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EU set to mimic UK banking ring-fence

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The European Union has unveiled its own version of Sir John Vickers’ proposals to split up the retail and investment arms of banks to allow them to fail safely.

The report, authored by Erkki Liikanen and published yesterday, was set up by the European Commission to protect taxpayers from bailing out banks. It recommends a ring-fence of trading and retail divisions at its heart.

The report is now under a six week consultation before the EC will consider legislative action.

Commissioner for financial services Michel Barnier said: “Our American partners had chosen the Volker Rule. The United Kingdom wanted to better protect the assets of depositors and asked Sir John Vickers to think of ways to achieve this.

“It was therefore legitimate and necessary to have this discussion at European level by relying on a strong and diversified expertise and once again did not avoid difficult questions. And there are many in a single market with nearly 8,000 banks and no single model!

MEP and Economic monetary affairs committee chair Sharon Bowles welcomed the paper but expressed concern that pensions could still be on the hook under bail-in proposals to make sure investors take a hit in the case of a bank failure.

Bowles said: “I am somewhat concerned about the implication of suggesting that a lot of the bail-in instruments be held by life insurance companies because that is where people’s pensions are.

“The requirement may see them take the hit if there is a banking problem. I am glad therefore that this is indicated as a point that requires more work. The right line to me seems to look for diversity in holdings.

“I welcome the recommendation for a clear line in the hierachy of bail-in instruments, this is vital.”

Finance Watch Secretary-general Thierry Philipponnat says: “This is an important step towards tackling the distortions of public subsidies and moral hazard in the banking sector.

“The Liikanen proposals are not just another regulatory initiative; they are the heart of the matter. Problems linked to bank structure, activities and size have been profoundly negative for the EU’s economy. Structural reform is an essential first step to putting that right.”

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