EU says banks should split risky trading from banking

Frankfurt buildings Europe's biggest banks would be affected, should these changes be brought in

A European Union advisory group says that Europe's banks should be split into separate legal entities, in order to protect ordinary retail banking from risky trading.

The review was set up to look at whether banks should be structurally reformed to avoid another crisis.

The group agreed that banks should separate certain high-risk banking activities from everyday banking.

Banks likely to be affected include Deutsche Bank and BNP Paribas.

Speaking later to the BBC, the leader of the expert group which compiled the report, Bank of Finland governor Erkki Liikanen, said banks could be forced to go further than the "moderate" directive of making them different parts of the same banking group.

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One of the outcomes of the crisis is the public outcry that the profits have been private but the losses have been shared by taxpayers”

End Quote Erkki Liikanen Chairman of the expert group on reforming the structure of banking

"[Banks] must present a plan that they are able to unwind their activities without harming the broader economy. If they fail to do this because their structures are too complex or too difficult to manage, then the regulator can ask for deeper separation," Mr Liikanen said.

The report's suggestions are similar to those put forward by the UK's Independent Commission on Banking and the Dodd-Frank act - particularly the Volcker rule - in the US, both designed to avert further financial crises in these countries.

A spokesperson for the UK Treasury said it was "encouraging" to see that the key findings echoed those of the ICB report, which also called for the ring-fencing of retail banks, and which the UK government is already in the process of enacting into legislation.

Sharing risk

Europe's leaders see banking reform as going hand-in-hand with supporting the economy.

The EU's report also looked at the risks of lending on property, and recommends it should be underpinned with larger capital reserves.

Lending too much to overvalued property was at the core of the banking crisis that led to the credit crunch.

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It is not at all clear that further structural reform would make the system safer or more efficient”

End Quote Association for Financial Markets in Europe

Ireland's over reliance on property, which helped it to thrive in the boom years, prompted it to ask for a rescue. It is also the reason Spain has asked for help for its banking sector.

The banking group also examined ways of spreading the risk burden of a collapsed bank to a wider group, so that bondholders, as well as shareholders, would take some of the losses in future.

"One of the outcomes of the crisis is the public outcry that the profits have been private but the losses have been shared by taxpayers," Mr Liikanen told BBC News.

"We must get rid of this trend because it leads to situations where banks take excessive risks because the government will bail them out," he said.

Bonuses

The report also suggested that bankers should accept bonds as part of their bonus, the value of which would fall if risky trades or lending lost money.

The proposals have been passed to EU internal markets commissioner Michel Barnier, who will make the decision on whether to present proposals in line with its recommendations and whose officials write the first draft of new laws.

Mr Barnier said: "The Commission will look at the impact of these recommendations both on growth and on the safety and integrity of financial services."

The industry body, the Association for Financial Markets in Europe, which represents big banks, welcomed these comments.

But it said the European banking industry was already undergoing "profound change" and questioned whether any more was needed.

"It is not at all clear that further structural reform would make the system safer or more efficient," it said in a statement.

The report, which the expert group said should be discussed before the end of the year, is just one of a number of high-level reviews of the banking sector, which is around 8,000-strong across the 27-country European Union.

On Wednesday, the European Banking Authority will release its final report on banks' implementation of plans to establish temporary capital buffers.

The EU is also moving towards banking union within the eurozone and is planning to have a eurozone-wide regulatory system, the Single Supervisory Mechanism (SSM), which it hopes will begin its work by the start of next year.

It would allow the ECB to assume full supervisory responsibility over any credit institution, particularly those which have received or requested public funding, with all banks covered by the SSM by the start of 2014.

The SSM needs to be adopted by member states' government ministers and MEPs.

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