Hans Hack on the road bumps facing the European Commission’s proposal on Banking Structural Reform
On 29 January the European Commission published the Liikanen proposal on banking structural reform. Named after the proposal’s working group chair, former Commissioner and current Governor of the Central Bank of Finland, the proposal has been spurred by the commendable objectives of reducing systemic risks and easing resolution where financial institutions fail. But the proposed measures are proving controversial and, some say, will be very difficult to implement.
A relatively small number of large financial institutions account for the majority financial activity. These benefit from diversification and scale and therefore facilitate cross-border capital flows and allocation of global savings. But, due to their interconnectedness with other financial institutions and markets, problems within these financial institutions risk causing distress to the broader financial system.
Given their complex structures and operations, such entities are difficult to regulate and supervise, and pose significant challenges as far as resolutions in the event of failure are concerned.
The Commission’s Liikanen proposal intends to address these concerns in line with the Basel Committee on Banking Supervision’s (BCBS) work to reduce the risks of financial institutions deemed ‘too big to fail’. Previous action taken by global and European leaders to address the too-big-to-fail conundrum have included raising capital requirements (Basel III), strengthening supervision, introducing an effective resolution, improving transparency and disclosure and strengthening the market infrastructure.
Structural reforms seek to shield deposit and payment functions of banks from risks generated in investment banking activities linked to volatilities in the financial market.
The final piece of the puzzle, according to the Commission, is that certain activities are too complex to accurately measure their risk profile or supervise effectively, and these may need to be broken up. This thinking has informed proposals in other jurisdictions, such as in France, Germany, and notably the US (Volcker) and the UK (Vickers).
But negotiations on the Liikanen proposal will likely be fraught both within Council and in the European Parliament. Firstly, different Member States will have points of view based on local banks’ business models. Those Member States that have already taken action will want the eventual EU ruleHans.Hack@fticonsulting.coms to reflect their own domestic laws. And lastly, certain groups within the EP – particularly on the left – will want to take the EU legislation much farther than the Commission’s original proposals.
Council starts its work on the dossier in the first half of 2014. As the EP will not be able to progress the proposal before the May elections, the legislative proposal cannot be expected to be agreed between all EU institutions before the end of the year, at the very earliest. It’s likely to be a long and bumpy ride.
For a detailed discussion of the Banking Structural Reform, see FTI Consulting’s Snapshot