31 October 2012

Financial World: Liikanen it or lump it ? (Graham Bishop article)

The Liikanen Group’s recent report proposed strong medicine for the ills of the banking system but explicitly stopped short of a legal separation of banks. Instead, the group has gone for a bank holding-company structure of legally (and in terms of technology) separate companies.

The “long-standing universal banking model in Europe would remain untouched,” says the report. Unfortunately, the divisions between some of the entities look quite wish-washy. Indeed, elements of the proposals have, arguably, already been overtaken since the group started work in February. In particular, the European Commission’s proposal on bank resolution and the consultation by the Bank for International Settlements on a Fundamental Review of Trading Book Capital Requirements have already eaten some of the Liikanen Group’s red meat. Has the report been turned into a non-event? The reaction of Michel Barnier, the internal market commissioner, may be telling: “This report will feed our reflections on the need for further action.” That sounds a bit like a polite dismissal – but he did open a consultation.

Separating out high-risk trading sounds simple but, in practical terms, it may not be so easy. At the basic level, exactly what activities will be shifted and at what threshold? The Commission is invited to calibrate the proportion of a bank’s balance sheet to be used as a trigger – between 15 and 25 per cent of the total assets. This may turn out to be quite a subjective analysis. But supporting customer–driven trading, hedged risk management and managing own liquid assets may all remain within the “deposit bank”. This surely means lots of scope for blurring the boundary and regulatory capture.

© Financial World