The European Union will ease the financial reforms that would force big banks to ring-fence their retails departments from riskier investment operations. On the European Commission draft proposal that the Financial Times had access to, the separation is no longer mandatory and would be less costly than first envisaged.
National supervisors are also given wide discretion in applying the reforms: their powers will be enhanced to force activities such as market-making and buying and selling derivatives to be placed in a separately capitalized entity.
After such a split, the deposit-taking bank would still be allowed to sell standardised derivatives for hedging risk to insurance groups, non-financial companies and pension funds – within an exposure limit that Brussels would be empowered to set.
The proprietary trading ban will be applied from 2018 and the separation of some banks from 2020, meaning that the decision on separation for most affected banks will be taken by the European Central Bank, which this year becomes the Eurozone’s top bank supervisor.
However, the same proposal, drawn up by the EU Commissioner Michel Barnier, adds a “narrowly defined” ban on 30 big banks using their own money for trading, so-called proprietary trading. This rule prohibits activities for “the sole purpose of making a profit for own account without actual or anticipated client activity”.
Despite the fact that the Likkanen report suggested that its recommendations should “apply to all banks regardless of business model, including the mutual and co-operative banks, to respect the diversity of the European banking system”, exemptions are now on the table. Thousands of EU small banks will be exempted from any separation requirements or the prohibition on proprietary trading and EU sovereign debt trading remains untouched. Supervisors will also be permitted to shield big mutuals, and co-operative and savings banks.
Due to be published in late January or February, the proposal follows the 2012 Liikanen report on the structure of banking. Following the 2008 financial crisis and the subsequent EU reforms that lead to the introduction of the most common rules to wind up failed lenders and to the launching of a Eurozone banking union, the European Commission is now seeking to find a middle way between international attempts to make bank structures safer and less complex.
After 15 months during which the implementation of the recommendations set by Erikk Liikanen met with resistance in France, Germany and a host of European banks, the law is only expected to come into vigor after December 2015, with its supervision becoming the responsibility of Mr. Barnier’s successor.
Michel Barnier believes the reforms are necessary but must be carried out in such a way that would avoid damaging the financing of the real economy and capital markets. In addition to the controversy of the potential inclusion of market-making (since this proposal goes further than reforms planned by Paris and Berlin), reluctance on this issue is also expected from the European Parliament. Sven Giegold, MEP and Green finance spokesperson, said the rules “risk having no real effect on the banking sector apart from adding bureaucracy”, representing nothing but a “symbolic political act”.
Please read the Financial Times article here.