SPECIAL REPORT / The European Greens will push for a compulsory ring-fence between banks’ riskier investment banking and retail activities, such as mortgages and lending to small businesses, after the European elections.
Philippe Lamberts told delegates at the European Business Summit yesterday (15 May) that a “Vickers-style” division would force Europe’s deposit-taking banks to start lending again.
Lamberts is a Green member of the European Parliament’s Economic and Monetary Affairs Committee and is standing for a second term.
Since the crisis, banks have been reluctant to lend to each other and to businesses, which has hampered growth. The United Kingdom’s Vickers Reforms, proposed in September 2011, divides investment from retail banking.
‘Timid’ EU proposal on the table
The European Commission made a proposal for the structural reform of Europe’s banks in January. It stopped short of a ring-fence for all banks, instead opting for a ban on proprietary trading, defined as particularly risky, for the biggest and most complex banks.
The proposal will be debated in the European Parliament after the May 22-25 elections. Lamberts signalled his intention to introduce the ring-fence for all banks as an amendment to the proposal. The amendment would have to be agreed by the Council of Ministers before it ultimately becomes law.
Lamberts said, “The question is how we make the banking industry do its job?
“[We don’t need] a timid kind of text but a more Vickers-like reform, splitting, compartmentalising the banking industry so as to make sure, at least, that the deposit-taking banks would have no other option but to focus on the real economy.
“This country is one where the savings rate is absurdly high. That money should flow to the real economy. And not just in Belgium but elsewhere – but it doesn’t.
“Now that text is on the table, it’s timid, we can give it some teeth and try to make it happen in what will be my second term hopefully.”
Banking industry sources confirmed they were concerned that the Greens and other European Parliamentary Parties such as the Socialists would back the move. MEPs are keen to act against banks after the failure to introduce an EU-wide Financial Transaction Tax (FTT, read more here), they said.
The commission proposal for FTT is being torn apart by member states, Lamberts said. “We are witnessing the slow-motion burial of the FTT and that is something I find upsetting,” he added.
Jonathan Faull, the European Commission’s senior civil servant in charge of financial services regulation, said that alternative sources of finance for business had to be developed.
“How is enterprise going to be financed in the future? A simple answer is to say not as much by banks as was the case until recently,” he said.
“Households and corporates will have to find, and public policy will have to encourage availability of alternate sources of finance, instead of simply going down to the bank on the corner of the street and taking out a loan.
He added, “Even though interest rates are low, and I think likely to remain low for some time, it is still the case that credit is harder to obtain than it was in the pre-crisis days…we can’t rely as much as we have hitherto on the banking sector.”
UK influence on EU banking reform.
The UK, while supportive of the eurozone banking union, has signalled it is a project it will never join. It is the only EU member state to say this.
Despite this stance the UK was very involved in the creation of the Single Supervisory Mechanism, a system involving the ECB and participating national authoritiers, and to a lesser extent the Single Resolution Mechanism, a tool to wind down struggling banks.
The UK Treasury had brought “had brought extra value” to the debate, which Lamberts welcomed, but talk of a referendum on the UK’s EU membership of the EU had weakened its influence.
Lamberts said, “The political course that [British Prime Minister] David Cameron has chosen has weakened the UK’s hand in European affairs rather than strengthened it. The whole idea of ‘Brexit’ is isolating the UK’s influence.”
Faull said that the banking union was made up of two mechanisms, the supervision of banks and the safe resolution of failing banks. Those rules are the same in member states that were not part of banking union so there was little chance of divergence within the single market.
“I have the impression watching the negotiations close up, other countries are likely to join [banking union]in due course […]does this mean and I know this is sometimes expressed as a British concern that somehow automatically by osmosis these people will begin to legislate together and form a caucus?
“Well all I can say is that when you see these people close up they are a very, very long way from that.”
Faull also rejected claims that as representative of the 18 nations, the ECB had weakened the authority of the EBA. The EBA brings together supervisors, such as the ECB has now become, rather than being a supervisor itself.
“I would like to think they are complimentary,” he said.
It’s true that when a group of nations, in this case the 18 euro area countries, form a bloc that could skew decision-making, Lamberts said.
“I share the UK’s concern in concentrating way too much power in one place, in this case the ECB. There’s a basic conflict of interest between its various missions. If it aims at stability it may be tempted to turn a blind eye on certain banks so as not to upset the system.”
That would not be a problem with a separate supervisor, he added.
In 2012, the European Commission established a group to examine possible reforms to the structure of the EU's banking sector.
Erkki Liikanen, Governor of the Bank of Finland and a former member of the European Commission, was appointed as the chairman.
The mandate was to determine whether, in addition to ongoing regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection, and, if so, to make proposals as appropriate.
The Group started its work in February 2012 and presented its final report to the Commission on 2 October 2012. The Commission examined the possible reform options and their implications and, on January 2014, it adopted a proposal for a regulation. The proposal banned the largest banks from engaging in risky, proprietary trading.
The Vickers Reforms were proposed in the UK in September 201. By ringfencing bank's riskier trading and retail activities, they aim to protect savers' deposits.
- 2 Oct. 2012: High-level group EU banking sector reform submits its conclusions.
- 29 Jan. 2014: European Commission follows up with its own proposals, but stops short of calling for splitting investment banking from retail banking.
- 2014-2015: EU Parliament and member states to debate follow-up to the Commission proposals.
- Press release: High-level Expert group on reforming the structure of the EU banking sector presents its report (2 Oct. 2012)
- Press release: Structural reform of the EU banking sector (29 Jan. 2014)