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1. EBIC’s general messages on the Liikanen Report’s recommendations
Although the EBIC appreciates the efforts of the European Commission and the Liikanen Group to strengthen financial stability in the European banking landscape, it considers that there is an excess of financial regulation at the moment and thus it could lead to overlaps between the different regulations.
The main item of the proposal is the ‘ring-fencing’ of trading and market making activities approach and the scheme of thresholds proposed. EBIC also considers that other alternatives, in particular the adoption of the Vickers approach (ring fencing of retail activities accompanied with capital surcharges) are highly problematic.
Therefore, EBIC expresses strong concerns about a mandatory separation of proprietary trading activities and other significant trading activities over a certain threshold.
EBIC supports the European Commission’s intent to carefully consider 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.
2. EBIC’s views on the inclusion of Assets held for sale as trading activities
In EBIC’s view the proposed criteria for making a first selection based on banks’ assets held for trading and available for sale (AFS) is too broad. This approach does not adequately take into account the level of risk of the different assets within the trading book and the AFS category and/or to what extent the risk of an asset is offset - entirely or partially - by a corresponding hedge. As a consequence of this broad scope, many banks will be perceived as having potentially risky trading positions and therefore will proceed to the second examination stage, where the calibration of the final threshold is not yet known.
3. EBIC’s view on the LTV (Loan to Value) and LTI (Loan-to-Income) ratios included in the instruments available for micro- and macro-prudential supervision
While it is common for individual lenders to use LTV/LTI ratios as important risk assessment criteria, the EBIC shares the Financial Stability Board’s view that it is not necessary for regulators and supervisors to mandate such caps if they satisfy themselves that the underwriting standards are sufficiently prudent and are unlikely to be eroded under competitive pressure. Indeed, EBIC has concerns that LTV/LTI caps could in some cases unnecessarily restrict access to credit for borrowers. EBIC is of the view that a variety of other ‘tools’ would have a similar impact on financial stability without the drawbacks associated with lending thresholds. These ‘tools’ include the new CRR/CRD IV and the new consumer protection rules in the upcoming ‘Mortgage Directive’, including information and adequate explanations, creditworthiness assessment and standards for advisory services.