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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SRM- Mexican standoff Euro-style

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

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”.

Single Resolution System- closer to being resolved

MEP’s voted on the 17th to establish their position on critical details of the single resolution system. During yesterday’s Parliamentary hearing, ECB President Mario Draghi said, Continue reading

EU Commission to Have Power to Resolve EU Banks?

The FT is reporting that, under the terms of a discussion paper currently under review in Brussels in relation to the single resolution mechanism (SRM), the EU Commission would be given the power to resolve EU banking institutions directly, with member states merely implementing Commission decisions.  This is in contrast to the agreement reached last week between France and Germany that the SRM should be run by a “resolution board” made up of national authorities (which itself when further than the original Germany vision of the SRM as a “network” of national supervisors).  The Commission also wants the resolution authority to have a single bank resolution fund as well as the power to borrow, using the “assets of euro area banks” as a guarantee and backstop.

EU Commission Publishes Liikanen Consultation

Introduction

On 16 May 2013, the EU Commission published “Reforming the structure of the EU banking sector”, a consultation paper which represents a follow-up to the recommendations made by the Liikanen High-Level Expert Group (the “HLEG”) in its report of October 2012.  The deadline for responses to the consultation is 3 July 2013.

The consultation paper only presents policy options with respect to the structural separation recommendations of the HLEG, noting that the HLEG’s other proposals have been at least partially addressed in other initiatives such as the Bank Resolution and Recovery Directive and the Capital Requirements Directive/Regulation, or will only become actionable after the completion of ongoing exercises such as the Basel Committee’s review of trading book capital requirements.  The Commission also accepts that structural reform will only affect a small subset of the approximately 8,000 EU banks.  In particular, most local and regional banks will be excluded as well as the banks that focus on customer related lending.  Moreover, separation requirements would not necessarily apply automatically to banks exceeding applicable thresholds but may be at the discretion of supervisors.

Policy Options

Against a “no action” baseline, the EU Commission is evaluating options grouped into three basic categories:

  • the scope of banks which should be subject to separation;
  • the scope of activities to be separated; and
  • the strength of separation.

Scope of banks subject to separation

Comments are requested on four options, all of which adopt differing definitions of “trading activity”, the separation criteria suggested by the HLEG:

  • using the original HLEG definition, under which assets ‘held for trading and available for sale’ are to be separated;
  • a narrower definition that excludes ‘available for sale’ assets;
  • a definition focused on gross volume of trading activity, which is likely to focus on proprietary trading and market-making activities; and
  • a definition focused on net volumes, designed to capture only those institutions which concentrate on proprietary trading.

Within each separation option, the Commission asks for responses as to the degree of supervisory discretion which should apply, with specific reference to the following sub-options:

  • ex-post separation determined by EU legislation but with the actual separation decision to be at the discretion of a supervisor;
  • ex-ante separation subject to supervisor discretion to exempt individual institutions or include additional firms in accordance with criteria and limits set out in EU legislation; and
  • ex-ante separation pursuant to which any bank with trading activities above the threshold would automatically be obliged to separate those activities.

The scope of activities to be separated

The Commission are considering three options which can be summarised as follows:

  • “Narrow” trading entity and “broad” deposit bank: under which, broadly, only proprietary trading and exposures to venture capital, private equity and hedge funds would be separated;
  • “Medium” trading entity and “medium” deposit bank: under which both proprietary trading and market making would be separated; or
  • “Broad” trading entity and “narrow” deposit bank: under which all wholesale and investment banking activities would be separated, including proprietary trading, market making, underwriting of securities, derivatives transactions and origination of securities.

Strength of separation

Three broad forms of separation, none of which are mutually exclusive, are considered:

  • accounting separation: the lightest form of separation (and considered unlikely to be sufficient by the Commission) under which a group would be required to make separate reports for each of its different business units but under which there would be no restrictions on intra-group legal and economic risks;
  • functional separation: under which some activities would need to be provided by separate functional subsidiaries with various sub-options available as to the degree of legal, economic, governance and operational separation which should apply; and
  • ownership separation: the strongest form of separation under which the services would have to be provided by different firms with no affiliations.

