Liikanen Report

European Commission Publishes Proposed Legislative Reforms of EU Banks

On May 6, the European Commission published a roadmap for legislative changes.  This follows the October 2012 publication of the Liikanen report, which provided a set of recommendations on banking reform sponsored by the Commission.

The initiative seeks to address issues in the EU banking sector, including moral hazard, excessive leverage, lack of market discipline and competition distortions.  Accordingly, the roadmap lays down a framework for anticipated EU directives covering which banking activities should be separated from each other or be subjected to separation requirements, the nature and extent of the separation and the de minimis exceptions available for smaller banks.

Although the proposals are expected to have a profound effect on the structure of banks, the Commission states that the “vast majority” of EU banks will not be affected by the initiative.  Roadmap.  Liikanen Report.

European Banking Federation – Response to Liikanen Report

On November 14, the European Banking Federation (EBF) published its response to the European Commission’s consultation on the EU banking sector structural reforms set out in the Liikanen report.

The EBF disagrees with the Liikanen report’s recommendation that the mandatory separation of proprietary trading activities would adequately address issues such as systemic risk.  Instead, it states that such a move may harm the ability of banks to lend and negatively impact the competitiveness of the European financial sector.  However, the EBF does agree that recovery and resolution plans need to be strengthened, suggesting that such measures should be an alternative to the mandatory separation of proprietary trading.

The European Commission’s consultation closed on November 13. Further responses will be published online in due course.

Liikanen Report: Structural Reforms of the EU Banking Sector

On October 2, the European Commission published the final report on reforming the structure of the EU banking sector by the high-level expert group chaired by Erkki Liikanen.  The group was established by the Commission in February 2012 in order to assess whether additional reform targeting the structure of individual banks would reduce potential failures and better protect retail clients.

The final report recommends the following steps, which the Commission will consider in light of its proposed legislative reforms:

  • o    Changing banks’ capital requirements, particularly in the areas of trading assets and loans relating to real estate;
  • o    Mandatorily separating proprietary trading from other significant trading activities, ensuring that they are legally separate from a deposit bank;
  • o    Permitting supervisors to require the further separation of activities to aid resolvability;
  • o    Reforming governance and remuneration arrangements; and
  • o    Amending certain of the bail in proposals contained in the proposal for the Resolution and Recovery Directive of June 2012.