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Restructuring the EU Banking System

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Restructuring the EU Banking System Memorandum Restructuring the EU banking system Memorandum 9 April 2013, Brussels Memorandum Restructuring the EU banking system function well and efficiently and have the necessary stability. Ms McCarthy sees the structural reform of the banking system as complementary to all other new regulations coming up. It is much more fundamental than simply changing the rules of operation. She believes that they are in Arlene McCarthy agreement in the ECON Member of the European committee on a number of core Parliament, rapporteur on issues and that is that we have to reforming the structure of the make sure that in any reform we undertake a first line of protection EU banking sector that must be put in place to The culture has not changed. We protect depositors and savers. continue to see crises and There is nothing wrong with taking scandals like Libor and misselling. risks, that is what generates We have not gotten away from profits and returns, but excessive banking bailouts. We have seen risk is not good and it has led to situations in the Netherlands in some of the problems in the which a bank had to be bailed out recent crisis and the taxpayers are very recently and we have seen still paying for that. Another issue the emergence of a banking crisis on which ECON members seem in Cyprus. to agree is that it is wrong that depositors and savers should Ms McCarthy is reluctant to take bear the cost for banks failing due anything definitive from that crisis to reckless activities. because the Cypriot case is a unique one. Nevertheless, a ECON members wish to put in conclusion to be drawn is that place measures that prevent banks are still too big to fail. The banks from being too big to fail. EU banking sector amounts to They also want to look at the 375 per cent of the EU’s GDP. So long-term sustainability and health this is a very important sector. of the sector. Some members do That is why we have to get it to not believe that there should be a Memorandum Restructuring the EU banking system distortion in the banking sector, Do we need a separation or unlike in other industries where should we have a ring-fence? To there is an implicit guarantee and we need a full separation or funding subsidy. Of course they should we be banning certain also want to reduce to probability activities? In any case, this will of bank failures and the likelihood happen. We will get a proposal and cost of government from the Commission and there interventions. will be a reform. What we now are seeing is that in the absence One of the arguments used by the of such a reform, the individual banking industry as to why we member states are taking actions should not have a separation or on their own. ring-fencing between retail and investment activities is that the If the industry does not want help cost would be too high, but Ms find a constructive approach, it is McCarthy would say that those going to happen in any case. So banks do not seem to have a the way to lobby is not to lobby problem with the cost taxpayers against it. have to bear when things go ___________________________________________________ wrong. One of the reasons why we need a structural reform is that we have a fundamental problem with public trust and confidence, which does not go away. What do we want our banking system to do? What structure do we need so that the banking system can do that? We want a more stable and competitive banking system that Mario Nava can contribute to growth. Directorate H – Financial Institutions, DG MARKT, We need to reduce the European Commission interconnectivity between the risky elements of banks and the Mr Nava started by underlining shadow banking system. Of what Ms McCarthy had said will course there are many questions. happen, that there will be a Memorandum Restructuring the EU banking system reform. He gave three probability and the cost of a bureaucratic reasons showing default. Here, the new capital how serious the Commission is requirement rules do part of the about this. First, they have put job. However, the fact that there together a high-level expert group, are intragroup subsidies and at i.e. the one led by Erkki Liikanen. the same time as there are basic Second, they have set up a new banking activities with deposits unit, which always should be and other riskier activities does taken as an important sign. The not create the right incentives. third sign is that the European Parliament is putting forward an There is a third reason which own-initiative report. should not be underestimated, and that is that a number of The co-legislators have to prove countries both within and outside the complementarity of this reform the EU have already taken actions to all other measures being taken. towards a structural reform of the There are three types of banking system. Most of the measures. First, there are banks are international and hence prudential rules and regulations it does not make sense to have such as CRD IV. Second, a lot several different national rules. has been done in the area of supervision. Finally, there are Those jurisdictions that already resolution measures, where there have taken action have chosen is a proposal out on crisis different approaches. First of all, management. However, as stated does one put the fence around in the Liikanen report, the current the retail activities or does one put reform agenda does not fully the fence around the investment correct incentives for excessive activities? The second question is risk taking, complexity and intra- what type of fence we should use. group subsidies. Hence, we need Should we have a high fence, i.e. to make sure that we create the full separation? Or should we right incentives for banks to go have a lower fence meaning just back to basic and start serving functional separation but not strict the real economy. legal separation? Finally there is The second point concerns the issue of defining investment financial stability and the activities and trading. _____________________________ Memorandum Restructuring the EU banking system organisations he supports the idea that diversification is in itself a risk mitigant. A separation will lead to narrower business models. Banks may be smaller by definition, but not necessarily less risky, neither individually, nor collectively. Furthermore, having separated them, we may actually encourage what is perceived to Iain Cummings be low-risk businesses to take Partner, Financial Services, more risk. KPMG, UK Another dynamic that we see Mr Cummings started with the within the financial sector is first discussion point on the progressive localisation. Arguably agenda: are the proposals in the there are moves to address this, Liikanen report the right way because it fundamentally comes forward? If the aim is to make from a lack of cross-border banks smaller, if the aim is to resolution measures. This has led support ex-ante resolution politicians and regulators to take measures and if the aim is to action in order to protect their prevent banks from using own reputation by dealing with guaranteed retail deposits to fund what they actually can deal with risky trading activities, then the within their own local system. Mr answer probably has to be yes. It Cummings fears, however, that by is by no means the only option, or moving trading businesses that indeed, the best. It is also one are inherently more international that has been tried at least twice away from the business perceived in history before and subsequently be more domestic, we have there have been periods of further incentive towards this stability. However, if we go down dynamic. The 1930s trade wars it this route we have to accept all of were driven by a failure to realise the consequences. It is by no that what looks sensible on a means a nirvana. In general, when country by country basis was not Mr Cummings looks at banking actually for a greater good. Memorandum Restructuring the EU banking system Having said all of this, one of the problems, retail distribution and most compelling arguments for sales culture without focus on risk Liikanen actually goes against was actually the issue. localisation. We have proposals from the US, from the UK, from There is a need for enhanced risk France and last week from governance in most organisations. Germany. Having different kinds of It is a process that most financial rules in different countries can services businesses are going only lead to huge inefficiencies. through. This is included as one of We need to have clarity about the recommendations in the where the dividing lines are. Liikanen report. We should not Liikanen has the advantage of lose sight of this, regardless of setting clarity across the whether we choose separation or marketplace within the EU about not. Whatever the size and shape what the rules are. There should of banks, it is essential that it be also be clarity about the definition clear to all stakeholders the risk and the application of those rules that those organisations are to ensure that we have a level taking. Poor governance and the playing field. “tone from the top” have Banks have realised that the contributed to all failures. As culture that permeated them, and Citigroup’s Chuck Prince said, “as still does after the crisis, needs to long as the music is playing, change. Most financial services you’ve got to get up and dance”.
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