EU reforms run into regulatory conflict
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EU reforms run into regulatory conflict

Draft bill to split off prop trading; national discretion allowed.

Three years after the Liikanen commission proposed legal separation of the trading operations of large European universal banking groups, policymakers remain at loggerheads over structural bank reforms (BSR) intended to reduce the interconnectedness of the financial system. 

In mid-June, the European council of member states published a draft bill that proposes full separation of the market activities of a retail-deposit-taking banking group if it engages in proprietary trading, or to those with total trading activities worth at least €70 billion, or 10% of total assets. However, in the latter case, enhanced supervision or higher capital requirements could, instead, be imposed.

These proposals are considerably less tough than the February 2014 draft: there would be wide national supervisory discretion in any separation decision; the threshold for structural reforms to be considered has been raised; and proprietary trading at the legally incorporated broker dealer would still be permitted. 

Moving away

Brian Polk, director for global regulatory strategy at PricewaterhouseCoopers, says: “It seems that the EU has been moving away from automaticity” of separation based on thresholds. Supervisory and national resolution authorities would have a measure of discretion and a variety of tools to deal with banks exceeding the threshold [including greater reporting and supervisory requirements]. This avoids many of the economic downsides [of the January 2014 draft] and we believe these changes are largely positive for both the industry and the wider European economy.” 

Sharon Bowles-160x186

 It may be hard to assuage the concerns of the left/centre-left, but returning to Liikanen is a logical position for the council

Sharon Bowles

In a PwC report published in January, Polk estimated structural reforms could cost EU banks €21 billion, because of increased funding, capitalization and operational costs for trading subsidiaries of universal banks. However, this estimate factored in the prospect of a large number of European institutions bearing the brunt of the structural reform law. Market participants reckon BSR would affect up to a dozen of the large universal banks – fewer than the 30 originally expected. 

But it’s not clear the European Parliament will give the green light to the new rules. In May, a month before the Commission’s latest proposal, the centre-left and Eurosceptic blocs in parliament unexpectedly indicated that they would block attempts by the European rapporteur on BSR, Gunnar Hökmark, to water down the original draft. 

A Brussels-based aide to the rapporteur says the Commission hopes to put the proposal to Parliament in the autumn to bring to a close the final chapter in the EU legislators’ drive to address the resolvability of systemically important institutions. However, the voting decision of centre-left groups, and German social democrats in particular, will be key. 

Sharon Bowles, a former chair of the European Parliament’s Economic and Monetary Affairs committee, says: “My instinctive response is that it may be hard to assuage the concerns of the left/centre-left, but returning to Liikanen is a logical position for the council. It is worth noting that if it goes to a second reading then the Parliament has to muster an overall majority [more than 50% of those eligible to vote] rather than a simple majority [of those present at a given vote] to amend the council position. 

"In the past, threats of second reading have been used against the council, but in circumstances like this they may act in council’s favour. The left may have to face a choice between something or nothing.” 

Financial reformers are unhappy. Paulina Przewoska, policy analyst at Brussels think-tank Finance Watch, says the latest proposal is micro-prudential – focusing on the resolvability of a given institution – and lacks a macroprudential focus on financial stability. 

The proposal to permit proprietary trading is, to some extent, academic because of the international impact of the US Volcker Rule. However, the fact that it remains permitted, in theory, highlights how policymakers’ priorities have shifted to increasing credit growth.

The Commission’s draft is compatible with the UK’s Financial Services (Banking Reform) Act 2013 that mandates ring-fencingthe retail operations of large universal banks, which effectively separates the trading unit. 


The power to impose structural changes on a systemically important universal bank if its resolvability is in question already exists within the 2014 Bank Recovery and Resolution Directive (BRRD), raising the spectre of US-style regulatory complexity in Europe. 

Further reading


Financial regulation: special focus

PwC’s Polk says: “BSR potentially sets up a conflict between the ECB/Single Supervisory Mechanism and the national resolution authorities and the eurozone’s Single Resolution Board. 

"Who will call the shots on bank structure? Is it to be the NRAs, which will use resolvability assessments to determine structure? Or is it to be the supervisor?”

Jan Pieter Krahnen, a member of the 2012 Liikanen group, fears BSR adds to the complexity of banks’ supervision, sets up the potential for regulatory conflict with the BRRD, and could weaken policymakers’ focus on stress-testing, living wills and enhancing market education on bail-in bonds. 

“History shows us that once new institutions are established, it is very difficult to remove them. The complexity of the eurozone’s regulatory architecture has increased markedly in short while.”