Liikanen’s Bank-Separation Proposal Sparks Opposition, EU Says

Finnish Central Bank Governor Erkki Liikanen’s proposals to force banks to divert some trading into separately capitalized units face widespread criticism, European Union regulators said after seeking views on the plans that may form the basis of an EU law.

Many banks argue that “a compelling case for mandatory separation of trading activities has not been made,” the European Commission said in a document summarizing responses to the draft measures. Some central banks and finance ministries in the 27-nation EU also signaled their opposition, according to the report, published on the EU’s website.

Michel Barnier, the EU’s financial services chief, has sought views on the structural measures, which were proposed earlier this year by an EU-mandated working group led by Liikanen, who’s also a member of the European Central Bank’s Governing Council.

Under the Liikanen group’s plan, lenders would transfer trading they conduct on their own behalf and other high risk activities into legally separate units. This trading entity wouldn’t be allowed to finance its activities through deposits covered by government guarantees.

Barnier has said the proposals are a “good basis” for future commission work.

Bank criticisms of the draft plans include that they would raise costs and spur the growth of so-called shadow banks that face less strict regulation, according to the report.

Central banks and finance ministries have “diverging views on the need for structural reform,” according to the report. Even those in support of the plans are seeking “greater clarity on the nature of the proposed separation and an impact assessment.”

The majority of “non-bank respondents, business federations or other representatives of corporate customers” also have “strong reservations about mandatory separation,” the commission said in the report.

Bank investors and consumer groups were more positive about the proposals.

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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