20 December 2012

DG MARKT: Summary of replies to consultation on recommendations of the HLEG on reforming structure of EU banking sector

1. Mandatory separation of proprietary trading activities and other significant trading activities (Recommendation 1)

In general, banks welcomed the Group's analysis, but argued that a compelling case for mandatory separation of trading activities has not been made. They felt that the proposal was not backed by the required evidence, and that there was a need for a thorough impact assessment.

The current reform agenda is seen by responding banks as sufficient to tackle the identified problems in the banking sector, including in particular the measures taken or proposed in CRR/CRDIV, the Bank Recovery and Resolution Directive (BRR), Banking Union, EMIR, etc. Also, structural separation recommendations are criticised along a number of dimensions, namely that:

• costs are high...;
• claimed benefits may not materialise...;
• competitiveness of the EU banking sector is harmed...;
• consistency with other structural reform initiatives is not ensured...;
• there is a lack of clarity and detail...

However, not all banks argued a strong case against structural separation. Also, several banks made a number of constructive proposals, for example regarding the designation of activities to be separated and the measurement of the proposed thresholds.

Banks and other respondents called for an impact assessment to evaluate further the rationale, objective and viability of the recommendation. The respondents themselves generally did not provide a quantification of expected impacts.

As regards non-bank respondents, business federations or other representatives of corporate customers generally expressed strong reservations about mandatory separation and a move away from universal banking in Europe. This is feared to increase costs and reduce access to bank finance for corporate customers. These concerns were coupled with calls for policy measures to reduce the barriers to entry in the banking market and fostering non-bank finance channels.

Among the public authorities, including central banks and national finance ministries, there were diverging views on the need for structural reform. While some were not convinced about the additional benefits of such reforms, others expressed strong support for insulating deposit-taking banks from other (trading) activities. However, even those in support of structural reform called for greater clarity on the nature of the proposed separation and an impact assessment.

Support for structural separation was generally provided by other financial institutions, at least from their perspective as institutional investors in banks. Institutional investors pointed to the tensions between the cultures of investment banks and retail/commercial banks and the wider risks if investment banking activity is being funded with retail deposits. They also feel that separation could facilitate market monitoring, risk management and bank resolution. However, the responding investors had some doubts about the proposed activities to be separated as well as the measurement of the thresholds for mandatory separation.

Strong support for mandatory separation was also provided by consumer representatives and a number of think tanks or NGOs. The view of some was that the Group's proposals did not go far enough, e.g. that deposit banks should be prohibited altogether from engaging in proprietary trading.

2. Additional separation of activities conditional on the recovery and resolution plan (Recommendation 2)

Respondents were generally in support of strengthened recovery and resolution plans (RRPs) and improved bank resolution. Several respondents noted that the Group's recommendations for additional separation conditional on a bank's RRP risked overlapping the provisions in the proposed BRR, which already envisages a number of measures, including structural change that the resolution authority may impose on banks where necessary and appropriate to facilitate resolution.

Banks argued that, with an effective recovery and resolution regime in place, there is no need for the mandatory separation proposed in the Group's first recommendation. Rather, the choice of corporate structure should be a matter left to be determined through the RRP process, as the relevant authorities are best placed to make the judgement on a caseby- case basis about whether or not a change in corporate structure enhances resolvability.

Some banks however considered any structural separation based on supervisory assessment as too intrusive and creating legal certainty. It was also considered important that uniformity in the RRP assessment is applied across Member States, and that the EBA should play an important role in this.

Other respondents took a more sceptical stance, saying that conditional separation based on the RRP would be arbitrary and that supervisors lack the capacity to adequately evaluate RRPs, especially given the complexity of the large EU banks. Mandatory separation of trading activities would simplify banks and make the recovery and resolution framework more effective and credible.

3. Amendments to the use of bail-in instruments as a resolution tool (Recommendation 3)

As regards comments on the specific Group proposals, there was no consensus among the respondents... The majority of respondents (mainly banks and other financial institutions) presented negative views on the proposal that bail-in instruments cannot be held by other banks, arguing that this would unduly limit the investor base and raise bank funding costs while at the same time be ineffective at limiting interconnectedness in the financial system.

4. Review of capital requirements on trading assets and real estate related loans (Recommendation 4) 

Most respondents (mainly banks) opposed the Group's proposal to revise capital charges for the trading book, by setting an extra capital buffer or introducing a minimum floor to risk-based requirements. Instead, they argue that CRDIII and CRR/CRDIV have reduced (or will further reduce) the risks stemming from the trading book, and that any remaining issues should be dealt with as part of the Basel Committee's on-going fundamental review of the trading book.

5. Strengthening the governance and control of banks (Recommendation 5)

As regards incentive schemes, the use of a maximum ratio between variable and fixed pay was viewed negatively, at least among the responding banks. Views were split on the use of bail-in bonds as part of remuneration. There was practically no support for fixing the remuneration to dividends, but more support for enhanced shareholders' say on pay.

Respondents did not feel that there was a strong need for strengthening measures on sanctions, with the exception of two (non-bank) respondents.

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