Eurozone banks to separate risky activities: Can they stay afloat?

Joint press conference by Michel Barnier, Member of the European Commission (on the right), and Erkki Liikanen, Governorof the Bank of Finland following the publication of the report prepared by the High-level Expert Group on reforming the structure of the EU banking sector. (EC Audiovisual Services, 02/10/2012).

Joint press conference by Michel Barnier, Member of the European Commission (on the right), and Erkki Liikanen, Governor of the Bank of Finland following the publication of the report prepared by the High-level Expert Group on reforming the structure of the EU banking sector. (EC Audiovisual Services, 02/10/2012).

Yesterday EU Commissioner Michel Barnier, in an interview to the German financial newspaper ‘Handelsblatt’, said that the European Commission has decided to go ahead and propose legislation to safeguard Eurozone’s banking system, along the lines of the recommendations of the high-level expert group, chaired by Erkki Liikanen, governor of the Bank of Finland. The main recommendation of the Liikanen report is the mandatory separation of proprietary trading and other high-risk trading activities of banks, from their standard business, “if the activities to be separated amount to a significant share of a bank’s business”. In this way deposits’ money would no longer be used to finance risky trading activities.

The EU authorities have been characteristically reluctant so far, to favour the separation of those two banking business lines, namely the risky bets and the traditional deposit and loan activities. The reason is that the major British, German and French banking conglomerates have been extensively exploiting other people’s money (deposits) for their own risky bets in every possible and impossible world market. The problem is how deep this usurp is and if the separation is possible? Let’s start the story from the beginning.

The Liikanen recommendations

The European Commission in November 2011 mandated a high level group, to study the European banking system. Erkki Liikanen, Governor of the Bank of Finland and a former member of the European Commission was appointed as its chairman. The mandate was to determine whether, in addition to the ongoing regulatory reforms, “structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection”, and if that is the case, to make recommendations as appropriate. The Group held monthly meetings, inviting different stakeholders, and organised a public consultation in May. On 2 October 2012 the group presented its report containing important recommendations.

In brief, the Group recommended actions in the five following areas: “Mandatory separation of proprietary trading and other high-risk trading activities; Possible additional separation of activities conditional on the recovery and resolution plan; Possible amendments to the use of bail-in instruments as a resolution tool; A review of capital requirements on trading assets and real estate related loans, and finally strengthening of the governance and control of banks”.

Still reading the proposals

Unfortunately, all along the last twelve months the EU authorities and more precisely the ECOFIN council was totally absorbed by the German objections, around the legal base of the Single Resolution Authority and Fund. At last today the article 114 of the Treaty seems to be accepted as such a base. Understandably the ECOFIN council has arrived to a compromise around the pending issues for the enactment of the European Banking Union.

Market sources say that Germany is now pressed by others apart from its Eurogroup peers to agree over the functioning of the bank resolution procedures. On top of that it seems that the largest Eurozone lender, the mighty Deutsche Bank, is exposed to risks that may surpass even the ability of Berlin to safely cover potential holes in the bank’s assets. Actually, OECD’s warning this week, about ‘shocks’ to Eurozone’s banking system, coming from the developing world, was an urgent message, that Europe should fix the holes of its banking system now. As a result, Berlin has softened its stance and now appears open to compromise.

To this effect, Commissioner Barnier proposed yesterday that along with the presently under discussion reshuffle of Eurozone’s banking system, the Liikanen group proposals should constitute a structural part. It’s a pity to watch the EU languishing behind the US in protecting consumers from bankers’ greed. Five years after the still ongoing western financial crisis and Europe has omitted to force the banks to stop financing their proprietary high risk trading activities with depositors’ money. The Americans have already accomplished this separation of banking activities.

Who can afford it?

This division appears now ‘cine qua non’, given that the European Central Bank has already launched its stress tests on assets and liabilities of the major 130 Eurozone lenders. If their results are to be convincing and transparent, all those banks must now start the separation exercise, distinguishing their risky market bets from traditional deposit and loan activities.

This exercise will of course entail the creation of two new banks, out of every banking conglomerate, one undertaking the risky assets and the other for the traditional part of the business. The question is which Eurozone banking group can safely realise that, without extra capital injections. After the separation, the ‘investment’ banks should still comply with EU directives about capital quality and adequacy provisions. Who will provide the extra capital needed, being of the order of at least €70 billion?

