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ESBG appreciates the efforts of the European Commission and the Liikanen Group to strengthen financial stability in the European banking landscape. ESBG also welcomes the fact that the Liikanen Group brings the risky practices of investment banking including proprietary trading, shadow banking and the ‘Too-big-to-fail-Problem’ to the spotlight, leaving aside the “Vickers Report” approach. In this sense, ESBG appreciates that these proposals do not include any increase in capital requirements for retail banks and do not envisage a separation of businesses for the entire banking system - in particular for the small savings and retail banks.
ESBG is of the opinion that there is an excess of financial regulation taking place that might result in an excessive and inflexible regulation, and in many cases will lead to overlaps between the different regulations, as well as unintentional consequences.
From ESBG’s perspective the adequate answer to the underlying problem of deficient risk management in some institutions would be improved supervision and an improvement of the loss absorbency in the own funds of institutions as already proposed in the reforms under implementation. In its view, the additional risk capital requirements included in the Basel 2.5 and Basel III frameworks of three to four times higher capital charges for trading activities should be sufficient.
ESBG is of the opinion that, in general, the universal banking model coped much better with the financial crisis than the separate banking system.
ESBG agrees with the Liikanen Group on the identification of the main drivers of the crisis: insufficient and uncoordinated supervision, inadequate risk management and excessive reliance on short term funding. In fact, ESBG considers that these problems have already been addressed by existing or newly prepared regulations.
Furthermore, a concrete assessment of the impact of the proposal cannot yet be carried out by financial institutions until the concrete proposals are made. For the time being the recommendations lack the sufficient clarity or precision to understand the eventual effects that can stem from the implementation of the proposals. Therefore, ESBG supports the European Commission’s intent to consider carefully the possible impact (with an appropriate and independent cost-benefit analysis) that the implementation of these recommendations might have on the banking industry and the European economy before endorsing them or proposing any legal reform.
Although ESBG appreciates the effort made to target the more risky institutions and activities, it still has some doubts about how the thresholds system for ring-fencing trading activities would be applied. It seems to be very difficult to assess which activities would fall under the threshold and which would fall outside, and moreover this will probably lead to similar legal disputes as created by the Volcker Rule.