05 January 2014

FT: Europe set to ease reform on bank splits

In a draft European Commission proposal, seen by the Financial Times, the separation is no longer mandatory, would be less costly and restrictive than first envisaged, and national supervisors are given wide discretion in applying the reforms. In a further twist, the commission adds its own “narrowly defined” version of the US Volcker rule, which outlaws proprietary trading. The ban applies to around 30 big banks, regardless of whether their deposit-taking part is fenced off.

The proposals stem from the 2012 Liikanen report on the structure of banking. They are the finale to a welter of EU reform since the 2008 financial crisis, which has raised capital standards, introduced the first common rules to wind up failed lenders and launched a eurozone-based Banking Union.

While deliberations on Liikanen are continuing within the commission, early drafts suggest Michel Barnier, the EU commissioner responsible, is opting for a middle way between international attempts to make bank structures safer and less complex to wind up.

The “Barnier rule” on proprietary trading prohibits activities for “the sole purpose of making a profit for own account without actual or anticipated client activity” – a narrow definition that goes beyond existing curbs planned in Europe. Mr Barnier sees the reforms as necessary but tailored to avoid damage to the financing of the real economy and capital markets. But the revisions to Liikanen will be controversial. Sven Giegold, a German Green MEP pressing for structural reforms, said the rules “risk having no real effect on the banking sector apart from adding bureaucracy”. “It looks like a purely symbolic political act", he said.

Potential exemptions will be a relief to industry. Thousands of EU small banks are exempt from any separation requirements or the prohibition on proprietary trading. EU sovereign debt trading remains untouched. Supervisors are also permitted to shield big mutuals, and cooperative and savings banks. These include Crédit Agricole and Group BPCE of France, and Germany’s DeKa and DZ Bank.

The Liikanen report, by contrast, said its recommendations must “apply to all banks regardless of business model, including the mutual and cooperative banks, to respect the diversity of the European banking system".

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Further reporting, 27.12.13 © Reuters

BBA comments:

According to [reports], the Commission is to step back from obliging structural separation between deposit-taking and trading activity and instead is to adopt a less radical option within the Likkanen report for supervisors to have reserve powers to oblige separation where – and only where – they do not have faith in an individual bank’s recovery and resolution planning.

This would be good news for many banks within the UK and across Europe, but of cold comfort only to the largest UK banks that under UK legislation finalised in the dying weeks of 2013 will be required to separate – or "ring-fence" – their deposit-taking and lending activity for households and SMEs from their investment banking activity.

BBA has no intention of suggesting that the Commission’s decision not to impose this type of separation should mean that the UK should rethink and, instead, are relieved that the Commission has not made the task for these banks even more complex by super-imposing at a European level a similar but different requirement – as can be their way. This in fact was the only ask in our response to the Commission’s most recent consultation. This could not be misinterpreted or missed since our response in entirety read:

As the Commission is aware, the UK is already at an advanced stage in putting in place domestic legislation to bring about the structural separation of its larger domestic banks based on the ring-fencing model. This is already a complicated exercise and our request in respect of this consultation would be to ask that the Commission seeks to avoid adding further complexity in determining how next to proceed at a European level.”

If these early reports are borne out upon publication of the draft legislative proposal and the Commission has stepped back from imposing a further layer of structural reform, this would be good news and would show that consultation can work.

Press release

© Financial Times