Proposed Split of Large Institutions Fight Looms Over EU Plans for Bank Reform

Published on Spiegel Online International, by Stefan Kaiser, October 3, 2012.

Until recently, calls to forcibly split up European banks were dismissed as a radical leftist idea. Now even an EU panel of experts is recommending dividing up dangerous financial giants. But the banking lobby, which would face major cost increases as a result, has the power to water down the ideas.

Europe’s major banks have never been in quite this much peril. Even when they tore entire economies into chaos and had to be bailed out with taxpayers’ billions, their core structure was never called into question.  

Now, however, a group of advisors to the European Commission has called for dangerous banks to be split up. They want the banks’ deposit-taking business, known as retail banking, to be separated from risky own-account trading in securities and derivatives and other investment banking activities. That is the core message of the report submitted on Tuesday by the group headed by Bank of Finland Governor Erkki Liikanen.

“We must get away from a system in which profits are private and losses are public and burden the taxpayer,” Liikanen said at the presentation of the report … //

…  Germany Getting Behind Bank Split Idea:

The center-left Social Democratic Party has seized on the issue. In July, SPD leader Sigmar Gabriel launched a vitriolic broadside against banks, saying they should be split up because they were holding countries to ransom and dictating government policy. Then Peer Steinbrück, nominated as the party’s challenger to Chancellor Angela Merkel in the next general election scheduled for late 2013, presented his own detailed set of proposals for banking reform last week. His suggestions were largely the same as those made by Liikanen’s group on Tuesday.

Germany’s ruling conservative parties are also warming to the idea. On Tuesday, Markus Feber, parliamentary group leader of Bavaria’s Christian Social Union in the European Parliament, said there should be a “high firewall” between investment banking and classic customer business.

“Small depositors must be protected in the future from the consequences of the banks’ gambling and high-risk deals,” he said.

The Liikanen report could also stir the German Finance Ministry into action. Finance Minister Wolfgang Schäuble had been waiting for the EU experts’ recommendations.

Even the pro-business, laissez-faire Free Democratic Party, the junior partner in Merkel’s center-right coalition, has voiced agreement with the recommendations. The Economics Ministry led by FDP leader Philipp Rösler last week responded to Steinbrück’s plan by saying it had already been working on similar ideas.

Banks Attack Proposals:

The banks are already storming the barricades in protest against the proposals. “In the view of the German banking sector, an organizational separation of all trading activities by universal banks would diminish the scope for internal risk spreading,” the German banking associations said in a statement on Tuesday.

That means that the riskier part of banks could no longer be secured by customer deposits in the more stable part of their operations.

A separation could indeed be very expensive for the big banks because their investment divisions could no longer rely on public bailouts, and would therefore have to pay far higher interest rates for credit from investors. Many banking operations would no longer be profitable.

It’s uncertain whether the Liikanen reforms will be implemented. The legislative process in the US and the UK has shown just how adept the powerful banking lobby is at diluting tough proposals.

That is why Michel Barnier, the European Commissioner in charge of regulation, sounded cautious on Tuesday, saying the report will “feed our reflections on the need for further action.” All parties had to be listened to first, he added. The first one he mentioned was the banking sector.
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