Brussels, 24/10/2013 (Agence Europe) - At the end of November, the European Commission will publish eagerly awaited draft legislation on the structure of European banking.
The aim of this final piece of major legislation under Commissioner Barnier in the current Commission is to look at systemic risk in banking in the light of the raft of legislation introduced in the EU over the past four years to fill legislative gaps that came to light during the financial crisis. Bank capital requirements have been stepped up, along with liquidity requirements and internal risk management. New rules on bank resolution will force shareholders and bondholders to shoulder their share of the burden in the event of a bank collapse.
The Liikanen group was asked whether, now that prudential bank regulations have been strengthened, there were still banks so interconnected or so big to fail or to be bailed out by the public purse. The answer, says a high-ranking European official, is yes, which is why a “tool” is needed at European level to ringfence some risks.
The Liikanen group report was published in October 2012, and suggests hiving off from retail banking into a legally separate body the most risky trading, market making, lending to speculative funds, SIV-type securities and investment in private equity funds (see EUROPE 10701). Two thresholds will be set, above which banks will first be assessed by the European bank supervisory body and then, at the second threshold, hiving off speculative business will become compulsory. The Liikanen Report leaves it for the Commission to decide on the second threshold, but suggests that separation should be compulsory when risky trading accounts for between 15% and 25% of a bank's total assets or more than €100 billion. This is aimed at preventing the rest of the bank paying for losses made in trading because the rest of the bank would only provide cash up to the level set for large exposure.
In its approach, the Commission will avoid challenging the universal banking model in Europe. The high-ranking official says the starting point is that there is no right or wrong banking model, as is seen by the fact that Anglo Irish Bank's capital fell by half after the bursting of the Irish property bubble, but Deutsche Bank has sailed through the financial crisis. The building society-savings bank model is not perfect either, as has been seen with the building society problems in Spain.
Work at the Commission will not be looking at a clear-cut division between trading and retail banking, but will focus on regulatory measures to determine when risky banking is to be hived off from the rest of a bank to prevent losses on the market in the event of failure from sinking the entire bank. The source said it was possible to intervene on when and how measures become automatic at European level and when and how they are to be left to the judgement of the member states, and also on the introduction of thresholds as suggested in the Liikanen Report or increasing prudential requirements if a bank wishes to continue with risky trading.
The Commission has taken account of measures introduced in the EU, in France, Germany and the United Kingdom, and also measures introduced in the United States. Each country has taken different measures. In the United Kingdom, the aim has been to protect savers, explains the Commission official, whereas in France, measures have been taken to deal with speculation by banks, but only between 1% and 3% of bank balance sheets have been hived off. The United States is finding it difficult, the source says, to put into practice its desire to ban speculation by banks.
In the field of financial regulations, the European legislator is currently examining how to put banking union into practice, so the draft legislation on the structure of banking has no chance of being introduced during the current European Parliament, in other words by May 2014. It will therefore be handed over to the member states and the next European Parliament, which will decide whether they want to push the reforms through. (MB/transl.fl)