13 November 2012

EBF response to the final report from the High-level Expert Group on reforming the structure of the EU banking sector

The EBF salutes the very thorough and considered analysis conducted by the HLEG which acknowledges that no particular business model was more or less vulnerable in the crisis, that the benefits of the universal banking model should be retained, that the Single Market should remain intact and that the regulatory reform agenda represents a substantive and robust response to addressing the deficiencies made apparent during the financial crisis. This analysis aligns well with the analysis made by the EBF in our study on the need for possible structural reforms.

Given this analysis the final recommendations of the HLEG calling for mandatory separation of proprietary trading activities and other significant trading activities over a certain threshold are open to legitimate challenge. EBF contends that a compelling case for mandatory separation has not been made in the report.

In addition, in EBF’s view the recommendation for mandatory separation is very general in nature; it does not adequately address the riskiness of assets; it does not solve the issue of systemic risk; it has distortive effects upon bank functions of vital importance to customers and the European economy; it will impact negatively on banks’ ability to lend to the economy; it will reduce diversification benefits of the universal banking model, it will reduce the competitiveness of the European financial sector compared to financial sectors not affected by this recommendation, and it will lead to a further fragmentation of the Single Market.

Instead of the proposed mandatory separation, EBF supports the HLEG recommendation to strengthen further the use of Recovery and Resolution Plans (RRPs) as proposed in avenue 1, as it fits better with the current regulatory reform agenda and can be incorporated with considerable less distortive impact than mandatory separation. By (only) pointing at the possibility of mandatory legal separation however, the HLEG creates the risk that resolution authorities skip the less far-reaching and more proportionate measures and resort to the ultimate and far more damaging measure of mandatory legal separation. The EBF therefore recommends that any impediments to resolvability are addressed along the lines of the better balanced provisions of the European Commission’s proposal for a Bank Recovery and Resolution Directive (BRRD).

The effective use of RRPs must be seen in the context of a well-functioning crisis management framework in concurrence with the BRRD proposal and should be based on an ongoing dialogue between the supervisor and the individual bank. Separation of certain activities conditional on the RRP should be the last resort, the supervisor should not impose structural measures on banks that are going concern and banks should have legal recourse to such supervisory decisions.

The HLEG does not address the potential economic consequences of implementing the proposed mandatory separation of trading activities. However, mandatory separation of trading activities would lead to higher costs that would hit bank customers in particular. Hence, EBF calls for an impact assessment of any legislative proposals.

EBF is yet to be convinced of the use of a designated bail-in category as recommended by the HLEG set against the proposition put forward in the BRRD proposal that a broad range of instruments should be eligible for bail-in within a statutory regime.

EBF would argue that the introduction of floors for risk weights and hence also the recommended floor for the trading book constitutes a significant threat to risk modelling and to the principle of calibrating capital requirements according to actual risks. EBF is involved in an ongoing dialogue with policymakers to improve the internal models of banks.

In regard to the recommendation for an extra non-risk based capital buffer for the trading book on top of the risk-based requirements (Basel II.5 and Basel III) EBF finds that any additional steps in this direction should await the finalisation of the review of the trading book and take into account the buffers already proposed in the CRD IV/CRR. The same goes for the HLEG recommendation for introducing LTV/LTI caps for real estate related lending: CRD IV/CRR already gives national supervisors a number of tools to address macro-prudential risks.

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