Brussels, 08/01/2015 (Agence Europe) - The draft report on the reform of the structure of the European systemic banks by Gunnar Hökmark (EPP, Sweden) casts doubt on the benefits of a systemic separation between trading activities and retail banking activities.
Adopted in early 2014, the Commission's proposed regulation suggests banning own-account trading within the EU in financial instruments and raw materials (but not on sovereign debt), and a ban on investing in hedge funds (but not in investment funds which do not use a leverage effect) (see EUROPE 11007). However, under an amendment tabled by Hökmark, the ban on investing in hedge funds would not apply “if these activities represent less than 2% of the tier-one own funds of the bank calculated on a consolidated basis”. As for the share of investments above this 2% threshold, this would be shed in a “five-year” transitional phase.
Separation. The regulation also gives the national supervisors (the ECB in the case of the eurozone) the option to require a systemic bank to regroup other risky trading activities (market-making, complex derivative products, complex securitisation operations, loans to venture capital funds) in legally and economically separate branches, so that any losses on these investments would have no impact on the retail activities of the group (deposits, payments). This provision would not apply if the bank in question can demonstrate that these activities are not risky.
“It is important to note that there is no indication that trading is riskier than lending, in fact it is more likely to be the reverse”, Hökmark states in his draft report. The Swedish Christian Democrat argues that “the level of bail-inable capital is a crucial parameter for judging the risks of trading”. And if it appears that there are excessive risks, the separation of the trading activities is one way of minimising them, along with “laying down increased capital requirements or reducing exposure to these risks”. The Swedish MEP, who was the EP's rapporteur on the 'Bank Recovery and Resolution Directive' ('BRRD'), also stresses that the competence on the separation of banking activities should be the responsibility of authorities which have the power to trigger banking resolution proceedings.
The organisation Finance Watch, which defends public interests in the financial sector, feels that the draft 'Hökmark' report waters down the “objectives, scope, definitions, and mechanism and sanctions” laid down in the initial legislative proposal, on the grounds that universal banks play an important role in financing the economy. “Universal banks are not the problem; 'too-big-to-fail' banking is. It distorts incentives so that Europe's megabanks are more focused on financial trading than on financing commercial investments”, says Christophe Nijdam, secretary general of the organisation. (MB)