Brussels, 03/10/2012 (Agence Europe) - Several MEPs and interest groups have reacted to the Liikanen Report on banking published on Tuesday 2 October, penned by an expert group headed by Finnish central bank governor Erkki Liikanen (see EUROPE 10701).
The chair of the European Parliament's Economic and Monetary Affairs Committee, Sharon Bowles (ADLE, UK), said in a press release that a new approach to the way banks are organised needs to be introduced, given their impact on the economy. Commenting on the idea of hiving off risky trading into a unit separate from the rest of the bank, she pointed out that the Parliament is already looking at various aspects of this in the negotiations on additional bank funding requirements (the CRD IV Directive).
The chair of the S&D party, Austrian Hannes Swoboda, urged the European Commission to look into the separation of different types of banking. He said the two models - total separation between retail and investment banking and ringfencing of retail and investment banking - should be examined in detail, and the S&D itself will make up its mind after making its own analysis of the idea.
Philippe Lamberts (Greens/EFA, Belgium) said the report smashed the myth of universal banking as the only model for the financial industry, but the Greens/EFA deplore the report's lack of ambition on key aspects of any reform, such as how banks are structured and the question of pay and bonuses. He said the hiving off of investment banking suggested in the Liikanen Report would certainly help avoid the savings of individuals and companies falling victim to the losses made by their banks' investment business, but the option of strict separation between retail and investment banking would be safer and easier to implement. The report fails to address the problems caused by the existence of banks that are too big to fail, he added, and called for a cap on the assets banks can own.
The European Banking Federation (EBF) is concerned because it says the suggested measures would undermine banks' ability to finance the real economy and could lead to a segmented Single Market. It says the hiving off of risky trading did not take full account of regulatory changes already introduced and others in the pipeline in terms of capital requirements, supervision and capital. The European Federation of Savings and Mortgage Lending is of an entirely different view. Its director, Andreas J. Zehnder, said that when somebody carries out very risky trading activities, taxpayers cannot be expected to pay the bill, and risk and liability should go hand in hand.
On behalf of the European Bureau of Consumer Unions (BEUC), Monique Goyens (who helped draw up the Liikanen Report) said that hiving off risky trading would help deal with the problem of the implicit guarantee that countries would always bail out banks, which the banks themselves had taken advantage of and had taken massive risks because they knew that in the last resort, they would be bailed out. Thierry Philipponnat, secretary general of Finance Watch, said that the Liikanen Report's recommendations tackled the heart of the problem, the moral hazard. He said that the EU must not waste time now that it has proposals for a Banking Union on the table and must get control of moral hazard.
Bank bonuses. Commenting on bank bonuses, Bowles and Lamberts welcome the Liikanen Report's suggestion that traders' bonuses should be in the form of convertible bonds, rather than share options. Bowles said that back in 2010, she had suggested that bank bonuses should be in the form of subordinated debt, 'CoCos' as they are known, but the idea had been considered too radical and had been watered down. She said the Parliament was trying to reverse the trend for CRD IV, but thus far, the Commission has not backed the modifications. CoCos are financial mechanisms that provide remuneration to investors in fat years, but are converted into shares in times of crisis. In the talks on CRD IV, MEPs recommend capping bank bonuses so they can never be higher than fixed salary (see EUROPE 10616). (MB/transl.fl)