflation in half a century had provoked widespread and public soul-searching by policymakers. It also followed a union survey in which around two-thirds of respondents said being in the good graces of powerful figures was the key to career advancement at the ECB, rather than job performance.   IPSO IS A FOUR-LETTER WORD According to the IPSO union, Moufakkir responded with a letter stressing that staff and union representatives must not make public claims of a “culture of fear” within the institution or its possible effects on ECB operations — including its forecasting work, which had come under especially intense scrutiny. It also accused Bowles of breaching his duty of loyalty under the ECB’s internal code of conduct, and instructed him to refrain from public statements that could “damage the ECB’s reputation.” A later letter by Moufakkir, addressed to IPSO dated Aug. 1 and seen by POLITICO, spells out the thinking. In it she stresses that the right of “staff representatives … to address the media without prior approval … applies exclusively to ‘matters falling within their mandate’. It does not apply to the ECB’s conduct of monetary policy, including its response to inflation.” In his interview, Bowles made no reference to current or future policy but rather to a work environment that he said fostered groupthink. Lagarde herself had warned against such risks, denouncing economists the previous year in Davos as a “tribal clique” and arguing that a diversity of views leads to better outcomes. Bowles had made similar statements to the media before, such as in an interview with the Handelsblatt daily paper published in January 2016, without eliciting any reaction from the bank’s management. Contacted by POLITICO for this story, the ECB said it had “stringent measures to ensure analytical work meets the highest standards of academic rigor and objectivity, which are essential to the ECB’s mandate of price stability and banking supervision.” Moufakkir suggested that Bowles’ comments undermine trust in the ECB and that this trust is crucial if the ECB is to deliver on its mandate. “Freedom of expression, which constitutes a fundamental right, does not override the duty of loyalty to which all ECB staff are bound,” she argued. Bowles rejected that framing, arguing in a letter to Moufakkir that he had a “professional obligation” to address such issues and their impact on the ECB’s capacity to fulfil its mission. PAPER TRAIL The trouble, according to the union, is that Moufakkir addressed the first two letters to an individual union representative (Bowles) who was speaking on its behalf, effectively undermining the union’s collective voice.  In her email, the union said, Moufakkir also “heavily misrepresented” Bowles’s comments and accused him of misconduct without affording him a hearing. In her letter from Aug. 1, Moufakkir maintained that her original letter to Bowles “was not a formal decision” to be recorded in his personal file, but rather a “reminder and clarification of applicable rules.”  “Its purpose was not to intimidate or silence Mr Bowles but to highlight to him the importance of prudence and external communications about ECB matters,” she wrote. The union said it sees this framing as an effort by the ECB to shield itself from judicial review: the letter addressed to Bowles was marked ECB-CONFIDENTIAL and Personal, conveying the impression of an official document. According to a person familiar with the matter, a special appeal launched by Bowles to the executive board to retract Moufakkir’s instruction has since been dismissed — without addressing its substance — because the letters had no binding legal effect and were therefore inadmissible. That has now prompted the union to turn to the ECJ; a response to a second appeal by Bowles remains outstanding. The union said that what it perceived as attempts by the ECB to silence union representatives have succeeded: Previously scheduled media interviews have been “cancelled due to fear of retaliation.” When contacted for comment, Bowles declined, citing the same reason. WHAT COMES NEXT? The ECB will have two months to submit its defense to the court. As an EU institution, the ECB is neither subject to German labor laws nor to similar rules in other EU member states and instead enjoys extensive scope to set and interpret its own rules. Out of 91 employment-related court cases since the bank’s inception, the ECB has won 71. Regardless of the legal implications, the union warned that the ECB’s approach undermines its institutional integrity and damages its credibility.  “Silencing staff representatives or whistleblowers prevents legitimate issues from being addressed and erodes trust in the institution,” it said. “Reputation cannot be protected by censorship — it must be earned through sound governance, transparency and open dialogue.” It sees the letter as part of a broader pattern in which the ECB has sought to restrict trade union activity and control staff representation, including planned changes to a representation framework that would limit the participation of union members in the ECB staff committee. IPSO is the sole trade union recognized by the ECB and holds seven out of the nine seats on the ECB’s staff committee, which is elected by all ECB staff. The ECB, for its part, has rejected much of the criticism emerging from survey organized by the union and the staff committee, which showed widespread distrust of leadership, surging burnout levels, and complaints about favoritism. The ECB has called the surveys methodologically flawed and unreliable.

