Among the general criticism from European banks for the Commission's proposal, the EBF expressed itself as "deeply concerned", and said that the "untimely proposal" was "at the expense of financing the economy".
AFME comment on additional EU bank structural measures
AFME believes the need for additional EU bank structure legislation at this stage is unproven. "There is a significant risk of conflicting with broader regulatory objectives", said chief executive Simon Lewis. "The new proposed measures are likely to lead to an extended period of business and funding model uncertainty for European banks, investors and the wider economy. The banking industry is already undergoing significant structural change as a result of major reforms underway to strengthen the safety and resilience of banks and ensure all institutions are resolvable without threat to the financial system and the real economy or losses to the taxpayer."
In particular, the proposed measures undermine confidence in the ability of capital markets to effectively support the European economy. The prospective separation of market making and related hedging from banks’ core activities goes beyond the approach taken in other jurisdictions and would deal a major blow to the European banking model, in particular universal banking. "Europe can ill afford a diminished financial system at a time when it seeks to diversify its funding sources and develop mechanisms in support of long-term financing", said Lewis.
Full press release
Association of German Banks/Bankenverband
"The German economy needs and wants universal banks. The Commission proposal now harbours the danger that banks will no longer be able to offer their customers the usual services on the same scale as before. That is not in the interests of the German economy", said general manager Michael Kemmer.
"Banks and banking groups must be structured in such a way that they can be reorganised and, if necessary, wound up without any risk to financial stability. This is already ensured by the recovery and resolution planning required under the Bank Recovery and Resolution Directive (BRRD)", Mr Kemmer commented. EU Member States have to transpose the relevant provisions of the BRRD, which the German legislator pre-empted by introducing the so-called Ring Fencing Act (Trennbankengesetz), into national law by the end of 2014 and apply them from 1 January 2015 – added to which there are the resolution tools provided for in the BRRD. "So additional measures to resolve the “too big to fail” problem are not necessary", Mr Kemmer argued.
Press release
BDI criticises proposal and warns about negative effects on real economy
"The proposals of the European Commission to ban proprietary trading by large banks and possibly outsource other activities ignore the negative effects this would have on the real economy. The proven model of universal banking is recklessly put on the line. Financing and risk management of the banks would be affected unnecessarily", stated Markus Kerber, chief executive of the Federation of German Industry (BDI).
"The real economy would have to bear much of the burden of adjustment", warned Kerber. "The proven universal banking system would be compromised in its substance by excessive interventions. This must be avoided", he said. Smooth banking transactions to hedge risk and to support complex capital market financing would need to remain possible.
"It is naïve to believe that the planned measures would render banks and financial markets really stable and crisis-proof", he continued. Higher capital and liquidity ratios as well as a a credible resolution regime in Europe would be much more useful instruments to avoid future imbalances.
Press release
Deloitte
Clifford Smout, co-head of the Deloitte Centre for Regulatory Strategy, said: “The Commission is likely to face challenges getting these proposals through the European Parliament and Council in their current form, given how contentious these issues have proved. The Regulation would ban proprietary trading at big banks operating in the EU but this is defined in a way likely to leave many banks unaffected. However, an outright ban would still be a step further than any EU country has taken so far, even if it is similar to the US regime.
“National supervisors would have very broad powers to decide whether to impose additional ring-fencing on banks’ trading activities. Even if the ECB ends up taking the lead on these issues within the eurozone, there could be inconsistencies between these rules and those in operation elsewhere.”
Press release
EBF: An untimely proposal for banks’ structural reform at the expense of financing the economy
The EBF is deeply concerned over the Commission’s proposal on structural reform of the EU banking sector and calls on policy-makers to carefully consider the economic implications of the proposal.
The proposal is untimely as it comes at a moment when the European economy is slowly recovering and where European policy-makers still need to understand the complete impact of the financial services regulatory reform agenda proposed under this Commission’s mandate. Therefore, proposing an additional policy measure at this point in time, that have such potentially far-reaching consequences on banks’ structure, daily business and organisation, is not prudent in the EBF’s view.
“Europe’s banks are committed to ensure financing to the real economy and support the EU growth agenda, but they need to be left the room to do so”, said Mr Ravoet, EBF Chief Executive. “With the scope and separation requirements that the Commission proposes this will most definitely be a difficult task”.
The broad scope of trading activities potentially subject to a separation requirement is very likely to hamper banks’ role in the economy. Activities that are client-driven and useful for the real economy – such as market-making that ensure liquidity for customers on a regular and on-going basis or client-related hedging services - may end up being separated from the core credit institution. This will impact liquidity in financial markets negatively and ultimately result in higher financing and hedging cost for corporate clients, due to the increased risk-profile of the trading entity. “The Commission has clearly understood the cost inflation argument and exempted market-making for government debt from the separation requirement”, added Ravoet, “it would appear similar treatment is not reserved for financial services to businesses”.
The EBF calls for the universal banking model to be preserved and believes that any further adjustment in the name of stability can be best achieved by calibration of the rules and regulations put in place over the last five years. The Commission should contribute to a predictable and stable environment for Europe’s banks to support the economic recovery in the Union and not introduce a prolonged uncertainty that will weigh on the international competitiveness and attractiveness of Europe’s banking sector.
