The European Central Bank (ECB) is revamping the codes that discipline its employees’ conduct. But when we compared them with the Federal Reserve’s Code of conduct, it turns out the ECB is still lagging behind.
Last November, two presidents of the Fed branches in Boston and Dallas were forced to resign, following disclosures about their trading activity in 2020. Robert Kaplan, President of the Dallas Fed alone made trades worth at least $1 million in 22 stocks and index funds, including Amazon, Chevron, Facebook, and Johnson & Johnson, raising an issue of incompatibility with his role in the Fed. The event deeply embarrassed the Federal Reserve, which was immediately put under scrutiny by the media.
This scandal coincided with the publication of the declaration of financial interest of the members of the ECB’s Governing Council, and sparked new interest in the Ethics Framework and the Code of Conduct – two documents that regulate the behaviour of ECB officials and its board. To see if the ECB was better equipped to protect itself from inside trading and other conflict of interests, we looked at the Code of Conduct and the Ethics Framework of the ECB to see if things could have been different on this side of the Atlantic.
Difference between Eurozone and US codes: which is better placed?
On a positive note, the ECB has reinforced its Code of Conduct by adding an enhanced Ethics Framework and creating new bodies such as the high-level Ethics Committee, which is chaired by Patrick Honohan. While the ECB Ethics Framework applies solely to the staff of the ECB, the Code of Conduct is for everyone, including the Executive Board of the ECB. The Ethics Committee was mandated by the Governing Council to reflect on the feasibility of establishing a single code of conduct, which would certainly be a step forward in safeguarding the integrity of the ECB.
We compared the ECB Code of Conduct with the New York Federal Reserve Code of Conduct to better grasp the differences between the ECB and the Fed. We saw several key differences between the two documents.
While the ECB’s conflict of interest policy only covers spouses or partners, the New York Fed Code of Conduct extends this to children. We highly recommend that the ECB considers this in future reforms of its code.
On cooling off periods, the Federal Reserve goes beyond the ECB’s clauses by adding: “for one year after leaving a Bank officer position, a former officer who ceases to be employed by the Bank may not appear before or communicate with an employee of any Reserve Bank or the Board with the intent to influence official action on behalf of another person”.
The Fed’s Code is indeed more stringent than the ECB’s codes. Certain specific insurance policies and annuities may not be permitted by the Fed’s Code. The ECB, on the other hand, does not specify this and classifies them as permitted private financial transactions.
Moreover, following the Fed’s code, officials cannot hold any security for less than 30 days, other than shares of a money market mutual fund. From the ECB’s disclosure document we cannot see how long securities are held by the members of the Governing Council. The Ethics Framework, as it stands now, does not oblige members to disclose this information. The ECB Ethics Framework only states that “private financial transactions shall be non-speculative, restrained and in reasonable proportion to their income and wealth in order not to put their financial independence at risk.” The ECB should at least set a clear minimum duration within which employees can hold assets, exactly as the Fed does.
What should the ECB do next?
As to private financial transactions, the ECB Ethics Framework lays down specific transactions that either require ex post reporting or prior approval. Other transactions are prohibited, such as marketable bonds, derivatives and so on. Purchase of shares of corporations, and bonds issued by these corporations is not prohibited but only requires ex-post reporting.
While the 2015 framework only required ex-post reporting, changes introduced at the end of 2021 mean that if transactions are deemed very sensitive they could be prohibited straight away according to their “sensitivity”. Passive investment of corporate bonds should be mandatory for the Governing Council members as long as the ECB operates the Corporate Sector Purchase Programmes (CSPP).
The ECB Code of Conducts states that “It is recommended that members and alternates place their investments under the control of one or more recognised portfolio managers” – this means that members cannot purchase equities directly. As this is a recommendation and not a binding rule, we don’t see any specific violation of the Code.
Ideally, going forward, the Code of Conduct should apply to all Eurosystem board members, including deputy governors of national central banks. This is particularly important as deputy governors usually attend Governing Council meetings in Frankfurt as “accompanying persons” to their governors. It is also quite frequent for deputy governors to be appointed as governors themselves when the mandate of the previous governors ends. Besides, the ECB clearly states that active investment should be prohibited to avoid conflict of interest with the role of Board member of the ECB.
We will carefully follow the next steps the ECB takes in this direction.
Credit Photo CC SonnyandSandy