The Road to Liikanen

On 6 May 2013, the EU Commission published a roadmap regarding a proposal for a structural reform of EU banks (i.e. the Liikanen reforms).  This followed the publication, on 2 October 2012, of the final report of the High-level Group on reforming the structure of the EU banking sector, chaired by Erkki Liikanen, a summary of which can be found here.

The main issues being considered by the Commission are:

  • The definition of relevant activities to be separated from deposit-taking entities.  This could include:
    • proprietary trading;
    • market-making; and
    • securities underwriting.
  • The nature and extent of separation and governance of separated entities.  Available options include:
    • functional separation (also referred to as “ring-fencing” or “subsidiarisation”);
    • accounting separation; or
    • full ownership separation.
  • Thresholds and de minimis exemptions.  These are likely to be based on:
    • bank balance sheet size; or
    • share of trading activities.

Consideration will also be given to:

  • the treatment of derivatives business (as principal or as agent);
  • the treatment of non-EU assets; and
  • exposures to hedge funds and private equity funds.

A further public consultation will be launched in early May 2013 and a meeting of stakeholders is due to be held on 17 May 2013.  Thereafter, as per its recent update, the Commission intends to adopt a legislative proposal in Q3 2013, although it is not yet certain whether that proposal will take the form of a Directive, a Regulation, or a combination of the two.

The Road to Non-Bank Resolution

On 6 May 2013, the EU Commission published a roadmap regarding a framework for crisis management and resolution for financial institutions other than banks (i.e. central counterparties, central securities depositories, insurance and reinsurance firms, payment systems, investment funds and certain trading venues).  The roadmap follows the consultation paper published on 5 October 2012, a summary of which is available here.

Rather than adopt a broad framework approach in terms of applicable nonbank institutions and general tools for authorities to intervene, the Commission believes that more specific provisions and tools in relation to each sectors is more appropriate due to the different types of risk to which each sector is exposed and the differing consequences their failure would have.  The Commission makes clear that any regulation will be proportionate in nature and “only entities which are big, interconnected or central enough in the financial system to cause widespread disruption should they fail” are to be subject to the regulation.

As noted in this update, the EU Commission currently expects a legislative proposal in this area to be adopted in November 2013.