Press release
FBF - Federation of French banks: Proposal disadvantages financing of real economy
This text would be a major handicap for the financing of European companies, contradicting the efforts of the European Union to restore growth and improve the employment situation. Indeed, by separation of the majority of market activities, the proposal of the European Commission would in particular hinder the major European banks to support businesses effectively, while new prudential rules involve a massive increase in exactly this type of financing.
This proposal has been created with no consultation of the stakeholders involved and at an unsuitable moment, creating confusion and uncertainty at a time when major European universal banks are already implementing ambitious banking reform legislation, particularly in France and Germany.
This unprecedented situation is a source of misunderstanding for banks and investors alike, so it is essential for the EU to demonstrate consistency and stability. Treating Member States differently by proposing exceptions which seems to apply to the UK alone, would create a new risk of fragmentation, contrary to the principles of the construction of the European Single Market.
Press release
Fitch Ratings - EU Bank Structural Reforms Would Further Restrain Trading
A ban on proprietary trading and the threat of having to split other risky trading activities into separate subsidiaries outlined in the European Commission’s proposed structural reforms yesterday would further restrain banks’ trading risks, Fitch Ratings says. Trading banks are already withdrawing from selected businesses as they realign their strategy with the evolving regulatory landscape and revenue prospects.
The proposed ban on proprietary trading would add additional constraints to banks’ activities and involve implementation and compliance costs, even though the securities operations that the proposal deals with are a relatively small part of the EU banking system. However, the proposed ban is likely to have less impact than the US Volcker rule because it has a narrower definition for restricted trading activities and will only apply to European banks deemed to be of global systemic importance – around 30 banks.
The potential for supervisors to require other high-risk trading activities, such as market-making, complex derivatives and securitisation businesses, to be placed into separate subsidiaries could also limit trading activities. Some banks may choose to reduce trading rather than risk incurring the costs of a separation. These could be significant since strict rules would be in place to ensure the trading entity remains economically and operationally separate, including funding arrangements.
If risky trading activities are subsidiarised, this could lead to greater ratings differentiation between legal entities in the same banking group. The extent to which separation could widen the gap would depend on the degree to which funding and capital are separated and the types of activities and risks in each subsidiary.
Splitting off a trading subsidiary would likely be neutral to slightly positive for the credit profiles of the deposit-taking bank. It could reduce downside risk as the bank would not be obliged to support its trading operations in case of problems, although some may still do so to avoid damaging their reputation. Overall, the ban on proprietary trading and separation would have minimal impact at the consolidated group level.
The structures of banking groups are already changing, particularly with resolution planning in mind. Much will depend on how the European Central Bank, when it takes up its role as single supervisor in November, requires banks and their subsidiaries to be capitalised and uses the proposed separation powers. Most of the European banks covered by these structural reforms will come under its supervision.
Plans are underway to place proprietary trading activities into separate subsidiaries in France and Germany, so the ban will mean exiting or selling these operations instead. UK banks have already begun steps to ring-fence their retail arms. They may have to contend with separating more than one part of their business, if these proposals are agreed by the European Parliament and Council.
Banks will have time to adjust as the proprietary trading ban would apply from 1 January 2017 and the potential separation of other trading activities from 1 July 2018.
Press release
HMT - UK Treasury
"Today's proposals from the European Commission have much in common with the banking reforms the UK has pioneered and have been designed to allow the UK to go ahead with full implementation of its reforms", a UK Treasury spokesman said.
"Indeed, the government's Banking Reform Act already meets, and in some places exceeds, the proposed standards set out by the Commission, putting the UK at the forefront of European and global efforts to create safer banks without taxpayer subsidies that distort the European single market."
Reuters
Further comments
The Financial Times (subscription) reports that Erkki Liikanen gave the final Barnier proposal a polite but cool response, particularly regarding the discretion given to supervisors. "It is important that the regulation is implemented in a coherent manner throughout the EU", he warned, with characteristic understatement. [See also separate Bank of Finland press release.]
Banque de France governor Christian Noyer said the proposals were “irresponsible and contrary to the interests of the European economy”.
France wants to make sure that the proposals reflect regulations already in place in France and Germany, Finance Minister Pierre Moscovici said, voicing concerns that the current plans favour banks in London. "I will be very vigilant about the choices that are made in the European text so that it does not call the French reform into question", Moscovici told Reuters in an interview. "This is something we are keeping an eye on with Germany." "It's important that the Commission has a neutral position and avoids giving one model preference over another or calling into question ambitious reforms that two big countries, France and Germany, have already put into place", he added.
To Mr Barnier, the criticism is a sign the proposal is pitched just right, hitting the perfect “point of balance” between US, UK, French and German initiatives to structure banks so they are simpler and less able to exploit implicit taxpayer subsidies. “I’m not surprised by the reactions", he said. “Have you ever seen any of my proposals welcomed with enthusiasm by the financial sector?” “These banks continue to engage in risky market activity that turns a profit but does not serve their customers. Is that proper? I say no.”
Main proposal
Responses from EP groups