On 14 November 2012, the European Banking Federation (EBF) published its response to the final report of the Liikanen Group on proposed structural reforms to the EU banking sector. Broadly, the Liikanen Group had recommended the mandatory separation, with respect to all banks exceeding a certain threshold, of trading business from more ‘traditional’ banking activities. The resulting entities would be required to fund themselves separately and meet other prudential regulatory requirements on a stand-alone basis. The main issues addressed by the EBF are summarised below.
The EBF believes that the case for mandatory separation has not been made in light of the Liikanen Group’s conclusions that:
- no particular business model was more or less vulnerable in the crisis;
- the benefits of the universal banking model should be retained;
- the EU Single Market should remain intact; and
- the regulatory reform agenda represents a “substantive and robust” response to addressing the deficiencies which become apparent during the financial crisis.
The EBF believes that mandatory separation:
- does not adequately address the riskiness of assets;
- does not solve the issue of systemic risk;
- has distortive effects upon bank functions;
- will impact negatively on banks’ ability to lend;
- will reduce diversification benefits of the universal banking model;
- will reduce the competitiveness of the European financial sector by creating a two-tier system where banks with risky trading positions below the threshold obtain an unfair advantage;
- will lead to a further fragmentation of the Single Market due to the fact that the reforms proposed by the Liikanen Group represent an add-on to national structural reform proposals such as Vickers and Volcker as well as future proposals being discussed in other Member States, including France, Holland and Belgium; and
- would result in higher costs for bank customers.
The EBF believes that there is a real risk that an independent trading entity would not be viable and would be downgraded by credit rating agencies, forcing up funding costs. This, together with the likely increase in administrative costs arising from the proposed requirements for separate reporting and independent boards and governance, could lead to non-EU banks replacing European banks as providers of ‘trading’ services as well as the concentration of risk in the few market participants large enough to bear the increased cost.
Instead of the proposed mandatory separation, the EBF supports a solution that targets high-risk and speculative trading activities, using proprietary trading activities with no link to clients’ needs as an example. To this end, it recommends the enhanced use of Recovery and Resolution Plans (RRPs) as a way to address any impediments to resolvability. However, it maintains that structural separation of certain activities conditional on the RRP should be viewed as a last resort.
The EBF is yet to be convinced that a designated bail-in category, as recommended by the Liikanen Group, is preferable to the proposals in the draft EU Recovery and Resolution Directive (RRD) requiring a broad range of bail-in-able debt instruments. The EBF also believes that further consideration needs to be given to the exclusion of short-dated instruments, although it acknowledges that a broad range of views exist even within the EBF, from suggestions to remove the short-dated exclusion altogether, to proposals that the one month period be increased to six months on the basis that this is more consistent with other supervisory requirements such as the Net Stable Funding Ratio under Basel III. The EBF believes strongly that derivative positions should not be included within the scope of bail-in.
The EBF believes that the introduction of floors for risk weightings “constitutes a significant threat to risk modelling and to the principle of calibrating capital requirements according to actual risks”. It also believes that proposals to establish extra non-risk based capital buffers for the trading book as well as LTV caps for real estate related lending (both of which would take effect on top of existing risk-based requirements) should be deferred pending the finalisation of the new Capital Requirements Directive. Specifically, the EBF states that exposures to funds falling within the scope of the Alternative Investment Fund Managers Directive should not be perceived as risky or speculative activities for which extra measures needs to be undertaken.