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Shadow-Bank Rules a Banking Union Cornerstone, Barnier Says

June 7 (Bloomberg) -- Proposals on shadow banking and the structure of lenders’ retail and investment arms are priorities this year as the European Union pushes toward a banking union, said Michel Barnier, the bloc’s financial services chief.

These measures, as well as the creation of European financial supervisors and rules to end government-backed bailouts of failing banks, are “fundamental cornerstones of a banking union,” Barnier said today in a speech in Copenhagen.

European Union leaders, including European Central Bank President Mario Draghi and European Commission President Jose Barroso, have called for a banking union with more coordination of regulation, as lawmakers seek to bolster confidence damaged by debt turmoil. EU President Herman Van Rompuy plans to report on proposed “building blocks” for deeper integration in the 17-nation euro area to the next summit of EU leaders on June 28-29 in Brussels.

Laws bringing deeper integration are “tough to implement and even tougher to explain to citizens,” Barnier said, according to prepared remarks. “But the reality is that we have no choice. We can no longer have a monetary union without an economic union.”

Shadow Banking

The commission “must ensure that the new financial regulation does not push certain banking activities toward the non-regulated sector,” Barnier said. Shadow banking, which includes money-market funds, securitizations and off-balance-sheet investment vehicles, represents as much as 30 percent of the entire financial system, he said.

Joint bank resolution funds or deposit insurance systems, which also may be proposed as banking union planning moves forward, need to be conceived in a way that includes all 27 EU member nations, not just the 17 countries in the euro area, Barnier told reporters after his speech.

“If we go much further, with much more integrated supervision, more pooling of resolution funds, more pooling of deposit guarantee funds, we should in any event propose it for 27,” Barnier said. “Maybe at some point there should be opting out for certain countries. But that is farther than where we are today.”

Barnier also said a group of bankers, economists and academics led by ECB council member Erkki Liikanen will report later this year as to whether the EU should seek to impose structural changes on lenders.

Volcker Rule

The group will examine plans in the U.S., known as the Volcker rule, to ban commercial banks from proprietary trading as well as U.K. proposals, drawn up by a panel led by former Bank of England Chief Economist John Vickers, to have a ring-fenced pool of reserves to back their retail banking activities.

Barnier told reporters that for now there is no proposal to help Spanish banks with the euro area’s firewall funds, the European Financial Stability Facility and its permanent successor the European Stability Mechanism.

“Today it’s not possible” and not foreseen, he said. He also said the European Commission has confidence in the Spanish government.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

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

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