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high level experts agree on separation of trading from banking October 2, 2012

Posted by Bradley in : financial regulation, transparency , trackback

The Report of the High-level Expert Group on reforming the structure of the EU banking sector is out. The Report states:

We organised hearings with a large number of stakeholders who represented providers of banking services, consumers of such services, investors in banks, policymakers and academics. The Group has furthermore held a public consultation of stakeholders, the responses to which are published together with this report.

But the report does not give details of any of the hearings. And, as of this morning, responses to the Consultation are still not available at the consultation page, nor is there a link to responses from the press release. There is a long bibliography at the back of the Report and many citations to academic literature throughout.

Here’s the conclusion of the Report:

The Group´s conclusion is that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group.
The central objectives of the separation are to make banking groups, especially their socially most vital parts (mainly deposit-taking and providing financial services to the non-financial sectors in the economy), safer and less connected to high-risk trading activities and to limit the implicit or explicit stake of taxpayer in the trading parts of banking groups. The Group’s recommendations regarding separation concern businesses which are considered to represent the riskiest parts of trading activities and where risk positions can change most rapidly.

There are five recommendations: separation of risky business from deposit-taking, a requirement for banks to have effective and realistic recovery and resolution plans, the use of designated bail-in instruments (to be held outside the banking system), more robust risk weights in the determination of minimum capital standards and more consistent treatment of risk in internal models, and corporate governance reforms. There’s some more detail in the report about how to ensure the insulation of the deposit-taking part of a bank from proprietary trading, but there are some questions. For example:

The use of derivatives for own asset and liability management purposes, as well as sales and purchases of assets to manage the assets in the liquidity portfolio, would also be permitted for deposit banks.

The authors of the report are limited in what they can recommend by the need to allow for the continued existence of universal banking in the EU, and by the idea that the proposals had to be sufficiently simple to be able to be implemented throughout the EU. The Group endorses the Commission’s European Banking Union proposals and states that its own proposals for the single market “can help the establishment of a banking union.”

It’s not clear what will happen to the recommendations. They aren’t evidently either very politically nuanced, or drafted with the sort of detail lawyers like (and we know how complicated the details of separating out proprietary trading from banking are in the US (the authors of the Liikanen Report seem to think the Volcker rules are in place as of July 2012 but if this is what they think they are mistaken)).


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