The Bank of Finland governor, Erkki
Liikanen, this month announced his
flagship report for reshaping European banks.
Here’s how these proposals could impact global banking and
how European banks can continue to work within the new
framework.
Liikanen’s central proposal is a trading
ring-fence for Europe’s major banks. This would force
banks to detach their risky trading activities from their
retail operations to protect taxpayers from having to bail them
out in a crisis.
The proposals will provide the basis for
structural reform of Europe’s banking sector. Lawyers
expect Liikanen will replace the
UK
Vickers and prompt a spate of mergers between
Europe’s second-tier and shrinking top-tier investment
banks as a strategy to create economies of scale.
But one senior in-house counsel warned they
could also promote an environment in which trading is no
longer profitable, thanks in part to conceptual differences
with existing regulatory reforms.
Vickers versus
Liikanen
The risks banks were allowed to take under
the Liikanen proposals remain a critical uncertainty, the
counsel said. Vickers tries to create no risk to make
deposit-takers into a utility. Under Liikanen, however, banks
are expected to take a lot of the typical lending risk but not
trading risk.
Indeed, Liikanen’s proposals go further
than many in the industry expected. The UK’s Independent
Commission on Banking (ICB) proposed building a
firewall around banks’ retail activities from their
wholesale operations. But Liikanen recommends
ringfencing banks’ more risky trading operations,
including proprietary trading and derivatives businesses above
a certain size.
Some of Europe’s biggest banks could
therefore face the expense of almost completely ringfencing
their trading activities. What’s more, the two structures
proposed in Liikanen and Vickers could force some of the
UK’s top banks to construct two ringfences: one
around the retail arm and one around trading.
The in-house counsel said in such a
climate hedge funds would play a key role in providing markets
for large corporates.
The lawyer believed any large-scale EU
banking sector restructuring was dependent on how US regulatory
developments, however, and more specifically on how the US
Securities and Exchange Commission (SEC) implements Basel
III.
“
If SEC-regulated investment bankers get out of a lot of
the Basel III issues,
the US
could become a lot more attractive
” the counsel told IFLR. “We could
see a situation where SEC-regulated investment banks have a
drastically lower cost base than their counterparts in Europe
and the US.”
The split between Dodd-Frank and SEC
regulation would also impact the way that global markets
develop, he said. “The rules under Dodd Frank are so
completely different that we could see competition and
different markets developing in future,” he said.
More EU banking reform to
come
Baker & McKenzie’s Paris-based European head of
banking and finance, Michael
Foundethakis,warned that Europe was
self-flagellating to a greater extent than banking systems
elsewhere.
What’s more he expected more
regulation to come for the European banking sector.
“Liikanen sets the minimum standard,” he said.
“Individual jurisdictions may choose to tweak it
further.”
Even so, he believed regulation was
important. But he stressed it was also important for Europe to
avoid knee-jerk reactions. “We need to first clear up the
mess from the crisis and then implement appropriate regulation
- not put the cart before the horse,” he said.
“It’s not a simple question of
ringfencing the retail from the trading arm,” said
Foundethakis. “The EU plans might not be enough and in the
mean-time they would make European banks less competitive. They
will squeeze liquidity from the market and prolong this
crisis.”
“We are in a double-dip recession
because not enough is being done to stimulate the economy and
right now we are simply stifling it further,” he
added.
See also:
‘How Liikanen will
impact Vickers implementation’
http://www.iflr.com/Article/3102467/Banking/How-Liikanen-will-impact-Vickers-implementation.html
‘European bank reform: Liikanen report
revealed’
http://www.iflr.com/Article/3097197/European-bank-reform-the-Liikanen-Report-revealed.html
‘Liikanen Report: market concerns’
http://www.iflr.com/Article/3101221/Banking/Liikanen-Report-market-concerns.html
‘Why an EU banking union poses an existential threat to
the UK – opinion’
http://www.iflr.com/Article/3101543/Banking/Why-an-EU-banking-union-poses-an-existential-threat-to-the-UK-opinion.html