EU lenders advised to ring-fence risky activity

BANKS should separate deposit-taking from trading and other high-risk investment banking work to shield taxpayers from further bailouts and protect savers, an EU advisory group said yesterday.

The advisers also singled out the risks of property lending and said it should be underpinned with larger capital reserves. The European Commission set up the group, led by Bank of Finland governor Erkki Liikanen, to examine bank structures.

The report will re-ignite a debate in Europe about reforming banks but it is unlikely that the EU’s executive, the European Commission, will respond soon with new regulation.

It is more focused on winning backing for its separate banking union plans to make the European Central Bank the main supervisor for euro zone lenders, a step which non-euro zone states have deep concerns about.

“The group has concluded that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within the banking group,” the report said.

“The activities to be separated would include proprietary trading of securities and derivatives, and certain other activities closely linked with securities and derivatives markets.”

The recommendations borrow from policies already being implemented in Britain to ringfence retail banking and in the US to curb banks’ proprietary trading.

The report also backs the idea of bail-in debt, a mechanism to impose losses on bondholders in the case of a bank’s bailout or collapse. The Liikanen group suggests that bankers should accept this type of bond as part of their bonus.

Legally separating or ringfencing investment banking would make it easier for the part of the bank that holds savers’ deposits and lends to BARCLAYS is changing its retail and business banking structure under new chief executive Antony Jenkins and has appointed the separate heads of retail banking and credit cards to its executive committee.

Jenkins will scrap the title of chief executive of retail and business banking, the position he held before being promoted to group chief executive, that also oversaw its BarclayCard credit card business. Instead, Ashok Vaswani will oversee all retail and business banking, expanding from the UK operations he currently runs, and join the bank’s executive committee. BarclayCard chief Valerie Soranno Keating will also join the committee. – Reuters businesses to keep running even if other parts of the group collapsed, some experts say.

It would affect European banks such as Britain’s Barclays, Germany’s Deutsche Bank and France’s BNP Paribas, which engage in high street banking alongside riskier trading in stocks, debt and other securities.

With property crashes in Spain, Ireland and elsewhere having triggered problems for banks, there is also a recommendation to consider specific capital charges to cover risks from property loans on a bank’s books. But European policymakers, struggling to contain the regional debt crisis, are set to give priority to creating a banking union that would allow euro zone countries to jointly support banks.

Michel Barnier, the European commissioner in charge of regulation, said: “I will now consider the next steps, in which the commission will look at the impact of these recommendations both on growth and on the safety and integrity of financial services.” – Reuters