EU Parliament: We Don’t Actually Expect Liikanen to Work…

…we just want smaller banks.

On 25 June 2013, the EU Parliament’s Economic and Monetary Affairs Committee (ECON) published a report containing a motion for a resolution on reforming the structure of the EU banking sector that it adopted on 18 June 2013.  The report is notable less for the actual wording of the resolution and more for some of the statements made in the recitals which seem to cast light on the underlying motivations driving the structural separation of banks.

Separation doesn’t work

Despite stating the belief that the Glass-Steagall Act “helped to provide a way out of the worst global financial crisis to have occurred [in the US] before the present crisis”, the EU Parliament concedes that “there is no evidence from the past that a separation model could contribute in a positive way to avoiding a future financial crisis or to diminishing the risk of it”.

Banks are too big

Within the motion the Parliament clearly states the position that:

  • individual banks should not be allowed to become so large – even within a single Member State – that their failure causes systemic risks; and
  • the size of a Member State’s banking sector should be limited in terms of:
    • size – the suggestion seems to be that the ratio of private sector loans to GDP should not exceed 100%;
    • complexity; and
    • interconnectedness.

The resolution gives a clue as to the ‘look and feel’ of these smaller banks, urging the EU Commission, inter alia, to:

  • encourage a return to the partnership model for investment banking so as to increase personal responsibility;
  • ensure that remuneration systems prioritise the use of bail-in bonds and shares rather than cash, commissions or value-based items; and
  • rationalise the scale of the activities of banking groups.

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