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: