European Parliament must back strong bank structure reform when it votes this week
European Commission should include long-term public benefits in its impact assessment
The European Parliament will this week vote on a non-legislative report that will help determine objectives for the EU’s banking structure reform, under proposals currently being drawn up by the European Commission.
Thierry Philipponnat, Secretary General of Finance Watch, said: “The case for a strong structural reform is beyond doubt. It must now be matched by political will. There is no public interest reason for citizens and taxpayers to continue supporting too-big-to-fail banks.”
In addition, Finance Watch calls for the European Commission’s ongoing impact assessment to assess not only the short-term costs of structural reform but also to include the substantial long-term public benefits of reducing the scope for banks to cause financial and economic crises as a result of their too-big-to-fail, too-complex-to-fail, or too-interconnected-to-fail structures.
Finance Watch has published a briefing note to assist citizens and civil society organisations who wish to respond to the Commission’s consultation, which closes on 11 July (see links below).
A strong reform of bank structure would not only bring financial stability, it would also bring a significant reduction in the funding subsidies associated with such banking, removing a distortion in the way that assets and credit are allocated.
“It is no coincidence that Europe’s largest banks have the smallest proportion of their assets committed to serving the real economy. As with any industry, hidden subsidies distort markets in ways that harm the general interest; banking is no different in this respect,” said Mr Philipponnat.
Finance Watch agrees with the conclusions of the Parliament’s report that:
- too-big-to-fail banks derive very large funding subsidies that distort the economy,
- Europe’s banking sector is dominated by a few giant banking groups , and
- the economy would benefit from a more diverse banking system built on trust and relationships.
Finance Watch regrets that the report stopped short of backing strong structural remedies in line with recommendations from the IMF, OECD, Bank of England and the EU’s own High level Expert Group on Reforming the Structure of Banking, among others.
“Several policies will help to reduce TBTF – such as recovery and resolution plans and higher trading book capital – but on their own these will not end it. To end TBTF, we need to change the structures that support it,” said Mr Philipponnat.
Finance Watch therefore calls for ex ante legal and capital separation of most trading activities – including market making and underwriting – from the deposit banking activities of large banks, as proposed by the HLEG.
“Unfortunately, when it comes to bank structure the interests of the banking industry and those of the general public pull in opposite directions. The EU’s policymakers must stand firm and deliver a strong proposal that puts the interests of citizens first,” said Mr Philipponnat.
- Finance Watch note on responding to the Commission’s consultation (deadline 11 July)
- Finance Watch policy brief, “The importance of being separated”
- Press release, “Time to cut the umbilical cord between bank deposits and financial trading”, 23 May 2013
- Other Finance Watch materials on bank structure
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Commission’s webpage on banking structural reform, the HLEG presented its final report on 2 October 2012.
The Commission is now examining possible reform options with a view to prepare a follow-up later in 2013, of which the current consultation is part. “Consultation: reforming the structure of the EU banking sector”, runs from 16 May to 11 July 2013.
A key question now for the EC is whether to propose separating nearly all trading in a meaningful way, as has been proposed by the Liikanen report and in the UK under the so-called Vickers reforms, or only a very small proportion of trading (mainly proprietary trading), as has been proposed in France and Germany.
To read Finance Watch’s views on the weaknesses of the French reform, see Finance Watch’s proposed amendments to the French bank reform proposals, 29 January 2013.
To read Finance Watch’s views on the weaknesses of the German reform, see Position paper on German bank reform, 22 April 2013.
In 2012, European banks lent only 28% of their balance sheets to the real economy: “In particular for the large institutions, the relative weight of banking activities has shifted from deposit taking, lending, securities underwriting, and trust services towards dealer and market-making activities, brokerage services, and own account trading….The activity shift was accompanied by … a rise in complex derivatives, increased interconnectedness, lengthened intermediation chains, and increased leverage. In March 2012, loans to non-financial corporations and households only make up 28%… of the aggregate balance sheet of EU monetary financial institutions.” (Liikanen report)