On 14 December 2012, the European Banking Authority (“EBA”) published its opinion on the recommendations of the High-level Expert Liikanen Group on reforming the structure of the EU banking sector.
The final report of the Liikanen Group was published on 2 October 2012 and made the following recommendations:
mandatory separation of proprietary trading and other high-risk trading activities to the extent exceeding a threshold;
- possible additional separation of activities conditional on an institution’s resolvability;
- possible amendments to the use of bail-in as a resolution tool;
- review of the capital requirements on trading assets and real estate loans; and
- strengthening banks’ governance and controls.
In general, the EBA considers that the Liikanen proposals strike an appropriate balance between protecting the core features of the universal banking model and strengthening the resilience of the financial sector. However, it believes that an impact assessment is required in order to properly be able to evaluate the potential benefits and cost of the proposals.
Aware that several Member States are considering structural change to national banking industries, the EBA emphasises the need to ensure consistency across the EU so as to protect the operation of the Single Market. To this end, it states that clear criteria must be established in relation to such issues as:
- the situations where separation is mandatory;
- parameters that apply to exceptions such as the provision of “hedging services to non-banking clients”; and
- the provision of financial support between deposit banks and trading entities pursuant to the proposed bank recovery and resolution directive (the “RRD”).
Banks’ compliance with the proposals should also be subject to periodic review and macro-prudential monitoring to avoid structural arbitrage. In addition, any structural changes must be consistent with existing legislation, such as the RRD and the large exposures regulation, but should not be viewed as a substitute for adequate supervision.
The EBA considers that there is a need to further develop the bail-in framework in the RRD in order to improve its legal and operational certainty and so avoid possible destabilising effects. The EBA repeats its preference for a two-tier bail-in regime. Under such a regime, bail-in would initially be applied to a targeted category of debt instruments. This targeted approach would, it is hoped, avoid the risk that a wide ex ante bail-in regime turns out to be of limited value once resolution actually occurs. Only if the targeted approach proved insufficient, would remaining creditors be bailed-in within a proper administrative resolution procedure.
In addition, banks would be required to issue and hold a minimum percentage of their liabilities as “bail-inable” debt. It is anticipated that this would create a market in bail-in debt, encourage the standardisation of contracts and incentivise rating agencies to focus on the rating of bail-in instruments. However, the EBA supports the proposal that such debt should be held outside of the banking system, suggesting that penal risk-weightings could be introduced in order to discourage acquisition of such securities by the banking sector. It also welcomes the suggestion to use bail-in instruments in remuneration schemes for top management and as part of bonus schemes.