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Driving home the structural reform of European banking

As the mandate of the current European Commission winds down later on this year, the college of Commissioners is in the process of adopting its last legislative proposals. Chief among these are the proposals in the shape of a regulation – along with what are known as accompanying measures – dealing with the structural reform of the European Banking sector. The draft regulation adopted at the end of January is intended to halt the largest banks from engaging in the risky business of proprietary trading. According to the Commission, the proposed rules would empower financial supervisory authorities to require the large corporate banks to separate certain potentially-risky business activities from their conventional deposit-taking business, if the pursuit of the so-considered perilous activities could jeopardise financial stability.

In short, the Commission’s proposal is intended to separate the “risky” proprietary trading activities of a bank from its more traditional role of safe credit deposit arm for investors. Besides the separation of proprietary trading from retail banking operations, the Commission is proposing to prevent banks from owning or having large exposures to hedge funds. In practice, the screening process would be entrusted to the national financial supervisory authorities within the EU28 member states, who would enjoy a degree of latitude on how to determine if trading activity is risky enough to warrant mandatory separation.

The draft regulation on the structural reform of the European banking sector is the last in a series of regulatory measures that have been spearheaded by the EU either within its jurisdiction or at international level primarily via the G20 in an attempt to ring-fence the financial industry and preclude the possibility of a repeat of the international financial and economic crisis instigated by the collapse of Lehman Brothers in 2008.

The proposed text of the draft regulation is itself based to a considerable extent on the results of a high-level expert group report, chaired by Erkki Liikanen, Governor of the Bank of Finland and a former member of the European Commission.

Considering that the findings of the Liikanen Expert Group were originally published in October 2012, the Commission’s proposals have clearly been heavily delayed and, given the forthcoming EP elections in late May, it is now too late for any substantive discussions to take place until the new European Parliament is constituted in summer time. The final outcome of the draft regulation on the structural reform of the European banking sector will now depend significantly on the ideological outlook of the next European Parliament, which should steer through the political deliberations on the Commission’s proposal.

For more information on EU business affairs, contact the Malta Business Bureau on info@mbb.org.mt or 2125 1719.

Omar Cutajar is the Malta Business Bureau’s permanent delegate in Brussels.

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