The report centres on the proposal of segregating trading activities from traditional banking operations without breaking up universal banks. Does that go far enough to mitigate the risks?
I don't think that we can eliminate the interconnectedness in the banking sector just by implementing this proposal. The risks won't automatically disappear just because we segregate individual business activities. That's why the proposals also want to ban credit relationships with certain financial market players such as hedge funds. However, the segregation of trading activities from the retail banking business could contribute to reducing the complexity of large banks. Incentives for the banks to improve the transparency of their structures could also be created. This makes the Liikanen proposals an attractive alternative – particularly as the report takes a holistic approach.
What do you mean by that?
The proposals don’t stop at a segregation of trading activities from the rest of a bank's operations. This measure is only a supplementary element, which is closely linked to higher capital requirements and improved corporate governance, and also to the future resolution regime. The supervisory authorities would have to prepare efficient and credible resolution plans and they would get considerable ex-ante powers of intervention – up to and including economic and organisational separation of critical business activities. The recovery plans which systemically important banks will soon have to submit will help us here.
The G20 has only required global systemically important banks to do this. Why does BaFin want domestic systemically important institutions to submit recovery plans too?
We view recovery planning as a type of extended risk management which better equips banks against crises. If credit institutions and supervisory bodies consider ahead of time what will need to be done in an emergency, they can then act more quickly and effectively. That's why it's important for all the major German banks to submit recovery plans for our critical review. Together with the Bundesbank, BaFin has drafted a circular that will help the institutions to develop their recovery plans. Market participants were invited to comment on a draft in November.
The Liikanen Report contains not only the approaches mentioned above, but also a proposal on remuneration requirements. What do you think about that?
The proposal is largely within the scope of what CRD III requires and what is also currently being discussed for CRD IV. This is true, for example, of linking variable remuneration to fixed remuneration. As soon as the European requirements, in particular those of CRD IV, have been finalised, they will be fully transposed into German legislation. One element is new: the expert group's proposal to pay a fixed, mandatory component of variable remuneration in the form of bail-in instruments. This should put a stop to “gambling for resurrection,” i.e. institutions close to insolvency using high-risk strategies in a last-ditch effort for recovery. In addition, such remuneration in instruments could provide incentives to employees that are more like those of an owner with a long-term interest in the businesses’ sustainable development. This is a welcome step. However it's important that the incentives should be carefully calibrated, particularly as the bail-in instrument has not yet been finally decided.
The proposals are on the table – what is the next step?
The wealth of good ideas should now be implemented with a view to what we want to achieve. The goal must be to make the system more secure. From my point of view, it is right that the report focuses on the large institutions and the firms with a high proportion of trading activities. The stricter requirements will thus only apply to institutions which are so large and interlinked that they could present a danger to financial market stability. Most medium-sized and smaller institutions, on the other hand, will not be impacted.
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