Diversity & Inclusion
By the end of this year, the European Commission will present its legislative proposals for EU banking structural reform. Once the proposals are implemented, EU banks will have to separate their “investment” business from “retail” business. The degree and nature of the required separation is still to be determined.
The European Commission’s proposals will come on top of a number of other international developments in this area.
Some EU countries1 already have begun implementing their own individual national approaches to bank restructuring. For example, the U.K. has begun implementing the Vickers Report, which sets out a number of bank structure separation recommendations. The U.K. Financial Services (Banking Reform) Bill is expected to become law by February 2014 with all relevant secondary legislation to be in place by May 2015 and final implementation by 2019.
In the U.S., there is no requirement that would require such separation for U.S. banks, although a proposed Federal Reserve rule would require non-U.S. banks operating in the U.S. to place their businesses that operate outside of the U.S. branch of the bank under a single U.S. holding company. This will require significant modification of many EU banks’ U.S. businesses. The Volcker Rule’s requirement that banks cease short-term proprietary trading contains no requirement that banks restructure their businesses.
The recent announcement by one global bank that it would ring fence its domestic banking business from other operations, subject to regulatory review and approval, may prove to be a model for other institutions contemplating similar requirements.
Michel Barnier, the European Internal Market and Services commissioner, is reported this week to have suggested that the European-level proposals may go further than certain national laws. Globally active banks will, therefore, need to determine what impact the Commission’s proposals will have on their current plans and will need to identify the differences between the various EU and non-EU approaches, where relevant, in the U.S., Switzerland and Asia. Regulator-validated separation plans are likely to help mitigate the increase in regulatory capital requirements that major banks are dealing with. A harmonised approach in the EU may be welcomed, but there is a concern that major differences in approach from those in non-EU jurisdictions may emerge.
Given their imminence this alert sets out the background to the forthcoming European Commission legislative proposals.
In October 2012, a high-level expert group chaired by Erkki Liikanen, governor of the Bank of Finland, published its recommendations on EU banking reform (the “Liikanen Report”). The group took into account the U.S. Volcker Rule and the U.K. Vickers Report when considering measures to:
The Liikanen report made five main recommendations:
In May 2013, the European Commission published a consultation paper on the Liikanen Report’s structural separation recommendations.
The Commission considered how much discretion should be given to national regulators in determining whether the relevant thresholds requiring separation have been reached. For example, should the EU supervisor have discretion (subject to complying with EU technical standards)? Should their role be limited to evaluating whether the bank’s scope is correct? Or, should they not have any discretion?
The Commission proposed three potential separation options:
The Commission considered the strength of the separation and proposed three options:
There are a number of other EU banking reforms that are distinct from the Commission’s policy proposals on banking structure:
1 The U.K., Germany, France, Belgium and the Netherlands are in various stages of preparing such laws.
2 The U.K., Sweden and the Czech Republic have indicated that they will not join the EU banking union.
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