Brussels shies away from forcing banking sector split

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In a draft proposal, the European Commission appears on course to step back from earlier plans that would rigorously force large banks to hive off their lending business from their risker trading operations.

The Financial Times reported yesterday (6 January) that such separation would no longer be mandatory, and “would be less costly and restrictive than first envisaged and national supervisors are given wide discretion in applying the reforms”.

The report was based on a leaked legislative proposal expected to be published by Internal Market Commissioner Michel Barnier in late January or February, which will aim to implement the findings of the 2012 Liikanen report on the structure of banking (see background).

Finnish central banker Erkki Liikanen’s report was contentious because it proposed the mandatory separation of proprietary trading and other high-risk trading, resisted by France and Germany in addition to most big European banks.

According to the Financial Times report such a ban would only now apply to around 30 big banks, and national supervisors would be left to make the decision of whether certain types of trading posed a “systemic risk” and so should be separated.

Barnier’s proposal will not become law before the end of his tenure as commissioner this year, leaving his successor to deal with the finer elements of the negotiations.

However the proposal also gives national supervisors the option of demanding tougher standards from their banks.

“There is no formal proposal from the Commission at this stage. So any text seen is merely a draft, subject to substantial change, and has no political endorsement from the College,” read a statement from the Commission, although the EU executive stepped back from denying the substance of the Financial Times report.

Barnier’s proposal will “ensure all banks can be resolvable and not require taxpayer bailout when they face difficulties,” the statement said, adding: “At the same time, while we solve "too big to fail' (TBTF), we want to do it in a way that avoids upsetting the economic recovery. That is why the proposal will ensure that financing of real economy is not impeded.”

In November 2011, the European Commission set up a high-level group 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 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.

  • Late Jan.-early Feb. 2014: Internal Market Commissioner Michel Barnier to publish proposal designed to implement Liikanen report

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