European Union banks would be forced to push much of their trading activities into separately capitalized units and face extra bonus rules under plans proposed by an EU-mandated working group.
The group, led by European Central Bank Governing Council member Erkki Liikanen, also calls for a toughening of Basel bank capital rules and for lenders to issue debt designed to be written down in crises. The non-binding recommendations are part of a detailed blueprint to protect taxpayers from bailouts.
“This report will be the cornerstone of our work” on bank structure, Michel Barnier, the EU’s financial services chief, told reporters in Brussels today. The European Commission “will look at the impact of these recommendations both on growth and on the safety and integrity” of lenders, he said.
U.S. and British regulators have also proposed structural changes to banks in a bid to curtail risks. U.K. Chancellor of the Exchequer George Osborne plans to force large lenders to separate their consumer and investment banking operations in an overhaul that the Treasury estimates may cost as much as 7 billion pounds ($11.3 billion) a year.
The U.K. plans, drafted by a panel led by former Bank of England Chief Economist John Vickers, won’t clash with any EU follow-up to the Liikanen group’s recommendations, according to an EU official.
U.K. Labour Party leader Ed Miliband said Sept. 30 that he may go further than Vickers and break up banks if he wins the nation’s 2015 general election.
Barnier said the commission would seek public comment on the Liikanen group’s proposals for the next six weeks before deciding how to proceed. Any steps to implement parts of the report would be proposed “before summer” 2013, Barnier told reporters at a joint briefing with Liikanen.
“Don’t ask me today to tell you what lies at the end of the road,” he said.
Under the Liikanen group’s plan, lenders would transfer trading they conduct on their own behalf and other “high risk” activities to a separately capitalized unit, according to the report.
This so-called trading entity would have to be “legally separate” from other parts of the bank. It also wouldn’t be allowed to finance its activities through deposits covered by government guarantees, according to the report. It would be allowed to be part of the same holding company as the rest of the business.