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

the European Sting Milestones

Featured Stings

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

Britain, EU take edgy steps to unlock Brexit talks as the war of words rages

VW diesel scandal and climate change: can increased independent car checks lead to cleaner mobility?

How to survive and thrive in our age of uncertainty

UN commission agrees roadmap on ensuring women’s social protection, mobility, safety, and access to economic opportunities

We generate 125,000 jumbo jets worth of e-waste every year. Here’s how we can tackle the problem

Joint EU-U.S. statement following the EU-U.S. Justice and Home Affairs Ministerial Meeting

Tuesday’s Daily Brief: Guterres calls for restraint in Venezuela, Jazz Day, the importance of breastfeeding, and updates from Libya, Iran and Mozambique

European Commission calls on national political parties to join efforts to ensure free and fair elections in Europe

This is how companies are working together to create a world without waste

Pharmaceuticals in the environment: Commission defines actions to address risks and challenges

Opening Remarks by H.E. Ambassador Yang Yanyi, Head of the Chinese Mission to the EU at the Chinese Fashion Night

The EU parliamentary elections, explained

From DIY editing to matchmaking by DNA: how human genomics is changing society

China by numbers: 10 facts to help you understand the superpower today

Switzerland to favour EU citizens in immigration quotas as the risk of a new referendum looms

Trump’s blasting win causes uncertainty and turbulence to the global financial markets

5 things you need to know about creativity

Intel, Almunia and 1 billion euros for unfair potatoes

Refugee crisis update: Commission still in panic while Turkey is to be added in the equation

Cambodia’s schools are the new frontline in the battle against climate change

Most US students aren’t learning about climate change. Parents and teachers think they should

UNICEF delivers medical supplies to Gaza in wake of deadly protests

Food choices today, impact health of both ‘people and planet’ tomorrow

Can indoor farming feed the world?

TTIP’s 11th round major takeaways and the usual “leaked” document

UN chief calls for Security Council to work with Myanmar to end ‘horrendous suffering’ of Rohingya refugees

4 ways blockchain will transform the mining and metals industry

Boris ‘single-handed’ threatens mainland Europe; can he afford a no-deal Brexit?

Finland must focus on integrating migrant women and their children to boost their contribution to the economy and society

We can build a carbon-neutral world by 2050. Here’s how

Dozens of children at risk as clashes in Hudaydah near hospital – UNICEF

EU security and defence industry prepares positions for ‘producers’ and ‘customers’

International community agrees on a road map for resolving the tax challenges arising from digitalisation of the economy

Deal on tightening the rules to stop terrorists from using homemade explosives

Primary Healthcare: Back to the Basics

Chart of the day: These countries have the largest carbon footprints

Egypt urged to free prominent couple jailed arbitrarily since last June: UN rights office

Europe might not avoid new partitioning on Ukrainian crisis

Governments adopt UN global migration pact to help ‘prevent suffering and chaos’

Protecting European consumers: toys and cars on top of the list of dangerous products

VW emissions scandal: EU unable to protect its consumers against large multinationals

Italian Prime Minister Giuseppe Conte: “Europe must listen to the people”

Brexit talks started with a London handicap and Brussels’ sternness

To meet development goals, UN agriculture agency ‘cannot only focus on tackling hunger anymore’

Algorithms could give the world its first ‘born digital’ free trade agreement in Africa

The 10 most common types of plastic choking Europe’s rivers

Innovating together: connectivity that matters at ITU Telecom World 2019 – in association with The European Sting

Health: The neglected aspect of climate change

Millions at risk if Syria’s war moves to last redoubt of Idlib, warns senior aid official

We have the tools to beat climate change. Now we need to legislate

Schengen: MEPs adopt their position on temporary checks at national borders

Youth unemployment: think out of the box

A day that Berlin and Brussels would remember for a long time

Reject passivity and embrace ‘responsibility for our future,’ Lithuania’s President tells UN Assembly

Eurostat confirms a dangerously fast falling inflation in Eurozone

Why banks escape from competition rules but not pharmaceutical firms

Eurobarometer: Not a single answer about what the Banking Union will cost to citizens

The world to teach Germans to…un-German

“Airbnb and YouTube are two great examples of a crowd based capitalism”, key stakeholders outline the boundaries of the 4th Industrial Revolution in Davos

Madagascar: UN chief commends leaders, State institutions following ‘historic milestone’ election

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s