A European Union banking panel has recommended breaking up big banks into risky trading units and deposit units.
The panel, called the “High-level Expert Group on Reforming the Structure of the EU Banking Sector” was chaired by Erkki Liikanen, the governor of the Bank of Finland.
In its report, the panel concluded 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,” Liikanen said.
The panel’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.
“Separation of these activities into separate legal entities within a group is the most direct way of tackling banks’ complexity and interconnectedness,” Liikanen said. “As the separation would make banking groups simpler and more transparent, it would also facilitate market discipline and supervision and, ultimately, recovery and resolution.”
“In the discussions within the Group, some members expressed a preference for a combination of measures: imposing a non-risk-weighted capital buffer for trading activities and leaving the separation of activities conditional on supervisory approval of a recovery and resolution plan, rather than a mandatory separation of banking activities.”
“In the spirit of transparency both basic alternatives and their motivation are presented in the report. However, the choice was made to recommend mandatory separation of certain trading activities. The report also makes other recommendations, for example concerning the use of designated bail-in instruments, the capital requirements on real estate lending, consistency of internal models and sound corporate governance.”