EU Commission Publishes Liikanen Consultation
Introduction
On 16 May 2013, the EU Commission published “Reforming the structure of the EU banking sector”, a consultation paper which represents a follow-up to the recommendations made by the Liikanen High-Level Expert Group (the “HLEG”) in its report of October 2012. The deadline for responses to the consultation is 3 July 2013.
The consultation paper only presents policy options with respect to the structural separation recommendations of the HLEG, noting that the HLEG’s other proposals have been at least partially addressed in other initiatives such as the Bank Resolution and Recovery Directive and the Capital Requirements Directive/Regulation, or will only become actionable after the completion of ongoing exercises such as the Basel Committee’s review of trading book capital requirements. The Commission also accepts that structural reform will only affect a small subset of the approximately 8,000 EU banks. In particular, most local and regional banks will be excluded as well as the banks that focus on customer related lending. Moreover, separation requirements would not necessarily apply automatically to banks exceeding applicable thresholds but may be at the discretion of supervisors.
Policy Options
Against a “no action” baseline, the EU Commission is evaluating options grouped into three basic categories:
- the scope of banks which should be subject to separation;
- the scope of activities to be separated; and
- the strength of separation.
Scope of banks subject to separation
Comments are requested on four options, all of which adopt differing definitions of “trading activity”, the separation criteria suggested by the HLEG:
- using the original HLEG definition, under which assets ‘held for trading and available for sale’ are to be separated;
- a narrower definition that excludes ‘available for sale’ assets;
- a definition focused on gross volume of trading activity, which is likely to focus on proprietary trading and market-making activities; and
- a definition focused on net volumes, designed to capture only those institutions which concentrate on proprietary trading.
Within each separation option, the Commission asks for responses as to the degree of supervisory discretion which should apply, with specific reference to the following sub-options:
- ex-post separation determined by EU legislation but with the actual separation decision to be at the discretion of a supervisor;
- ex-ante separation subject to supervisor discretion to exempt individual institutions or include additional firms in accordance with criteria and limits set out in EU legislation; and
- ex-ante separation pursuant to which any bank with trading activities above the threshold would automatically be obliged to separate those activities.
The scope of activities to be separated
The Commission are considering three options which can be summarised as follows:
- “Narrow” trading entity and “broad” deposit bank: under which, broadly, only proprietary trading and exposures to venture capital, private equity and hedge funds would be separated;
- “Medium” trading entity and “medium” deposit bank: under which both proprietary trading and market making would be separated; or
- “Broad” trading entity and “narrow” deposit bank: under which all wholesale and investment banking activities would be separated, including proprietary trading, market making, underwriting of securities, derivatives transactions and origination of securities.
Strength of separation
Three broad forms of separation, none of which are mutually exclusive, are considered:
- accounting separation: the lightest form of separation (and considered unlikely to be sufficient by the Commission) under which a group would be required to make separate reports for each of its different business units but under which there would be no restrictions on intra-group legal and economic risks;
- functional separation: under which some activities would need to be provided by separate functional subsidiaries with various sub-options available as to the degree of legal, economic, governance and operational separation which should apply; and
- ownership separation: the strongest form of separation under which the services would have to be provided by different firms with no affiliations.
The three ‘strength of separation’ options proposed by the Commission can be summarised as follows:
|
Option |
Degree of Functional Separation |
Degree of Ownership Separation |
| Functional separation with economic and governance links restricted according to current rules (“Functional Separation 1”) |
|
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| Functional separation with tighter restrictions on economic and governance links (“Functional Separation 2”) |
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| Ownership separation |
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Overview of Options
The Commission provides the following matrix which summaries all of the possible permutations associated with each policy option:
|
Activities/Strength |
Functional Separation 1 (current requirements) |
Functional Separation 2 (stricter requirements) |
Ownership Separation |
| Narrow Trading Entity/ Broad Deposit Bank
e.g. Proprietary trading + exposures to venture capital/private equity/hedge funds |
Option A [approximate to legislation in France and Germany]
|
Option B [approximate to US swaps push-out rule] |
Option C [approximate to US Volcker rule] |
| Medium Trading Entity/ Medium Deposit Bank
e.g. proprietary trading + market making |
Option D [approximate to legislation in France or Germany if wider separation activated] |
Option E [Approximate to HLEG recommendations] |
Option F |
| Broad Trading Entity/ Narrow Deposit Bank
e.g. all investment banking activities |
Option G |
Option H [approximate to US Bank Holding Company Act and UK Banking Reform Bill] |
Option I |
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