More than a dozen of Europe’s biggest banks face the upheaval and cost of building a ringfence around their trading activities if the findings of the EU-appointed Liikanen review are implemented. The likes of Deutsche Bank, Barclays and BNP Paribas are likely to be the hardest hit.
On Tuesday, banks were digesting the conclusions of the hard-hitting report with a mix of concern and resignation.
“This looks like a pretty full segmentation of our markets business,” said one senior executive at a large bank.
The review, chaired by Erkki Liikanen, governor of Finland’s central bank, provides the first pan-EU proposal for restructuring big banks, with a novel twist on the trading restrictions of the US Volcker rule and the UK Vickers reforms, which ringfence retail banking.
Alongside the trading firewall are other proposals to make banks safer and protect taxpayers, including measures to rein in bonuses and take a tougher approach to the risks of property lending conducted by retail banks.
All eyes are now on Michel Barnier, the EU commissioner responsible for financial services, who will have the final say on whether to push forward with a Liikanen-inspired legislative proposal.
To the relief of bankers, Mr. Barnier is publicly stressing the “independence” of the Liikanen advice and the need for a thorough consultation and impact assessment.
“Don’t ask me today to tell you what lies at the end of the road,” he said.
However, people close to the process said Mr. Barnier’s comments should be taken with a pinch of salt and the expedited six-week consultation could mean a law enacted within 15 months. “Barnier is super-supportive and has full political backing from many European capitals,” said one.
Much will depend on whether EU member states have the appetite to handle another big financial overhaul – and whether France presses ahead with structural reforms promised by President François Hollande.
The Liikanen review is seen to be particularly relevant in France, where all the big banks –BNP, Société Générale, Crédit Agricole and BPCE – face being caught by the ringfencing requirement. The banks expect Mr. Hollande to use the EU review as the trigger to instigate his own accelerated reform process along similar lines.
According to a rough analysis of the trading assets of Europe’s leading banks, published with the review, 14 groups could be affected by the ringfencing rules on the basis of 2011 numbers.
However, that number could be far smaller by the time any rules are implemented, given that several are contracting as the financial crisis continues, bankers say. Royal Bank of Scotland , Germany’s Commerzbank and Landesbank Baden-Württemberg and France’s Crédit Agricole are all shrinking.
More controversially, four Nordic banks – Danske, Nordea, SEB and Swedbank – which have been seen as success stories during the financial crisis, could also be caught by the ringfencing rule, alongside the likes of France’s mutually owned BPCE, which owns most of the investment bank Natixis, and HSBC .
Among the eurozone banks, Deutsche (with 51 percent of assets accounted for by trading) and BNP (with a 39 percent weighting) are likely to be the most affected by the ringfencing rules, with between €800 billion and €1 trillion of assets potentially spun off into separately capitalized and funded subsidiaries.
But the changes could prove particularly irksome for UK banks, where the authorities are already pressing ahead with a rival ringfencing structure. That model, part of the Vickers Commission recommendations of last year, is due to split off banks’ retail banking businesses from their investment banking units, and is expected to be disruptive for Barclays , which has large operations in both spheres.
Although the Liikanen review seeks to allay concerns on this front, stressing that the two ringfence schemes are “fully compatible”, most banking experts believe that a bank such as Barclays would have to put in place two ringfences – one around retail operations and the other around trading (which accounts for 44 per cent of total assets). A third section of the bank would then be left holding other assets, such as the balance of investment banking operations.
Britain’s Treasury publicly welcomed the Liikanen report and said it was “encouraged” that the findings “echoed” those of Vickers. But London will stress to Mr. Barnier the need for flexibility in any proposals and will want the policy fine-tuned to ensure the ringfences are compatible.
“The EU will either be saying shelve Vickers and take Liikanen, or you can have Vickers as long as it is consistent with Liikanen,” said Thomas Huertas, a partner at Ernst & Young and former vice-chair of the European Banking Authority. “The details will matter.”
Critics of the ringfence plan said it would inevitably raise the cost of funding for clients, such as corporate bond issuers. It would also create a two-tier banking system in Europe and magnify the competitive disadvantage with the US, where structural changes have been less stringent.
The Liikanen review acknowledges these potential costs, but calculates they are a price worth paying. “To the extent that part of the funding cost increase is due to the removal of an implicit subsidy, this may not present a social cost,” it says.