News Column

EU Experts Want Banks to Split Off Risky Trading Activities

Oct. 2, 2012

Alexandra Mayer-Hohdahl

European Union banks should be forced to keep risky trading business separate from activities involving depositors, a group of experts recommended Tuesday as the bloc works to draw lessons from the global financial crisis.

"We think that this separation, this prevention, this balancing, this differentiation of risks is a key element for the stability, the sturdiness of the banking sector over the long term," the EU's market regulation commissioner, Michel Barnier, told reporters in Brussels.

But he will take into account not just the opinion of the independent expert group - whose report he called a "cornerstone" - in deciding whether to proceed with new legislation for the EU's 27 countries. A six-week public consultation is also underway.

The banking industry already went on the offensive Tuesday, with the president of the Association of German Public Banks arguing that "a dual banking system would damage the stability of our banking system rather than strengthen it."

The 11 experts on the group, led by Finnish Central Bank Governor Erkki Liikanen, however, argued for "legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group," noting that "excessive risk taking" was a precursor of the crisis.

They suggested that mandated separations be limited only to banks whose trading assets exceed 100 billion euros (129 billion dollars) and represent 15 to 25 per cent of total assets.

"The smallest banks would be considered to be fully excluded from the separation requirement," the report said.

The trading activities targeted would be those deemed to be "the riskiest parts of investment banking activities and where risk positions can change most rapidly," it noted.

The separated trading and deposit activities could exist within the same bank, but would need "to be funded and capitalized separately," the group said.

Such a system would help make it easier for governments to shut down a troubled lender, since such a move could no longer be opposed for posing a danger to the larger banking system.

The expert group also proposed other reforms, including on capital requirements and banker compensation - for instance suggesting that those could be partially made up of bonds on which national regulators could force losses.

Liikanen, a former EU commissioner, argued that the measures proposed by his group will help shield taxpayers, who have often had to foot the bill for bank failures during the crisis.

"I believe this report goes a long way (in the) direction where we get rid of the system where profits are private and costs are public," he said in Brussels.

"If there is such an opinion widely that whatever happens with the complex, big financial institutions, taxpayers will pay in the end, that's sort of a problem, because it leads to higher excessive risk-taking," he added.

Any proposals made by the commission would have to be approved by EU member states and the European Parliament to become law.

The chairwoman of the legislature's economic and monetary affairs committee welcomed Barnier's "willingness" to bring forward more legislative proposals.

"It is clear that there needs to be a new approach to the way in which banks are structured, given the impact such institutions can have on the economy, which citizens are still paying the price for now," Sharon Bowles said.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH