Bankers in the European Union say proposed structural reforms floated by EU lawmakers are “unnecessary and unjustified,” and were buoyed last week by reservations expressed in a draft report to European Parliament’s economic committee.
The proposed Bank Structural Reform, put forward a year ago, targets the largest, most complex banks by seeking to prevent them from engaging in proprietary trading or requiring those banks in some cases to separate “potentially risky trading activities” from their deposit-taking business. At the time, then Internal Market and Services Commissioner Michel Barnier called the proposal “the final cogs in the wheel to complete the regulatory overhaul of the European banking system,” and necessary to prevent differing national strategies from creating “fault lines” in the new banking union.
“The proposed measures will further strengthen financial stability and ensure taxpayers don’t end up paying for the mistakes of banks,” Barnier said.
However, bankers argue the proposal will result in just the opposite, hampering activities that promote economic growth and raising costs for trading entities and core credit institutions. Graziano Crema, head of regulation for corporate and investment banking for BBVA and a representative of the European Banking Federation, testified last month at a parliamentary meeting that the proposal “is unnecessary and unjustified.” Crema pointed to the more than 40 financial reforms passed since 2008, including tougher capital requirements, structural changes, and a more centralized and intensive approach to supervision. He also defended the strength of universal banks and their importance to the economy.
“The universal bank model has proven to be one of the most resilient in the recent financial crisis,” Crema said. “As the IMF says, ‘the fact that many smaller banks were bailed out during the crisis suggest that size restrictions are not a panacea.’”
The proposal would cut incentives for universal banks to undertake market-making activities, reducing the market liquidity for instruments like corporate bonds and making financing more difficult, Crema argued, pointing out that those impacts contradict the EU’s jobs and growth agenda.
“Separation by itself does not solve the too big to fail issues,” Crema said.
The lead lawmaker reviewing the proposal for Parliament’s Economic and Monetary Affairs Committee indicated some agreement on this position in his draft report to the committee released last week. MEP Gunnar Hökmark of Sweden noted in his report that Europe is underinvested, and that European banks need to have the ability to provide liquidity throughout the bloc. While specialized banks are important, they alone are not sufficient and increased dependence on them would weaken financial stability, Hökmark wrote.
“Systemic risks that we are exposed to in universal banks must be met by a risk-based approach, not by deeming one business structure as a systemic risk when that is not the case and presuming that trading is more systemically risky than lending, which is not the case,” Hökmark said in his report.
Hökmark also noted that new financial legislation “has changed the landscape,” making today’s markets quite different than those existing in 2009. While he endorsed the commission’s goal of addressing systemic risks still present despite the new regulations, Hökmark cautioned that it must be done through a risk-based approach and not result in more transactions pushed to the shadow banking sector.
The EBF said in a statement last week that it is carefully reviewing the draft report, repeating its support for measures to make the sector safer without undermining economic growth.
“The draft report shares banks’ concerns by acknowledging the importance of preserving vital liquidity-generating functions for economic growth whilst maintaining cost effective financial services for SMEs,” the EBF said. The report “sets the base for further discussions among co-legislators.”