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11/12/2016

Lawmakers fail EU plans to split up large banks

Euro & Finance

Lawmakers fail EU plans to split up large banks

The Bank of England. London, February 2012.

[Matt Brown/Flickr]

Deep divisions between political groups in the European Parliament are set to sink reforms aimed at preventing banks from being “too big to fail”, a key political objective following the 2008 financial crisis.

The report on the proposal for a regulation on structural measures for “improving the resilience of EU credit institutions” is currently being reviewed by the Committee on Economic and Monetary Affairs in Parliament.

Amendments for the report will be considered by the committee later this month (23 February) with a vote planned for 23 March.

Green Belgian MEP Philippe Lamberts told EurActiv the odds of the report passing the vote were less than “50-50”.

The right-wing Europe of Freedom and Direct Democracy (EFDD) group has tabled more than 100 amendments to the report, and Syed Kamall, a British Tory MEP who chairs the European Conservatives and Reformists group (ECR) said the report has been “extremely divisive” in the committee.

“I’m not convinced we’ve solved the issue of banks being too big to fail,” Kamall said, explaining his opposition to the report.

Lamberts called for a “European Vickers”, referring to a 2013 regulation which ring-fenced UK banks’ retail and investment arms to help prevent contagion in the case of a new crisis.

“Separation of investment banking from retail banking is a necessary but not sufficient condition to prevent banks that are too big to fail. The report has been watered down. If we followed these recommendations it is likely no banks would ever be separated,” said Lamberts.

During the eurozone crisis, European governments spent €1.5 trillion propping up banks whose failure was deemed a systemic risk to the wider economy. Many countries have sought to put in place protections at a national level. The report debated in Parliament seeks to provide rules applicable to all European banks.

The main points of contention are the extent of the separation between the retail and investment arms of banks, and a decision on their size, to be covered by the proposed legislation.

When the report was originally published at the beginning of January, NGO Finance Watch said it “substantially weaken the objectives, scope, definitions, mechanism and sanctions in the Commission’s original proposal” and left “an ineffective shell regulation”.

However, industry group the European Banking Federation said that it “expressed opposition over tackling this matter at a European level, given the many legislative initiatives already taken.”

Gunner Hokmark, the Swedish MEP in charge of the report, could not be reached on Tuesday (3 February). However speaking to EurActiv earlier this month, the EPP legislator denied that the report amounted to a watering down of proposals, saying it was more important to address risk rather than focusing on ring fencing.  

“I am trying to build a consistent legacy with existing legislation,” said Hokmark. “The European Central Bank has noted in reports diversified banks have proved to be more resilient. For example Lehman Brothers was a specialised bank. It is extremely important to address risk, not just structure,” he added.

Background

A high-level advisory group was appointed in 2011 to make recommendations on structural reforms of the EU banking sector, with a view to strengthening financial stability and improving consumer protection.

The initiative followed other measures aimed at protecting consumers against risky banking activities in the aftermath of the 2008 global financial crisis.

The conclusion of the group, led by Bank of Finland Governor Erkki Liikanen, was to separate deposit banking from trading and other high-risk investment in order to shield taxpayers from further bailouts and protect savers.

>> Read: Liikanen group urges splitting retail, high-risk banking

The recommendations borrowed from policies already being implemented in Britain to ring-fence retail banking and in the United States to curb banks' proprietary trading or taking bets with own money.

The report also backed the idea of bail-in debt, a mechanism to impose losses on bondholders in the case of a banks' bailout or collapse.

In July 2010, the Commission asked banks to guarantee at least €50,000 in payouts to clients, up from the €20,000 previously, in an effort to prevent bank runs.

Timeline

  • 23 February: Amendments considered in committee
  • 23 March: Committee vote on amended report