EU Banks Face Ringfence on Trading Assets

Europe’s big banks could be forced to ringfence trading assets under a plan emerging as the consensus recommendation of an EU-wide review of the structure of banking.

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EU building flags brussels

With a month to go until the Liikanen review is due to be completed, people close to the project said a clear majority was emerging in favor of a combination of the U.S. and U.K. approach to structural reform of banks — taking elements of both the Volcker and Vickers rules.

The central tenet of the U.S. Volcker ruleis a ban on so-called proprietary trading — activity that involves betting the bank’s own money. Britain’s Vickers commission concluded that retail banking activities should be ringfenced from universal banks’ investment banking operations.

Under the plan to ringfence trading activities, any bank that exceeded a threshold of trading assets as a proportion of total assets – which could be set as low as 5 per cent – would be obliged to establish a separately capitalized subsidiary to house that activity.

Two people said the 11-member Liikanen committee, set up in November by Michel Barnier, the EU single market commissioner, had made particularly good headway towards a unanimous view at a meeting in Brussels last week. At least seven are thought to support a trading ringfence.

One member of the committee is firmly against any structural reform, the people said, with another two keen on some kind of middle ground. A compromise could involve triggering the creation of a ringfenced entity only if a bank came close to failure. That could happen under the terms of a bank’s so-called living will, the wind-up plan that all big banks will be obliged to prepare as part of a separate regulatory reform process.

The panel was established by Mr. Barnier after calls from across Europe for the EU to take its cue from reforms in the UK and US. The committee is chaired by Erkki Liikanen, the Finnish central bank chief, with the other members comprising a range of former bankers and other financial experts.

Mr. Liikanen, who has kept his own views on reform secret, even from other members of the committee, is due to hand his report to Mr. Barnier by early October. The commissioner will then consider and amend it before publication.

Mr. Barnier was initially cool on the idea of any structural reform and his views of the trading ringfence idea are unknown. But insiders think it unlikely that he would significantly redraft the report.

Aside from its central thrust, the report is also poised to endorse the direction of several global reform initiatives — including the move to Basel III capital and liquidity rules and the introduction of a leverage ratio to cap the size of balance sheets relative to capital.