EC: Summary of the replies to the consultation of the internal market and services directorate general

20 December 2012

European Commission summary of the replies to the consultation of the internal market and services directorate general on the recommendations of the High-level Expert Group on reforming the structure of the EU banking sector.

The High-level Expert Group on reforming the structure of the EU banking sector ('the Group'), chaired by Erkki Liikanen, Governor of the Bank of Finland, presented its report to the European Commission on 2 October. The report contains both structural and non-structural reform recommendations aimed at complementing the current regulatory reform agenda:

• As regards structure, the Group recommends a mandatory separation of proprietary trading and other high-risk trading activities into a separate legal entity within the banking group (recommendation 1). This separation would only be mandatory if the activities to be separated amount to a significant share of a bank’s business. Accordingly, the majority of banks would remain unaffected, to the extent that they would have credible and effective recovery and resolution plans in place. Furthermore, the Group considers that separation of additional activities may be necessary conditional on the recovery and resolution plans (recommendation 2). That judgement would be left to supervisors.
• The non-structural recommendations relate to the use of bail-in as a resolution tool (recommendation 3); a review of capital requirements on trading assets and real estate related loans (recommendation 4); and measures aimed at strengthening the governance and control of banks (recommendation 5).

This note summarises the replies received, structured to cover each of the five main areas of recommendations made by the Group. The proposal for the mandatory separation of bank trading activities was subject to most comment and controversy, especially from responding banks, and hence is summarised in more detail.

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.

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.

Recommendation 3

Not all respondents commented on the bail-in proposals contained in the Group's report. Some provided various comments on bail-in, but without commenting directly on the specific Group proposal that there should be a more targeted bail-in approach involving clearly designated bail-in instruments rather than bail-in of almost all unsecured liabilities. As regards comments on the specific Group proposals, there was no consensus among the respondents.

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.

Recommendation 5

There were many respondents who did not comment on the Group's corporate governance recommendations at all, and if they commented, they (in particular banks) often focused mainly on the recommendations related to incentive schemes / remuneration.

 

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