EU advisers say high-risk, retail banking should be separated

Tue Oct 2, 2012 8:56am EDT
 
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By John O'Donnell

BRUSSELS (Reuters) - Banks should separate deposit taking from trading and other high-risk investment banking work to shield taxpayers from further bailouts and protect savers, an EU advisory group said on Tuesday.

The advisers also single out the risks of property lending and said it should be underpinned with larger capital reserves. The European Commission set up the group of experts, led by Bank of Finland Governor Erkki Liikanen, to examine bank structures.

The report will reignite a debate in Europe about reforming banks but it is unlikely that the EU's executive, the European Commission, will respond soon with new regulation.

It is more focused on winning backing for its separate banking union plans to make the European Central Bank the main supervisor for euro zone lenders, a step which non-euro zone states have deep concerns about.

"The group has concluded that it is necessary to require legal separation of certain particularly risky financial activities from deposit taking banks within the banking group," said the report.

"The activities to be separated would include proprietary trading of securities and derivatives, and certain other activities closely linked with securities and derivatives markets."

The recommendations borrow from policies already being implemented in Britain to ring-fence retail banking and in the United States to curb banks' proprietary trading or taking bets with own money.

The report also backs the idea of bail-in debt, a mechanism to impose losses on bondholders in the case of a banks' bailout or collapse. The Liikanen group suggests that bankers should accept this type of bond as part of their bonus.   Continued...

 
Bank of Finland Governor Erkki Liikanen (L), who led the group of academics and experts set up by the European Commission and Michel Barnier, the European Commissioner in charge of regulation hold a joint news conference in Brussels October 2, 2012. REUTERS/Eric Vidal