03 February 2014
The European Commission has proposed a structural reform of the European banking sector in order to stabilise, regulate and increase the transparency of it.
The new rules look to stopping the biggest and most complex banks from engaging in the risky activity of proprietary trading; give supervisors the power to require those banks to separate certain potentially risky trading activities from their deposit-taking business if the pursuit of such activities compromises financial stability; and also to increase transparency of certain transactions in the shadow banking sector.
However, Clifford Smout, co-head of the Deloitte Centre for Regulatory Strategy, said: ‘The Commission is likely to face challenges getting these proposals through the European Parliament and Council in their current form, given how contentious these issues have proved.
‘The Regulation would ban proprietary trading at big banks operating in the EU but this is defined in a way likely to leave many banks unaffected. However, an outright ban would still be a step further than any EU country has taken so far, even if it is similar to the US regime.’
The proposal on structural reform of EU banks will apply only to the largest and most complex EU banks with significant trading activities. It will ban proprietary trading in financial instruments and commodities, i.e. trading on own account for the sole purpose of making profit for the bank. According to the EC, this activity entails many risks but no tangible benefits for the bank's clients or the wider economy.
It will also grant supervisors the power and, in certain instances, the obligation to require the transfer of other high-risk trading activities (such as market-making, complex derivatives and securitisation operations) to separate legal trading entities within the group (subsidiarisation). The EC states that this aims to avoid the risk that banks would get around the ban on the prohibition of certain trading activities by engaging in hidden proprietary trading activities which become too significant or highly leveraged and potentially put the whole bank and wider financial system at risk. Banks will have the possibility of not separating activities if they can show to the satisfaction of their supervisor that the risks generated are mitigated by other means.
Lastly, the EC states it will provide rules on the economic, legal, governance, and operational links between the separated trading entity and the rest of the banking group.
Michel Barnier, Commissioner for internal market and services said: ‘[These] proposals are the final cogs in the wheel to complete the regulatory overhaul of the European banking system. This legislation deals with the small number of very large banks which otherwise might still be too-big-to-fail, too-costly-to save, too-complex-to-resolve. The proposed measures will further strengthen financial stability and ensure taxpayers don't end up paying for the mistakes of banks.’