03 October 2022

SRB: Guest blog - Westman: The Liikanen Report and the proposal for a resolution framework – 10 years on

While the proposal for structural reform in the banking sector was not implemented in the EU, many of the ideas brought forward by the high-level expert group can be found in other regulatory initiatives.

It is now a decade since the Liikanen Report was published. The task to assess the need for separation of business lines, legal entities or assets and liabilities to ensure the resolvability of every bank is now in the hand of the resolution authorities.

Proposals for structural reform in the banking sector

Published in October 2012, the Liikanen Report outlined the work by the high-level expert group commissioned by Commissioner Michel Barnier to assess the need for structural reform in the banking sector. Former governor of Bank of Finland Erkki Liikanen chaired the group.[1] The thinking of the high-level expert group was structured along two different avenues. One was based on the notion that that resolution authorities will make the needed tough decisions to ensure resolvability based on the assessment done during the annual resolution planning process. Hence, a one-size-fits-all structural reform ex-ante, which possibly would reduce the diversity in banking business models, would not be needed. The other saw the need for a separation of significant trading activity ex-ante to make resolution manageable at the time of crisis. This would also reduce risk of contagion within large, multi-business line banks and make bank easier to manage, supervise and monitor, thus further reducing the room for excessive risk taking.

The final proposal for structural reform was a combination of the two avenues.[2] Proprietary trading and other high-risk trading were to be separated from the socially most vital parts of deposit-taking and lending, while bank-level specificities were to be accounted for by conditioning further separation of, for example, market-making activity on the credibility of recovery and resolution plans. The separation was to be done within the group in terms of legal and operational barriers, and so acknowledges the benefits of the universal banking model. The implementation of the proposed structural reform was to be mandatory only for banks with significant trading activity.

The legislative proposal on bank structural reform[3] drafted based on the work of the high-level expert group was withdrawn by the EU Commission in 2018. While the high-level expert group was working on its proposals, the Commission made the proposal for the Bank Recovery and Resolution Directive (BRRD). At the same time, the European Council asked for a roadmap to create the Banking Union. The BRRD was adopted in spring 2014, while the Single Resolution Mechanism Regulation (SRMR), creating the second pillar of the Banking Union, was adopted in July 2014. The Single Resolution Board (SRB) with responsibility for significant institutions in the Banking Union and the national resolution authorities (including in Finland the Finnish Financial Stability Authority (FFSA)) with the responsibility for less-significant institutions were established in 2015. Now it is up to us resolution authorities to show that we will, as needed, take the tough decisions based on a bank specific assessment along the lines of the first avenue in the Liikanen Report...

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