25 May 2012

Commissioner Barnier: Towards better regulation of the shadow banking system

If we want a truly integrated and stable financial market, we cannot afford to have 27 different approaches to this important issue, as on other matters relating to banks, especially the capital requirements. A degree of flexibility may be needed at national level to reflect local circumstances. Our CRD IV proposal also plans to allow national regulators to address capital requirements under certain conditions.

In this context and in accordance with the announcement in Parliament in November 2011, I commissioned a panel of experts chaired by Erkki Liikanen, Governor of the Central Bank of Finland and former member of the European Commission, to make independent proposals on the structure of the European banking sector.

Mr Liikanen's experience in banking and European matters is an important asset for this group, which also comprises independent adviseres from all over Europe, equipped both with professional experience and various different qualifications. At this stage, it would of course be premature to ask the group to present preliminary conclusions. The group began its work in February and is expected to continue until the summer.

Nevertheless, I would like to return three important points:

1. The group's first task is to determine whether, in addition to ongoing regulatory reforms, reforms are required to the structure of European banks to strengthen the stability and efficiency of the European banking sector, and help consumer protection. Then, if the group responds positively to this first question, it will propose the necessary structural reforms to diversify risk in banks better, to strengthen financial stability, and to enable banks to play their role in promoting growth in the domestic market.

2. I asked the group to listen to to all the stakeholders: not just the European banking sector itself, but also national supervisors, investors, and of course the consumers of financial services and civil society.

I welcome the fact that the group has chosen a very inclusive approach by inviting representatives of private finance and business to their meetings, and launching a public consultation, which allows all stakeholders to express their views. This consultation is open until June 1.

3. An important point first: neither I nor the Commission in general have replied to the question as to which structure of the banking system would best be able to manage risk. As we have observed during the crisis, systemic risk may relate to small retail banks (Northern Rock), investment banks (Lehman Brothers) or universal banks.

The Liikanen group has studied with great interest what is happening in the US with the "Volcker Rule", and in the UK with the proposals of the Independent Commission chaired by Sir John Vickers. As Sir John pointed out, the challenges facing the financial sector on the continent are similar to those for which it has proposed solutions in the UK. That said, I want to emphasise that the solution is not necessarily to import "Volcker" or apply "Vickers" in Europe. Our challenge is rather to analyse the structure of the European banking sector, to examine all the reform options, and to assess their impact.

In this context, I welcome this opportunity to debate with Mr Volcker and Mr Vicker. I'd be especially interested in the views of Mr Volcker on the implementation of the "Volcker rule" in the United States.

I share the view completely that the objective is to limit and better regulate risky banking activities which add value to financial stability... The Commission has proposed, as part of its MiFID II proposal presented last October, to prohibit trading in own account in the context of the new OTF trading platform. I also agree that a restriction of proprietary trading may be an effective way to reduce systemic risks and solve problems revealed by the current crisis.

However, the current discussion in the US illustrates the difficulty of good calibration and an efficient implementation of this rule. As we have seen, the very definition of proprietary trading has caused regulators more problems than expected. Moreover, I note that the implementation of the Volcker rule - or at least the project as presented by US regulators - appears to pose significant risks to other areas of the world and would require substantial international coordination.

Is the separation of banking from retail banking and investment banking likely to eliminate the systemic risk generated by investing activities of European banks? In this context, I have noted the comments of Sir John on the practical implementation of the recommendations of his commission, including the scope of the legal separation between retail business and commercial activities of banks. And I noticed that Sir John seems to insist on a restructuring of the activities of universal banks rather than breaking their current structures.

As you know, we do not have a single European banking model, or even a single banking sector. European banks and national banking sectors differ greatly, not only by their size and geographic scope, but by their activities and missions, their funding model, their model of income generation, their governance, operational structure, etc. This diversity which is the wealth of the European banking sector represents an additional challenge: we must find effective solutions to support different banking models within the European banking sector, whilst preserving that which is functioning well.

Full speech (French only)

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