10 September 2012

Reuters: No big break-ups in reform of Europe's banks

The EU will insist on higher reserves from banks and impose stricter oversight to protect taxpayers and savers from further bailouts caused by risk-taking, but will not break them up to separate investment banking from retail activities. (Includes quotes from Graham Bishop.)

While there may be public backing for such a move, EU officials and banking experts said the splitting up of banks to lessen risks to the general public across the European Union would be too complex to achieve in the short term.

EU finance ministers will meet in Cyprus on Friday to discuss the work of a panel of experts, led by Bank of Finland Governor Erkki Liikanen, charged with exploring possible reform of bank structures in the wake of the crisis that beset the world economy from 2007.

"The real question is how does the bank provide enough capital so that whatever happens, it doesn't crystallise in a loss for the taxpayer", said Graham Bishop, an EU policy consultant, commenting on the challenge to regulators. "The first port of call is capital", he said, adding that shaking up the structure of banks could come later.

The European Union will use tighter capital rules and closer European Central Bank oversight to stop banks taking risks that imperil the financial system, the financial experts said.

The group's report, which is due at the start of October, is expected to deliver a strong message to European policymakers to try to prevent further bailouts. The report will examine an idea some experts believe could have softened the impact of the banking crisis - ring-fencing high-risk businesses such as trading from more stable activities such as retail banking.

There have been strong arguments saying that legally separating investment banking operations would make it easier for the part of the bank that holds savers' deposits and lends to business to stay open in the event of a crisis, even if other parts of the group were to go bankrupt.

But EU officials believe using rules that dictate how much capital banks have to keep to cover the risk of losses or relying on new powers that are expected to be granted to the European Central Bank in the coming months will prove more useful in keeping banks in check in the short term.

Introducing rules to cut through the structure of banks in Europe would have to wait for the completion of a banking union reform, placing the European Central Bank at the head of the fragmented system of national regulators, reducing their role.

Under this proposal, the ECB could monitor banks' liquidity closely and demand higher requirements on banks to keep up their capital reserves.

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