The three ‘strength of separation’ options proposed by the Commission can be summarised as follows:

Option

Degree of Functional Separation

Degree of Ownership Separation 

Functional   separation with economic and governance links restricted according to current   rules (“Functional Separation 1”)
  • Separate legal entities required
  • Legal entities subject to capital, liquidity, leverage and large   exposure rules on an individual basis
  • Separate governance (unless waived) for each entity
 
Functional   separation with tighter restrictions on economic and governance links (“Functional   Separation 2”)
  • Separate legal entities required
  • Restrictions on ownership links between separated entities   within the group
  • Legal entities subject to capital, liquidity, leverage and large   exposure rules on an individual basis
  • Intra-group dealings to be at arms’ length
  • No waiver of large exposure restrictions in relation to intra-group   trades
  • Limits on intra-group guarantees from deposit taking entity to   trading entity
  • Limits on board directors acting for multiple entities within   the group
 
Ownership   separation  
  • Banks to divest themselves of certain activities

Overview of Options

The Commission provides the following matrix which summaries all of the possible permutations associated with each policy option:

Activities/Strength

Functional Separation 1 (current requirements) 

Functional Separation 2 (stricter requirements)

Ownership   Separation

Narrow Trading Entity/ Broad Deposit Bank

e.g. Proprietary trading +   exposures to venture capital/private equity/hedge funds

Option A

[approximate to   legislation in France and Germany]

Option B

[approximate to US   swaps push-out rule]

Option C

[approximate to US   Volcker rule]

Medium Trading Entity/ Medium Deposit Bank

e.g. proprietary trading +   market making

Option D

[approximate to   legislation in France or Germany if wider separation activated]

Option E

[Approximate to   HLEG recommendations]

Option F

Broad Trading Entity/ Narrow   Deposit Bank

e.g. all investment banking   activities

Option G

Option H

[approximate to US   Bank Holding Company Act and UK Banking Reform Bill]

Option I

 

EU Commission Publishes Summary of Responses to Non-Bank RRP Consultation

Introduction

On 8 March 2013, the EU Commission published a summary of the responses (67 in total) it received to its October 2012 consultation on a possible recovery and resolution framework for financial institutions other than banks.  There is also a set of links to individual responses.

The summary addresses views expressed on the three categories of financial Institutions considered in the consultation, being:

  • financial market infrastructures (“FMI”) i.e. central counterparties (“CCP”) and central securities depositories (“CSD”);
  • insurance companies; and
  • other non-bank entities and institutions e.g. payment systems.

Financial Market Infrastructures

There was general agreement on the need for recovery and resolution plans (“RRP”) for FMIs, due to their systemic importance.  Although resolution measures for all FMIs should focus on ensuring the continuity of essential services, the RRP regimes for CCPs and CSDs should be tailored, reflecting the general view that CCPs are more systemically important than CSDs.  Both the RRP regimes for CCPs and CSDs should be different from the current proposals regarding RRP for banks, although powers to transfer operations of a failing FMI to a purchaser or bridge entity would still be required.  There was little common ground on the application of loss allocation to FMI beyond the need for predictability, clarity, preciseness, transparency and parity.

Insurance and Reinsurance Firms

There was a wide-spread recognition that insurance companies are less systemically important that banks and that Solvency II will enhance supervisors’ powers of intervention.  Nonetheless, except amongst insurers, there was general support for further investigation into the scope for resolution tools which could protect policyholders as well as financial stability in the event of an insurer’s failure. However, even outside of the insurance industry, there was no conclusive support as to the need for a detailed RRP framework.  The insurance industry objected to insurance-specific RRP proposals, arguing at a high-level that there is no evidence that RRP is needed and specifically that:

  • as yet, no sources of systemic risk in insurance have been identified;
  • consistency with international developments must be ensured before the EU legislates;
  • the current framework is sufficient, particularly in light of Solvency II; and
  • bank RRP is not suited to the insurance industry.

Other non-bank financial institutions

The majority of respondents expressed the view that payment systems currently do not require further consideration from an RRP perspective due to the fact that they are subject to central bank oversight.