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Banking Union
04 October 2012

Martin Wolf: Liikanen is at least a step forward for EU banks


The review of the structure of EU banking carried out by an expert committee could, with important modifications, be a big step forward, comments Wolf in his FT column.

The suggested ringfencing of trading assets, though different in detail, represents an endorsement of the ICB’s approach. The report argues that “the specific objectives of separation are to ... limit a banking group’s incentives and ability to take excessive risks with insured deposits” and to “prevent the coverage of losses incurred in the trading entity by the funds of the deposit bank, and hence limit the liability of taxpayer and the deposit insurance system”. The ICB took a similar view. Again, the report seems close to the views of the ICB on bail-inable debt. I welcome plans to pay bankers in junior debt that must be held for long periods. Similarly, I agree with the scepticism on risk-weighting, given the experience of its limitations. Much higher unweighted equity requirements are needed.

As happened in response to the ICB report, the critics will argue that in the crisis universal banks showed no greater tendency to collapse than simpler entities. This is true, but irrelevant... Nevertheless, I have concerns. The most important is over the threshold and the procedure for putting the trading activities into a ringfenced entity. This is to involve two stages. The trigger for the first stage would be that assets held for trading exceed €100 billion or 15-25 per cent of total assets. In the second, supervisors would determine the need for separation. Moreover, the European Commission is to calibrate the criterion for the share of a bank’s total assets. But these thresholds are far too high and the room for coercing the commission too great. Hedging services for clients would also be exempt from ringfencing. In all, far too many activities would end up outside the ringfence.

The Liikanen report goes in the same direction as the ICB, though by a different route. Given reasonable flexibility, its recommendations should also be compatible with what the UK plans to do. All this is quite encouraging. I also like what it says about risk-weighting, capital requirements, bail-inable debt, compensation and governance. But the holes left in the fence are too big to ensure adequate protection of retail banking, the taxpayer and the economy from trading activities. This is a step forward. But the next ones must be further forward, not backward. The EU must enjoy safer banking. It has no sane alternative.

Full article (FT subscription required)


© Financial Times


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