08 January 2013

FT: UK urges EU to adopt banking reforms

The British government on Tuesday urged Germany and other European nations to implement an EU-commissioned report on banking that recommended erecting ringfences to separate banks' high street operations from riskier investment banking.

George Osborne, the British chancellor, said EU countries should all adopt the recommendations of the Liikanen review, published last year, echoing similar reforms under way in Britain.

“Britain, Germany and other European countries all experienced serious problems in their financial systems in 2008 and 2009, and all are learning lessons”, Mr Osborne said. “We need better and more intelligent financial regulation to ensure banks work for the benefit of our economies. [Liikanen] is an idea that the EU, including Germany, should give serious consideration to implementing.”

Mr Osborne reminded his audience that Britain is pressing ahead with a similar ringfencing idea for universal banks that currently combine retail and investment banking activities under one roof. The UK’s Vickers reforms, which are currently being drafted into law, will safeguard high street banking and other “core” banking operations, while the Liikanen plan would isolate trading activities.

British banks fear they could be disadvantaged if they are forced to comply with the Vickers reforms, while continental European competitors are not. The European Commission has yet to decide how the ideas of the Liikanen review should be carried forward at an EU level, although France has already announced plans for a watered-down version.

Germany has so far reacted coolly to some of the Liikanen proposals, with officials in the government and at the Bundesbank, which has a role in bank supervision, defending the country’s universal banking model.

Some analysts expect the centre-left Social Democrat party to make bank reform a theme in its election campaign this year, with the Liikanen ringfencing principle a potential starting point for such a policy. Peer Steinbrück, the former German finance minister who is the party’s candidate for chancellor, has come out in favour of breaking up big banks and separating investment and retail banking.

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