On 24 January 2014, the EU Commission published a press release confirming that, on 29 January 2014, it will publish a legislative proposal on EU bank structural reform designed to implement the findings of the Liikanen High Level Group.
It is thought that political agreement on the legislative proposals will not be reached before the end of 2015, with restrictions on proprietary trading likely to take effect from 2018.
The European parliament has updated its BRRD procedure file, postponing the plenary consideration of the proposal to its 14-17th April session. The regulatory framework has been agreed, however the plenary vote is a very necessary formality. Any further delay would place this cornerstone of EU banking reform perilously close to the 22nd May EU election.
The Conference of Presidents Group have held intensive talks with their EP negotiators on the state of SRM play. The result is firmly-worded missive sent today from their own current President, Martin Schulz, to Commission President Manuel Barroso, summary translations in bold italic: Continue reading →
On 17 January 2014, the EU Commission published a press release confirming that it will make a proposal “in coming weeks” for the reform of the structure of banking in the EU. The proposal will be based on the findings of Liikanen Report, published in October 2012, and will apparently will be “the final piece of the puzzle to address “too big to fail” banks”.
The FT is reporting this morning that the latest draft of the Liikanen proposals, which implement bank structural reform within the EU, will be significantly watered down. According to the article, separation will no longer be mandatory and will be less restrictive than previously thought. Wider discretion is also to be given to national competent authorities – not always a good thing – to decide whether certain trading activity constitute a “systemic risk”, based on metrics provided by the European Banking Authority. However, there may be a sting in the tail, with the EU Commission apparently proposing an ‘EU Volcker-Lite’ ban on proprietary trading – but only for the EU’s 30 largest banks.
On 11 December 2013, the European Commission published a press release containing remarks made by Michel Barnier, European Commissioner for Internal Market and Services on EU banking structural reform. Mr Barnier stated that the legislative proposal on EU banking reform will be presented at the beginning of January 2014. Following the recent publication of the Volcker Rule on 10 December 2013, the Commission will also look at the details of this new rule (see this blog post for more details). For certain banks deemed too big to fail, he explained that the EU banking reform proposal will consider separation, calibration and treatment of the risks taken by these banks.
The ECB has published its legal opinion on the Single Resolution Mechanism (SRM), a short summary follows:
The SRM should include all EU credit institutions
Resolution should only be triggered by a supervisory assessment of “failing or likely to fail”
The SRM should not require new legislation, Article 114 of the Treaty should suffice as a legal basis
The ECB supports early implementation of the bail-in tool (currently 2018)
Resolution financing must be provided by the Single Bank Resolution Fund. The ECB proposes a “temporary, fiscally neutral backstop” to the SBRF in the form of a credit line supplied by Member States, but recoupable from the financial industry
The ECB seeks representation as an observer in all plenary and executive meetings of the Single Resolution Board
The opinion voices its full support for the SRM which it views as a necessary complement to the Single Supervisory Mechanism, although it considers it crucial that the responsibilities of supervisory and resolution authorities are kept distinct. The ECB regards a fully-functioning single supervisory mechanism as a vital precondition for the establishment of the SRM, it therefore strongly supports adoption of the SSM legislation during the Parliament’s current term. This being the case, the ECB voices its support for the SRM to become effective as of 1st January 2015.
The 32 page opinion contains little that is unexpected; it is notable though, for its bullish tone on scope and timing of implementation. Perhaps it may be unwise to rely on delay.
On 12 September 2013, the European Parliament published a press release announcing the adoption of a package of legislative acts to set up a Single Supervisory Mechanism (SSM) for the Eurozone. The SSM legislation was adopted with very large majorities and will bring the EU’s largest banks under the direct oversight of the European Central Bank (ECB) from September 2014.
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%;
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.