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 26 October 2012, the IMF published a speech given in Toronto by its Managing Director, Christine Lagarde, on global financial sector reform.
Ms Lagarde noted that progress had been made on implementing financial sector reform, specifically referring to Basel III and improved standards for the resolution of banks. In particular, she welcomed the EU’s moves to adopt a legal framework for a single supervisory mechanism by the end of 2012 as well as provisions regarding national resolution and deposit guarantee frameworks. However, she noted that a globally coordinated discussion and response was still required in a number of areas, including:
- current efforts to resolve the issue of “too important to fail” through structural reform as proposed by Volcker, Vickers and Liikanen; and
- international agreement on methodologies to assess compliance of recovery and resolution planning for large cross-border institutions.
The effectiveness of both the proposed Vickers and Liikanen ringfenced were questioned yesterday during evidence given by Paul Volcker to the UK Parliamentary Commission on Banking Standards.
According to this FT article, Mr Volcker described the Vickers ringfence as “difficult to sustain” and full of holes “likely to get bigger over time”. The article also suggests that the future direction of the legislation designed to enact Vickers may diverge from a wholescale adoption of its proposals.
Elsewhere, the FT also reports that legal advice provided to the EU Council has concluded that plans to create a single eurozone banking supervisor may be illegal unless treaty change is enacted so as to broaden the scope of governance rules at the ECB. Moreover, non-eurozone countries that wish to opt into the new regime would not legally be entitled to vote, making it less likely that those countries would wish to join and so undermining the effectiveness of the initiative from the outset
On 28 September 2012, the EU Commission published a press release confirming that the final report of the Liikanen Committee is due to published on 2 October 2012.
The Liikanen Committee is an expert group, formed by the EU Commission in February 2012 and chaired by Erkki Liikanen (former Governor of the Bank of Finland), to investigate the case for structural reform of the EU banking sector in order to strengthen financial stability and improve efficiency and consumer protection.
According to this FT article, it seems that the Liikanen Committee will draw on the proposals of the Vickers Report in the UK and the Volcker Rule in the US and recommend that certain trading activities of banks are ringfenced. However, it is thought that the committee will not go as far as recommending actual levels of capital that must be applied to ringfenced operations. Questions also remain as to the maximum permissible volume of trading activities that may take place before a ringfence must be created.