EU Bank-Separation Bill Stalls as U.K. Builds Vickers Fence

  • U.K. pressing ahead with plans to shield banks' retail units
  • EU parliament's Swinburne says draft law has proven divisive

In London, the U.K.’s biggest banks are racing to split off their consumer units by 2019 under the so-called Vickers rule. In Brussels, attempts to forge a European Union bank-separation law are going nowhere fast.

Both efforts began with blue-ribbon panels looking for ways to solve the problem of too-big-to-fail banks. In the U.K., the Independent Commission on Banking headed by John Vickers published a report in 2011 that led to legislation two years later. An EU group led by Erkki Liikanen produced findings in 2012, but three years later talks are bogged down in the European Parliament.

“The long and fractious discussions on the issue of bank structural reform and the many views expressed” in parliament and by EU member states “show just how divisive this issue is,” said Kay Swinburne, a British member of the assembly. 

The European Commission, the EU’s executive arm, presented a draft bank-structure plan in early 2014. It would require the bloc’s biggest banks to be screened by the central bank or another agency that supervises them. Separation of investment and consumer banking would take place if the firms were found to exceed certain levels of trading and risk-taking, with some limited room for supervisors to grant an exception if the bank proves that there is no risk to financial stability.

Failed Proposal

The Council of the European Union, which represents national governments and forms one half of the bloc’s legislature, reached a negotiating position on the bank-separation bill in June. Before talks can begin on a final version of the draft law, the parliament must arrive at its stance, beginning in the Economic and Monetary Affairs Committee.

Consensus in the committee has been hard to find, however. In May, lawmakers shot down a proposal put forward by lead legislator Gunnar Hoekmark. 

“This is the first piece of regulation I have seen fall in the economic committee since the crisis, which suggests political consensus and a suitable outcome are unlikely,” said Swinburne, a Conservative Party lawmaker.

Since that vote, little progress has been made. Hoekmark said he hopes “extremists” won’t be allowed to block the bill’s progress. “If this can be the understanding, we will be able to go forward,” he said. The Swedish lawmaker attributed the committee’s rejection of his initial proposal to an alliance of left-leaning lawmakers and legislators on the “extremes” of the parliament’s political spectrum.

FSB Plan

So while the U.K.’s big banks are scrambling to submit “near-final” ring-fencing plans to the Bank of England by the end of January, lenders in the rest of Europe are left to wonder what’s coming.

Some critics say the EU has missed the boat and its bill has been overtaken by events, as alternative approaches to tackling too-big-to-fail banks move forward. In addition to the U.K., Germany and France have already put national bank-structure laws in place.

At the global level, the Financial Stability Board is close to wrapping up work on its total loss-absorbing capacity rules, which would require the world’s biggest lenders to have capital and debt available to take losses to ensure they can be recapitalized and restructured in an orderly way without recourse to public funds.

Societe Generale SA Chief Executive Officer Frederic Oudea said on Oct. 13 that the “structure of banks is not at the heart of the crisis” any longer, and it’s important “not to add another useless layer that will effectively create competitiveness issues.”

Or as Swinburne put it: “In a European context maybe it’s time to take a long look at existing regulations and see whether the current bank structural reform proposal is addressing a problem that has already been solved.”

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