On 16 December, the European Commission presented its work programme for 2015 to the European Parliament. Despite hints to the contrary, the European Commission Bank Structural Reform (BSR) proposal, tabled in January this year by former EU Internal Market Commissioner Michel Barnier, remains on the new Commission’s work programme. The Bank Structural Reform (BSR) proposal will mandate a ban on proprietary trading and separation of trading from retail activities in Europe’s biggest banks.
The EBF has continually warned policy makers of the unintended negative economic implications the BSR proposal would bring. Separating banking activities would seriously undermine the Commission’s jobs and growth agenda as they would hinder the creation of a stronger capital market and make the provision of long term finance that is desperately needed to inspire investor confidence and to help the recovery in Europe more expensive. Dropping the bank structural reform plans would have eliminated a major source of uncertainty plaguing the financial sector.
Corporate customers, including SMEs, will be forced to use multiple banks for their business. The split would make banking more costly for corporate clients because they would lose diversification benefits. What is more, universal banks are a major source of liquidity in the bond markets and help bring corporates to market by underwriting their issuances. Its liquidity generating and market making activities drive capital markets as investors are left more confident that they can buy and sell more easily and at demand. Bank Structural Reform will force such activities out of the largest universal banks and will drive up the cost for services to the economy while potentially creating systemic risks by causing a concentration of trading activities with fewer and bigger market participants.
The European Commission has yet to provide a full comprehensive impact analysis of the new regulations and measures imposed on the banking sector since 2010. The landmark Capital Requirements Regulation (CRDIV/CRR) and Banking Recovery and Resolution Directive (BRRD) have largely dealt with the issue of ‘Too Big to Fail’ through the introduction of stricter capital and liquidity rules and a framework to bail-in creditors instead of taxpayers. The creation of the Banking Union in the EU makes it even more unlikely that banks will have to call on government support in the event of a future crisis. Still to be added to these measures is the FSB’s Total Loss Absorbency Capacity standard for global banks, which will further raise capital requirements.
The European Parliament and Council yet have to form their respective positions before trilogue discussions can commence. It remains to be seen how policy makers will reconcile the conflicting policy goals set by the Commission in 2015.
EBF contact: Timothy Buenker (firstname.lastname@example.org)