Bank Structure Key Issues
The EU’s High Level Expert Group on structural aspects of the EU banking sector, led by Bank of Finland Governor Erkki Liikanen, was appointed by the European Commission to examine whether the current EU banking regulatory reform agenda should include structural reforms to increase stability and customer protection.
The conclusions of the HLEG were that no particular business model in the European banking sector did particularly well, or particularly poorly, in the financial crisis. Rather, the analysis by HLEG revealed excessive risk-taking – often in trading highly complex instruments or real estate related lending, and excessive reliance on short-term funding in the run-up to the financial crisis. The risk-taking was not matched with adequate capital protection, and strong linkages between financial institutions created high levels of systemic risk.
The HLEG gave five recommendations to European policymakers:
- Mandatory separation of proprietary trading and other high-risk trading activities,
- Possible additional separation of activities conditional on the recovery and resolution plan,
- Possible amendments to the use of bail-in instruments as a resolution tool,
- A review of capital requirements on trading assets and real estate related loans, and
- A strengthening of the governance and control of banks.
The European Commission used more than a year considering how to regulate in this area. On 29 January 2014, after several postponements, the Commission adopted the Regulation on structural measures to improve the resilience of the EU credit institutions. The proposal aims at further strengthening the stability and resilience of the EU banking system. It sets out rules on structural changes for "too-big-to-fail banks" (TBTF). It explicitly targets the largest and most complex EU banks with significant trading activities.