02 October 2012

High-level Expert Group on reforming the structure of the EU banking sector presents its report

Governor Erkki Liikanen said: "The report contains the Group's recommendations for further reforms of the banking sector, including structural reform. Building on the substantial measures already under way, I believe that the Group's recommendations would, if implemented, provide for a safer, more stable and efficient banking system serving the needs of citizens, the EU economy and the internal market."

Internal Market and Services Commissioner Michel Barnier said: "I would like to extend my thanks to Erkki Liikanen and the members of the group. This is an important report that will inform our policy on regulating the financial sector. The report underlines the excessive risks taken by banks in the past, and makes important recommendations to make sure that banks work in the interest of their customers". He continued: "This report will feed our reflections on the need for further action. I will now consider the next steps, in which the Commission will look at the impact of these recommendations both on growth and on the safety and integrity of financial services. We need to look at these questions also in light of the financial reforms that I have already put on the table of the European Parliament and the Council."

The proposals of the High-level Expert Group

The Group recommends a set of five measures that augment and complement the set of regulatory reforms already enacted or proposed by the EU, the Basel Committee and national governments.

1. Proprietary trading and other high risk trading activities should be assigned to a separate legal entity if the activities to be separated amount to a significant share of a bank's business and are above a certain threshold. This would ensure that trading activities beyond the threshold are carried out on a stand-alone basis and separately from the deposit bank. As a consequence, deposits, and the explicit and implicit guarantee they carry, would no longer directly support risky trading activities. The long-standing universal banking model in Europe would, however, remain untouched, since the separated activities can be carried out in the same banking group. Hence, banks' ability to provide a wide range of financial services to their customers would be maintained. Within the Group, some members expressed a preference for a combination of measures: imposing a non-risk-weighted capital buffer for trading activities and leaving the separation of activities conditional on supervisory approval of a recovery and resolution plan, rather than a mandatory separation of banking activities. Both basic alternatives and their motivation are presented in the report.
2. Second, effective and realistic recovery and resolution plans must be drawn up and maintained by the banks, as proposed in the Commission's Bank Recovery and Resolution Directive. The resolution authority should request a wider separation than the considered mandatory separation above if this is deemed necessary to ensure resolvability and operational continuity of critical functions.
3. The use of designated bail-in instruments is strongly supported by the Group. The position of bail-in instruments within the hierarchy of debt commitments in a bank's balance sheet must be clear so that investors know the eventual treatment in case of resolution. Banks should build up a sufficiently large layer of “bail-inable” debt. Such debt (or an equivalent amount of equity) would increase the overall loss-absorptive capacity, decrease risk-taking incentives, and improve transparency and the pricing of risk.
4. The Group proposes to apply more robust risk weights in the determination of minimum capital standards and more consistent treatment of risk in internal models. Once the Basel Committee has concluded its review of the trading book, the Commission should assess whether the results would be sufficient to cover the risks of both deposit banks and trading entities in Europe. Also, the treatment of real estate lending within the capital requirements framework should be reconsidered, as well as maximum loan-to-value (and/or loan-to-income) ratios included in the instruments available for micro- and macro-prudential supervision.
5. Finally, the Group considers that it is necessary to augment existing corporate governance reforms by specific measures to:
   1. strengthen boards and management;
   2. promote the risk management function;
   3. rein in compensation for bank management and staff;
   4. improve risk disclosure; and
   5. strengthen sanctioning powers.

Background

Commissioner Michel Barnier announced his decision to set up the Group in November 2011. He then appointed Erkki Liikanen, Governor of the Bank of Finland and a former member of the European Commission, as Chairman. The members were appointed in February 2012. They were chosen on the basis of their technical expertise and professional background, and were appointed in a personal capacity.

The Group held monthly meetings, inviting different stakeholders, and organised a public consultation in May. Its mandate was to determine whether, in addition to ongoing regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection, and if that is the case to make recommendations as appropriate. Today's report concludes the mandate of the Group.

Press release

• Report and Executive summary
• Governor Liikanen's statement
• Mandate
• Consultation

The European Commission is launching a new consultation on the recommendations of the High-level Expert Group on reforming the structure of the EU banking sector. This consultation is part of the European Commission’s process for assessing the Group’s report and recommendations. Deadline for comments is 13 November 2012. View

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