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EU unveils reform of 'too-big-to-fail' banks

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EU unveils reform of 'too-big-to-fail' banks

Photo © Roman Levin - Fotolia

(BRUSSELS) - The European Union unveiled long-awaited plans to rein in the "too-big-to-fail" banks Wednesday, rejecting claims they have been too watered down to prevent a repeat of the 2008 banking crisis.

The reforms affect about 30 of the biggest lenders and would stop them trading on their own account as well as forcing them to hive off some of their riskiest activities.

But they stop short of the recommendations in a 2012 EU report that all banks should ring-fence their retail operations from the high-risk trading widely blamed for the global crash.

France and Germany, both seeking to protect their own flagship banks, are meanwhile irritated by the EU's plans and say their own national laws go far enough.

EU Financial Services commissioner Michel Barnier, announcing the plans in Brussels, said they were the "the final cogs in the wheel to complete the regulatory overhaul of the European banking system."

"This legislation deals with the small number of very large banks which otherwise might still be too-big-to-fail, too-costly-to save, too-complex-to-resolve," he said.

The banking crisis that started with the collapse of Lehman Brothers and the ensuing eurozone debt crisis has prompted the EU to adopt a raft of banking sector reforms to tighten overall regulation and minimise excessive risk taking.

The EU did not specify which banks would be covered by the latest reforms on Wednesday, saying only that it would cover around 30 lenders representing over 65 percent of the total banking assets in the bloc.

But Barnier cited Germany's Deutsche Bank as a relevant case, saying its assets where equivalent to more than 80 percent of the country's annual economic output, making regulation much more than just a national issue.

Other banking giants likely to come under the new rules would include HSBC and France's Societe Generale.

Barnier insists plan 'balanced, realistic'

Barnier, a Frenchman who is talked off as the possible new European Commission head to be named later this year, rejected criticisms coming from all sides.

"The European parliament says it's not enough, bankers that it's too much, Britain wants an exception," he said.

"When you take all that together, I think we have found the middle way. This text is balanced and realistic."

Governments in several European countries were forced to bail out failed banks during the crisis, costing taxpayers billions of euros and leaving several lenders state-owned.

The proposals set out on Wednesday would stop the biggest banks from engaging in "proprietary trading" -- trading with their own money for their own gain at a risk to depositors.

They would also give EU banking supervisors the power to make big banks hive off high-risk activities -- such as complex derivatives of the kind that led the banking sector into crisis in the first place -- if they were seen as compromising financial stability.

But they do not go as far as the 2012 Liikanen Report, which Barnier commissioned. It said all banks should separate their riskier activities from their traditional role in ordinary, low-margin but largely safe retail banking.

The plans announced Wednesday echo the United States' "Volcker Rule" on banks trading on their own accounts, which US regulators approved in December.

The EU's proposals are unlikely to come into effect any time soon.

They must first go to the European parliament for discussion, but with elections in May and then a change-around of all the top positions in the EU later this year, it is unlikely they will be taken up until late 2014 or early 2015.

Barnier said he hoped the proprietary trading rule would come into effect by 2017, with the high-risk split in force in 2018.

The proposals go further than German and French laws adopted in 2013 that do not ban proprietary trading.

German Finance Minister Wolfgang Schaeuble said Tuesday that he and his French counterpart Pierre Moscovici believed the EU should be "very careful -- this is an extremely difficult subject."

"France and Germany have said that we are adopting legislation more quickly at a national level so that European legislation can draw on this experience," Schaeuble said.

Britain, with its huge financial centre in the City of London, also has no proprietary trading ban but it strictly separates retail and investment banking.

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