EU Weighs Bank-Structure Overhaul in Wake of Liikanen Plan

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The European Union is weighing how far to go in forcing a break up of large lenders as it seeks to prevent banks in the debt-laden bloc from being too big to fail.

EU regulators are examining “a number of options” for how big a chunk of their trading activities banks should be forced to shift into separately capitalized units, according to a copy of the plans published on the European Commission website today.

“Structural reforms may increase the credibility and effectiveness of the recovery and resolution process for large and complex banking groups, thereby lowering the ultimate taxpayer costs,” the commission said.

The EU is seeking ways to structure riskier activities outside of more traditional banking in a bid to take taxpayers off the hook for bailouts and to protect depositors at crisis-hit lenders. Deutsche Bank AG and Credit Agricole SA are among banks in the European Union to have publicly lobbied against proposals by a high-level group, led by Bank of Finland governor Erkki Liikanen, to force lenders to separate their trading activities.

Michel Barnier, the EU’s financial services chief, has said he is “firmly committed” to presenting legislation later this year. A consultation period on the EU’s possible follow-up to the Liikanen report runs until July 3, the commission said.

Legally Separate

Under the Liikanen plans, the bank’s trading entity would be legally separate from other parts of the bank. High-risk activities that would have to be transferred to it would include, among others, unsecured loans to hedge funds and private equity investments. The proposals would affect both proprietary trading and market making.

The Association for Financial Markets in Europe, a group representing international lenders including Deutsche Bank and BNP Paribas SA, have urged the EU to avoid implementing structural separation.

“It is far from clear what ex ante separation of certain activities would add on top of existing regulatory proposals either in terms of protecting taxpayers or aiding financial stability,” Michael Lever, a managing director at AFME, said in an e-mail.

The EU is already planning, in a separate draft law, to hand regulators the powers “to require a structural reorganization” of a bank, if needed to ensure it can be wound down if it fails, Lever said.

EU Options

Options under consideration by the EU range from “relatively few trading activities,” such as speculative proprietary trading, having to be split off, to a more radical solution where “all wholesale and investment banking activities would need to be separated,” the commission said.

The EU is examining several alternatives to the Liikanen definition of which assets should be transferred, according to the document. These include “a more narrow definition that excludes available for sale assets as mostly composed of securities held for liquidity purposes.”

Another point on which the EU is seeking views is whether market-making activities, where a bank offers both buy and sell prices on a security to stimulate trading, should be affected by the new rules, the commission said.

U.S. and British regulators have already proposed structural changes to banks in a bid to curtail risks. U.K. Chancellor of the Exchequer George Osborne plans to force large lenders to separate their consumer and investment banking operations in an overhaul that the Treasury estimates may cost as much as 7 billion pounds ($10.6 billion) a year.

The U.K. plans were drafted by a panel led by former Bank of England Chief Economist John Vickers.

The Brussels-based Commission, which proposes draft laws for the 27-nation EU, said it is weighing how separation should work in practice, including whether lenders should be forced to fully divest trading activities that aren’t allowed within their deposit-taking arm .