EU Publishes Responses to Liikanen Consultation

Introduction

On 21 December 2012, the European Commission published a summary of the replies received to its October 2012 consultation on the recommendations of the high-level expert group on reforming the structure of the EU banking sector (the “Liikanen Group”).  It also published links to individual responses.

In total, the Commission services received 89 responses and broke its summary down by reference to the five main recommendations of the Liikanen Group, as set out below.

Mandatory Separation of Proprietary Trading Activities and Other Significant Trading Activities

In general, banks believe that a compelling case for mandatory separation has not been made and contend that the current reform agenda is sufficient to tackle identified problems in the banking sector.  Structural separation was criticised on the following grounds:

  • Costs are high: the proposals are regarded as being inconsistent with universal banking and the associated costs will ultimately be borne by users of banking services;
  • Claimed benefits may not materialise: bank structure is not regarded as a main driver of the financial crisis and structural change may actually create incentives for regulatory arbitrage;
  • EU banking competitiveness will be harmed: Non-EU banks may not be subject to similar rules and only the largest trading houses will remain viable, leading to increased market concentration;
  • Lack of consistency with other structural reform initiatives: such as those proposed in the USA and the UK; and
  • Lack of clarity and detail: what is to constitute ‘significant’ trading activity that would mandate separation; which activities are to be separated; and what will be nature of the resultant relationship between a separated trading entity, a deposit bank and their holding company?

Even public authorities, including central banks and national finance ministries do not universally hold the view that the Liikanen reforms are necessary, although other types of financial institution, as well as consumer groups and think-tanks, were generally in favour of the proposals.

Additional Separation of Activities Conditional on Recovery and Resolution Plans (RRPs)

Respondents were generally in support of strengthened RRPs, with banks arguing that an effective RRP obviated the need for mandatory separation.  However, some respondents argued that conditional separation based on RRPs would be arbitrary and that supervisors lack the capacity to adequately evaluate RRPs.  Accordingly, mandatory separation would not only simplify banks but make the RRP framework more effective and credible.

Amendments to the Use of Bail-In Instruments as a Resolution Tool

There were respondents both for and against a more targeted bail-in approach involving clearly designated bail-in instruments (as opposed to bail-in of almost all unsecured liabilities).  However, the majority of respondents did not support the proposal that bail-in instruments should not be held by other banks, on the basis that this would limit the investor base, raise bank funding costs and be ineffective at limiting interconnectedness in the financial system.

Review of Capital Requirements on Trading Assets and Real Estate Related Loans

Most respondents opposed the proposal to revise capital charges for the trading book, by setting an extra capital buffer or introducing a minimum floor to risk-based requirements, believing that these risks are being addressed via CRDIII and CRR/CRDIV.

Strengthening the Governance and Control of Banks

Respondents pointed out that significant progress has been made in banks’ corporate governance practices in recent years, and that further improvements are in the pipeline. There was general support for enhanced shareholders’ say on pay.  Whilst the need for diversity of skills and experience of Board members was recognised, there was less support for introducing the proposed “fit & proper” tests.  The general support for strong risk management contrasted against the lack of support for the proposed parallel risk reporting by Risk and Control Management to the Chief Executive Officer and the Risk and Audit Committee.  There was also a lack of support (among banks) for the proposal to set a maximum ratio between variable and fixed pay or for the proposal to fix remuneration to dividends.  Views were split on the use of bail-in bonds as part of remuneration.

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