Bank structure proposal has right objectives but fragile mechanism, unlikely to reduce too-big-to-fail banking unless strengthened
Brussels, 30 January 2014 - The European Commission’s legislative proposal on bank structure, published yesterday, has little prospect of reducing the economic burden of too-big-to-fail banking on the EU’s taxpayers and real economy despite having the right objectives, said Finance Watch, the public interest advocacy group.
The text sets the correct objectives for bank structure reform but lacks the legal means to deliver them. This is partly because decisions on the separation of trading activities will depend on a narrow test of whether there is a threat to financial stability, rather than a broader test that relates to all the objectives.
Additionally, the decision to separate is left to competent authorities, while key Member States have expressed unconditional support for their national too-big-to-fail champions against the very idea of separation. This makes it extremely difficult to predict whether separation of too-big-to-fail banks will ever be achieved under this legislation.
The core objectives of the proposed regulation, contained in Article 1, are commendable and include, among other things, to:
- avoid resource misallocation
- encourage real economy lending
- reduce conflicts of interest
- reduce bank interconnectedness
- make bank resolution possible (an essential condition for successful Banking Union).
Delivering these Article 1 objectives would be of great value to the economy and the wider public interest. Unfortunately, the proposed mechanism only says that these objectives should be “taken into account” and does not relate to them directly. We therefore doubt that the legislation will be able to deliver its objectives.
In addition, the regulation’s effectiveness on separation is limited by a high level of administrative complexity and numerous carve-outs, most surprisingly the exclusion of derivatives trading from a key decision-making process, when it is admitted by all that an oversized, speculative derivatives market lies at the heart of the financial system’s interconnectedness.
The measures to restrict proprietary trading are stronger and welcome. However, as the text itself recognizes, prohibition of proprietary trading contributes only marginally to reduce too-big-to-fail banking and the harmful implicit subsidies that go with it.
We also welcome the measures taken to bring transparency to Securities Financing Transactions and address the important topic of re-hypothecation.
Thierry Philipponnat, Finance Watch Secretary General, said:
“The objectives of this proposal are the right ones but there are significant weaknesses in the mechanism for delivering them. The text’s effectiveness is also undermined by its excessive complexity. It is therefore unlikely that the proposal will deliver a meaningful improvement to the structure of the EU banking industry or reduce the damage that too-big-to-fail banking inflicts on Europe’s economy.
“Too-big-to-fail banking is responsible for a very significant missallocation of resources which damages the real economy, as can be seen by the overdevelopment of trading and derivatives assets on the balance sheets of the EU’s too-big-to-fail banks. We are worried that the proposed regulation will do little to change that.”
For more detailed commentary on the draft, or to interview one of the team, please contact:
Greg Ford, Head of Communications at Finance Watch, on +322.401.8740 or +44 7703 219 222 or
Charlotte Geiger, Communications Officer at Finance Watch, on +322.401.8741 or
1) In the years leading up to the crisis, systemically important financial institutions (SIFIs) in receipt of too-big-to-fail funding benefits increased the size of their trading books six times faster than their banking books (Bank of England). Each of the EU’s largest banks is now close in size to the GDP of its home country (EC), yet the majority of their assets relate only to financial trading and derivatives:
- EU bank lending to the real economy was only 28% of total assets in 2012 (HLEG);
- of the trillions of euros in trading assets, less than 10% of non-equity securities in the Eurozone were issued by non-financial corporates (ECB);
- more than 90% of global derivatives transactions have no real economy counterparty (BIS).
2) National legislation on bank structure is in place in France, Germany and the UK, and under consideration in the Netherlands, Denmark and Belgium.
3) Public opinion polls show that 70% of German citizens want stronger regulation of banks and 84% of French citizens would like to see a full separation of bank credit from bank trading (sources: IFOP, SAS)
Factsheet for journalists with data on the effects of bank separation (pdf, 3 pages)
European Parliament report on bank structure, 3 July 2013
Finance Watch’s publications on bank structure
EC proposal, 29 January 2014