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Bank separation is essential for banking competition and the economy, the time for indefinite bank subsidies is over

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Brussels, 8 April 2013 – Finance Watch, the public interest association, today published a policy note “The importance of being separated – Making the public interest sovereign over banks” on the benefits of separating trading from lending activities among Europe’s largest universal banks.

Finance Watch calls on policymakers to ignore misleading claims that “we have done enough bank reform already” or that “separation would hurt the real economy”. These and other myths are addressed in the document and comprehensively debunked. The document explains why bank separation is vital if the EU’s other bank reforms are to be coherent and protect the public.

Key points include:

  • Today’s banking market is distorted by funding subsidies which harm competition in the banking market and discourage banks from serving the wider economy as they should.
  • Existing bank reform proposals do not stop banks from being too-big-to-fail and will not protect the general public from future banking crises.
  • The separation of banking activities is a critical step in restoring both Europe’s banking sector and economy to health.

Duncan Lindo, senior policy analyst at Finance Watch and the paper’s author, said:

“For the EU’s package of bank reforms to be meaningful, policymakers must confront the issue that lies at the heart of Europe’s banking troubles: too-big-to-fail.

“Reforming bank structure is not something to be afraid of: there are vested interests to overcome but it is a vital step in returning Europe’s banks and economy to health.”

Arguments against separation typically include threats that it could put the EU banking sector at an international competitive disadvantage, and attempts to draw the wrong conclusion from the observation that “no one bank business model did better than others in the crisis”.

To these, policymakers should recall:

  • The crisis cost hundreds of billions in direct bank support and brought five years of recession to the EU; a banking system built on moral hazard is clearly unaffordable.
  • A reformed and stable banking system would attract long-term investment to both banks and the economy.
  • The survival of banks with too-big-to-fail status in the crisis does not prove their resilience, it merely proves they were too big to be allowed to fail.

Thierry Philipponnat, Secretary General of Finance Watch, said:

“This case for separation has already been made by the EU’s High level Expert Group: we need regulation of bank structure. Policymakers must have the conviction now to bring real competition and market discipline to the banking sector.

“The time for indefinite funding subsidies for the banking industry is over.”

To download the policy note click here (16 pages pdf).

ENDS

For further information or to interview Duncan or Thierry, please contact:

Greg Ford, head of communications, on +322.401.8740 or +44 7703 219 222 orgreg.ford@finance-watch.org

Charlotte Geiger, communications officer, on +322.401.8741 orcharlotte.geiger@finance-watch.org

NOTES FOR EDITORS

In November 2011, Commissioner Michel Barnier announced his intention to set up a High-level Expert Group (HLEG) to consider in depth the need for possible reforms to the structure of the EU banking sector, chaired by Erkki Liikanen. The HLEG final report was published on 2 October 2012 and recommended among other things that banks’ proprietary trading and other significant trading activities should be placed in a separate legal entity (although this can remain part of a banking group) if above a given threshold. The report can be downloaded from: http://ec.europa.eu/internal_market/bank/group_of_experts/index_en.htm#High-level_Expert_Group

Finance Watch’s 14 November 2012 response to the Liikanen Report can be downloaded from:

http://www.finance-watch.org/ifile/Publications/Responses/121113_Answer_to_EC_Consult_Liikanen.pdf

The European Parliament published a non-legislative draft report (rapporteur Arlene McCarthy, S&D, UK) on 8 March 2013 in favour of separation, which can be downloaded from:

http://www.finance-watch.org/ifile/Dossiers/Banking%20structure/EP%20INI%20draft%20report.pdf.

A vote in ECON is scheduled for 28 May 2013 with a vote in Plenary at the beginning of July.

The Commission working plan for 2013 indicated that legislative follow up to the Liikanen report should be published around summer 2013.

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