Germany’s two banking supervisory agencies have drafted a plan to ease the burden of regulation on Europe’s smaller banks and are now seeing if it will fly. An informal discussion paper drafted by the Deutsche Bundesbank and Bafin — which share responsibility for supervising German banks — proposes freeing banks across the EU of the need to report capital ratios based on complex calculations of the riskiness of their assets, as well as liberating them from various other obligations. The proposals are the first concrete result of a drive to simplify regulation that began earlier this year and are the clearest sign yet that the EU is — belatedly — ready to undo some of the stifling financial regulation it introduced over a decade ago. Regulation is currently based on the global Basel III accords that were agreed by regulators in 2010, two years after reckless lending by U.S. and European banks caused the biggest financial crisis in nearly 80 years and a wrenching recession across most of the world. Basel III drastically increased the amount of capital and liquidity that banks have to hold to protect themselves against a possible repeat. But the accords were aimed primarily at big international institutions whose operations were capable of destabilizing the global financial system; as the impact of the 2008-2009 disaster has faded, regulators have grudgingly come to accept that their response went too far. The U.S., Switzerland and the U.K. have already implemented less intrusive regimes for smaller banks with simpler business models. “With the proposal for an EU small banks regime, we have provided important impetus to the discussions on simplifying the regulatory framework,” Michael Theurer, the Bundesbank’s head of banking supervision, said in emailed comments, stressing that the proposal “does not represent a departure from the Basel framework.” The framework would be open to banks with less than €10 billion in assets and with a mainly domestic focus (at least 75 per cent of their business should be in the European Economic Area). Banks using it would not be allowed to hold any cryptocurrency assets such as Bitcoin, and would be allowed to hold only minimal amounts of derivatives or assets for trading purposes. They would also have to prove that their vulnerability to changes in interest rates is acceptably low. ‘PARADIGM SHIFT’ Under the Capital Requirements Regulation, which applies Basel III in the EU, banks are generally required to report two capital ratios — one adjusted for risk, and one unadjusted. The latter, known as the leverage ratio, was originally intended as a backstop to prevent larger banks from gaming the system by understating the risks on their books under internal models allowed by the accords The German proposals suggest that smaller banks would merely have to report a leverage ratio, albeit a “significantly higher” one than the present 3 percent. By comparison, U.S. community banks must keep their leverage ratios above 9 percent, which means they must hold at least $9 of capital for every $100 in assets. Theurer said the Bundesbank had deliberately refrained from suggesting a specific ratio at this time. This idea “is more than a technical detail,” Daniel Quinten, a member of the board at Germany’s Federal Association of Cooperative Banks, said in a post on social media. “It would be a paradigm shift — and a chance for more proportionality, more efficiency and less bureaucracy in regulation.” The proposals — and the feedback they get — are to be incorporated in a report that a high-level European Central Bank task force will recommend to the European Commission at the end of the year. | Florian Wiegand/EPA The proposals also simplify demands on liquidity coverage. They would exempt banks from the Basel III Net Stable Funding Ratio — a complex formula for guaranteeing liquidity over a one-year timeframe — and would replace it with a new requirement that would limit their lending to only 90 percent of their deposit base. Banks would also have to keep at least 10 percent of their assets in highly liquid form, such as cash, central bank reserves or short-term government debt. This, the discussion paper said, “would achieve similar potential outcomes with dramatically reduced complexity.” The proposals — and the feedback they get — are to be incorporated in a report that a high-level European Central Bank task force will recommend to the European Commission at the end of the year. Additional reporting by Carlo Boffa.

U.S. Senator Elizabeth Warren has called for a former Trump-appointed banking regulator to be dismissed from the global financial watchdog, warning he is putting the world’s economic stability at risk. Randal Quarles, who was vice chair of supervision at the U.S. Federal Reserve from 2017 to 2021 where he oversaw a wave of deregulation, was last month chosen to lead a worldwide review of post-2008 financial crisis reforms for the Financial Stability Board. In a letter addressed to FSB Chair Andrew Bailey, obtained by POLITICO, Warren blamed Quarles’ deregulatory measures for the collapse of three U.S. banks including Silicon Valley Bank in 2023 and warned he would bring the same mindset to global standards. “Mr. Quarles spent his tenure as a top financial regulator in the United States weakening safeguards for megabanks at the expense of financial stability and the American public,” said Warren, a former U.S. presidential hopeful who is the most senior Democrat on the Senate banking committee. “It would be deeply troubling if this FSB review became a mechanism to coordinate the easing of post-2008 rules across the globe.” She said Quarles’ background “demonstrates that he is the wrong person to lead such a review.” She called on Bailey to “consider terminating the appointment and conduct your own search for a suitable replacement.” Bailey, who is governor of the Bank of England, became FSB chair after Quarles’ appointment. The warning came as the FSB, a global body that monitors and coordinates national financial regulations, issued new guidance on the regulation of nonbank financial groups, such as hedge funds. The guidance recommended capping the amount of borrowing these groups can do, but left up to national regulators to determine the details. ROLLING BACK SAFEGUARDS In the years following the 2008 global financial crisis, countries clubbed together and tasked the FSB with coordinating national regulators to prevent a similar crisis happening again. But in 2017, with momentum shifting back to deregulation, newly-elected U.S. president Donald Trump nominated Quarles to head up the Fed’s banking supervision arm. Warren’s main criticism of Quarles relates to his implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which gave the Fed discretion to apply tougher regulatory standards to large banks with assets of between $100 billion and $250 billion. “Under the law, Mr. Quarles had discretion to apply these rules … [but] he and other Trump-installed regulators refused to do so,” she said. She said Quarles also led the rollback of rules prohibiting banks from making “risky proprietary bets with customer deposits and from investing in or sponsoring hedge funds or private equity funds.” Both of these contributed to the collapse in 2023 of Silicon Valley Bank, she said. As well as calling for Quarles’ termination, the letter asks whether his appointment is an indication that the FSB sees “this review as an opportunity to coordinate the easing of post-2008 financial safeguards.” Neither Quarles nor the FSB immediately responded to a request for comment.