European policymakers should now introduce limited
liability for EU banks not more regulation, UK lawyers have
Ahead of the anticipated Liikanen Report,
speculation is growing that the Liikanen Committee will
advocate the introduction of a hybrid model combining the US and UK approaches
to bank reform.
The US Volcker approach bans proprietary trading. In
contrast, the UKs Vickers will require major European banks to
build a firewall between consumer and investment banks. In an
IFLR poll last week, 75% of participants opposed a combined approach
Shearman & Sterlings Barney Reynolds said
Europes regulators were applying too many safety belts.
It was now time to look from the other end and consider the
application of limited liability for banks, he said.
There is currently a very small number of
significant banks in Europe, none of which has sprung up
overnight and all of which are of huge value and key to the
regional economies, he said.
But by applying yet more restrictions -
partly out of a desire to be safe and partly out of an
understandable desire for retribution - policymakers are in
danger of killing parts of the banking system and being left
with very little, he added
It is time for banks to have the option of shedding
their skin by placing riskier assets in a bad bank with
residual liability, while instigating a possible charge over
the equity of the ongoing bank remaining.
Financial institutions facing liquidation
should not be killed off entirely, said Reynolds.
Experience shows such businesses do not get replaced.
Were in danger of going too far.
The Liikanen Review, together with US and UK
banking reforms, simply add another seat belt by further
reducing market participants permitted activities.
How much safer does it actually make the market, if
regulators keep adding more rules, and is that safety worth the
price? he asked.
The creation of a sustainable European-wide
resolution framework, including the establishment of bridge
banks to partially takeover the undertaking of failed banks,
has been proposed by Europes policymakers.
The European Commissions Recovery and
Resolution Directive might also require that retail depositors
be given preference over ordinary, and even some senior,
creditors in the event of a bail-in of liabilties.
But Reynolds suggests taking the concept further
and wiping the slate clean for a small core of the bank, which
can continue in business. This protection would mirror that
given to ship-owners worldwide.
Ashursts James Perry said the Directive, as
proposed, would significantly reduce the cost of deposit
guarantee schemes, but at the expense of higher funding
Vickers vs Volcker
Perry was hopeful the Liikanen Report would
suggest, at worst, a Vickers-style separation of banks
businesses over and above the more radical Volcker Rule.
There are so many balls in the air in Europe
at the moment, I just dont think the Commission and
politicians will have the stomach to fight for full
Volcker-style separation, he said. Ultimately
Vickers is Volcker-light. It clearly would cause some degree of
upheaval for Europes banks but nowhere near as much as
Volckers heavy alternative.
Reynolds agreed. The Volcker Rule has proved
very unpopular in the US, he said. Once you drill
down into the details, and particularly how key terms, such as
proprietary and portfolio hedging, are defined under Volcker,
it becomes too imprecise and controversial to be easily
Vickers' more sophisticated, less blunt approach
would likely prove more successful for Europes banks, he
The beauty of ring-fencing is it can be
implemented with minimum distortion to Europes current
market structure, said Reynolds.
Although undesirable and arguably unnecessary, UK
banks would still be able to operate under a combined UK/EU
Vickers ring-fencing, Reynolds said. In theory UK
financial institutions could just function as three separate
business, he said. The cost of this would depend on
as-yet undisclosed regulatory capital requirements for any EU
ring-fence, he said.
But one UK-based compliance officer argued the
increased regulatory burden would leave UK banks operating with
two broken legs one broken by Vickers and the other by
European reform. I dont understand why UK
regulators didnt foresee that, he said.
Market participants are hopeful that if a
ring-fencing mechanism is incorporated within EU reforms, it
would only be activated in an emergency - for example, if a
bank is approaching failure. This model could be included in a
banks so-called living will - the plan to help dismantle
a bank during a crisis.
Even so, the compliance officer believed the days
of big banks were numbered. Theres too much
political capital been invested; the introduction of further
ring-fencing or limits on trading is highly likely, he
Perry said European reforms would add to further
costs for both European and UK banks, with the latter
potentially worse off if the Liikanen Committee opts against a
Vickers equivalent. If that were to happen UK banks would
complain and rightly so, he said.
Liikanen part of the
Perry stressed, however, that any reforms suggested
by the Liikanen Committee should not be seen in isolation.
The Liikanen Review is just another piece of
the jigsaw, he said. Its one further thing to
add to a long list of costs that are going to hit the EU
banking industry over the next six to seven years along with
liquidity, capital, trading book reforms and the
They will have a fundamental impact when you
put them together, he said. But Liikanen is only a
part of it.
The Liikanen Review was
established in November 2011 by EU commissioner, Michel
Barnier. Its purpose is to conduct a full-scale analysis of
Europes lending sector and recommend banking reforms for
the region. The Committees findings are not expected to
be published until next month.
Liikanen poll: 75% Volcker/Vickers hybrid
wrong for Europes banks
EU split over banking union