EU Commission to Publish Liikanen Proposal on 29 January 2014

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.

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Liikanen Proposal by End of January?

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”.

EU Shies Away From Liikanen?

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.

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.

EU Commission Extends Liikanen Consultation

The EU Commission has extended its consultation on reforms to the structure of the EU banking sector to 11 July 2013 according to its webpage.  The consultation was launched on 16 May 2013 and was expected to run until 3 July 2013.  The Commission is seeking views on policy options relating to the scope of banks potentially subject to structural separation.

EU Commission Publishes Liikanen FAQs

On 7 June 2013, the European Commission published an FAQ document regarding its May 2013 consultation on the Structural Reform of the EU Banking Sector (the Liikanen Reforms) – see this blog post for more detail.  The FAQs have been drafted in response to requests for clarification about the data templates published as part of the May consultation and deal with the following issues:

  • The nature of the treatment afforded to confidential information submitted by respondents;
  • Scenario analysis, specifically:
    • the impact on the group’s balance sheet and P&L resulting from the enactment of CRDIV and the Bank Recovery and Resolution Directive;
    • whether the scenarios assume the existence of specific underlying corporate structures;
    • the extent to which a trading entity can be funded by deposits;
    • how netted derivatives are to be reported;
    • how “matched principal” trading, “provision of direct market access to customers” and hedging activity are to be treated in relation to market making;
    • how exposures to venture capital, private equity and hedge funds are to be defined; and
    • how short-term and long-term securities are to be distinguished.

Legislation Update

On 3 June 2013, the EU Commission published an updated summary detailing the timetable for certain legislative proposals and non-legislative acts that it expects to adopt between 28 May 2013 and 31 December 2013.  Of most note are the following:

 

Initiative

Current Adoption Date

Previous Adoption Date (per April/May summary)

Regulation on a single resolution authority and a single resolution fund within a Single Resolution Mechanism

July 2013

No reference

Directive/Regulation on the reform of the structure of EU banks (the Liikanen Reforms)

October 2013

Q3 2013

Framework for crisis management and resolution for financial institutions other than banks

November 2013

No reference