Instead of a structural mandatory separation, there is need to focus on implementing already existing regulatory proposals as well on strengthening supervision and risk management. This approach is important because diverse European banking business models have proven to be an asset during the crisis. The European economy must preserve the capacity of savings and retail banking to foster growth through financing households and SMEs.
Updated: Janaury 2017
ESBG considers that there is no need for further banking regulation since it would be better to wait until the upcoming rules come fully into operation. However, should a banking structure reform take place, the thorough impact assessment of the costs and benefits of each model of structural reform should be carefully examined. The impact assessment should also consider the interaction and overlaps with on-going and upcoming banking rules, the economic situation and the current difficulties experienced by some SMEs in accessing funding.
Furthermore, the role of the savings and retail banks in Europe should be carefully considered. They provide a full set of banking services to their customers: individuals and SMEs. Either an eventual separation of the trading activities, or a prohibition on some activities (such as market-making), which are key for the provision of banking services to customers, may be detrimental to the role of banks in the provision of banking services and lending, and therefore for economic growth.
Lastly, ESBG considers that the Vickers Report approach would be very detrimental for the European banking industry given that it would make it very difficult for these small and medium-sized universal banks to carry out their normal activities. The banking system would be much more concentrated, resulting in a set of large cross-border banks which will probably generate more risk. This is exactly the opposite of the sought-after effect.
On 2 October 2012, the European Commission unveiled the final conclusions of the Liikanen Group on the structural reform of the European banking industry, which aim to strengthen financial stability of the banking system. The Group opted for the approach of ring-fencing trading bank activities, without banning proprietary trading and including market-making activities; ring-fenced banks would not be allowed to engage in deposit-taking activities. The legally separate deposit bank and trading entity would be entitled to operate within a bank holding company structure, but would have to be capitalised separately. It should be noted that the ring-fence would only apply to those banks that hold significant trading activities portfolios.
Following a consultation process, the European Commission finally published its proposal for a regulation on banking structure reform together with a proposal to regulate shadow banking activities such as Security Financing Transactions (SFT). The final text suggests a stronger model than it was first thought. As with the Liikanen Report the proposal will apply solely to the larger financial institutions in Europe, which will number 29 banks according to the Commission's plans. These banks will be banned from engaging in proprietary trading activities. Additionally, further separation of other trading activities, such as market-making activities, could apply when exceeding some metrics following a still unclear process in which competent authorities would have discretionary powers.