Brussels pushes full separation of banking units

By bne IntelliNews October 3, 2012

bne -

Retail banks in the EU should be forcibly ring-fenced from risky trading operations, a high-level report on reform of the European banking sector released on October 2 insists, creating consensus with US and UK proposals.

While the report, one of several in Europe and around the world put together to review ongoing regulatory reform, is happy with raised capital ratios and liquidity requirements, it adds that it has "concluded that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks."

The call brings Brussels into line with both Washington and London, which have both also made proposals to restructure the industry along the same lines. However, the group behind the EU report goes further, suggesting deeper separation than previously seen may be necessary to avoid further crises in the future.

"This idea clearly draws from the Vickers proposals in the UK for ring-fencing retail banking," points out Michael Symonds at Daiwa Capital, "and would represent the greatest challenge for large capital-markets focused institutions such as Barclays, BNP Paribas, Deutsche Bank, Royal Bank of Scotland and Societe Generale (notwithstanding the existing de-risking initiatives of all of these banking groups)."

Speaking to the BBC, Bank of Finland Governor Erkki Liikanen, who led the group, said banks could be forced to go further than the "moderate" directive of making them different parts of the same banking group. "[Banks] must present a plan that they are able to unwind their activities without harming the broader economy. If they fail to do this because their structures are too complex or too difficult to manage, then the regulator can ask for deeper separation," Liikanen said.

The report also calls for higher capital requirements on trading assets and real estate related loans; a designated layer of "bail-in" debt incorporated into capital structures, but to be held outside the banking system (i.e by investment funds and life insurance companies); and for government and regulators to step up oversight, particularly concerning risk management and compensation.

While noting that the report represents no more than a set of high-level recommendations at this stage and there's a long and rocky route through all member states, Symonds says that the major points are set to act as cornerstones for the inevitable reform of EU banking when it does arrive.

"As with Volcker in the US and Vickers in the UK, structural banking reforms across the EU are an inevitable outcome of the crisis, and the Liikanen recommendations will no doubt set the foundation for future legislation," he states, before pointing out that the creation of an EU banking union will take precedence.

Related Articles

Latvia’s Citadele Bank pulls IPO

bne IntelliNews - Latvia's Citadele Bank has postponed its initial public offering (IPO), citing “ongoing unfavourable market conditions”, the bank announced on November 11. The postponement ... more

BOOK REVIEW: “Europe’s Orphan” – how the euro became a scapegoat for policy ills

Kit Gillet in Bucharest - The euro, conceived as part of a grand and unifying vision for Europe, has, over the last few years, become tainted and often even blamed for the calamities that have ... more

Mystery Latvian linked to Scottish shell companies denies role in $1bn Moldova bank fraud

Graham Stack in Berlin - A Latvian financier linked to the mass production of Scottish shell companies has denied to bne IntelliNews any involvement in the $1bn Moldovan bank fraud that has caused ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss