30 September 2012

Reuters: Europe focused on union rather than breaking up banks

Experts submitting their report to the Commission this week may recommend that European banks should separate retail banking from their riskier investment arms to make them safer and soften the impact of financial crises. (Includes quote from Graham Bishop.)

Making a separation between retail and high-risk businesses such as trading could be among the proposals Liikanen will make on Tuesday to stop crises in investment banking hurting high street banks and the consumers and small businesses who depend on them. But European policymakers, struggling to contain the regional debt crisis and associated banking troubles, are already working on creating a banking union that would eventually allow eurozone countries to support banks jointly. This means there would be little time to pursue complicated structural banking changes, and Brussels is likely instead to opt for safeguards such as larger capital reserves for risky business.

Legally separating investment banking would make it easier for the part of the bank that holds savers' deposits and lend to business to stay open in the event of a crisis, even if other parts of the group go bankrupt, some banking experts say. It would affect European banks, such as Barclays, Germany's Deutsche Bank or France's BNP Paribas, who combine high street banking alongside riskier trading of stocks, debt and other securities.

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 to be granted to the ECB will prove more useful in keeping banks in check in the short term. Setting aside capital by holding back profits, for example, makes banks less risky for shareholders and host countries. "One objective (of the report) was to get rid of the implicit guarantee of the taxpayer for banks", said a second person familiar with the committee's work.

Graham Bishop, a consultant on EU regulatory issues, said a scandal over the manipulation of the London interbank offered rate (Libor) would add to pressure to make structural changes. "There is a feeling that banks have let society down", he said. "Libor is going to further inflame public anger over how banks work." "The current structure hasn't worked - If ever there was a moment to try something else, then this would be it."

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