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An EU advisory group, led by Bank of Finland chief Erkki Liikanen, proposed last October that banks separate their deposit-taking arms from proprietary trading and other risky investment banking to shield taxpayers and to protect savers. "The general direction of the Liikanen report - essentially to retain the system of universal banks but to increase the ability to wind up banks - is right from our point of view", Dombret said in the prepared statement. "But the proposal to separate (units of banks) also entails disadvantages and several difficulties", he added.
Dombret pointed to difficulties in the regulatory implementation of such separation and said a cost-benefit analysis was needed before implementing the proposal. He also questioned whether the stability gains would be as high as the Liikanen group assumed since splitting the business arms could reduce contagion within a bank but could in turn increase contagion on the market.
The Liikanen proposal was a response to concerns sparked during the global financial crisis that retail banking is highly vulnerable to troubles engulfing the investment banks.
The Bundesbank statement said: "In our view, the general thrust of the Liikanen Report – the idea that the universal banking system should essentially be retained, but the resolution of banks should be made simpler – is correct. In our opinion, the report accurately describes the existing problems in the European universal banking system. We share the findings resulting from the analyses in the three basic sections. The two detailed analytical sections on the development of the banking sector in the EU and the various business models provide a sound basis for the discussion of any structural reforms.
With its reform proposals in five separate areas, the Liikanen Group rightly adopts a holistic approach that explicitly builds on existing and/or future regulations. The central proposal that there be an obligation to separate trading has the potential to be a further useful element of the reform agenda, which should, overall, increase the stability of the financial system. In that regard, the Expert Group is right not to target the strict separation of banking activities – instead seeking, in principle, to retain the universal banking system, with the trading unit and the deposit-taking unit (albeit legally and financially separate) able to operate within the same holding company.
We are, in principle, sympathetic to the separation proposal made by the Liikanen Group. A functional separation can help to protect traditional banking operations – including payment transactions – conducted in deposit-taking credit institutions against risks stemming from speculative proprietary trading.
However, the separation proposal also has disadvantages and creates problems of its own. The activities that are to be separated must be clearly defined, as must any exceptions, in order to prevent the rules from being circumvented. The difficulties encountered with the regulatory implementation of the Volcker Rule in the United States are a warning in this regard. The Liikanen Group looked in detail at two options (termed “avenues”) as regards functional separation. We believe that both options are practicable, but the lower degree of intervention involved in Avenue 1 needs to be weighed, from a policy perspective, against the superior predictability of Avenue 2."
Full Bundsbank statement © Deutsche Bundesbank, 26.2.13