EUROPE’S planned ringfence to split up retail and investment banking activities could easily be evaded by banks and need to be based on new rules to avoid this happening, a report from the Eurosystem and European Central Bank (ECB) argued yesterday.
The plan, proposed by Finnish central banker Erkki Liikanen, would see the split of activities based on International Financial Reporting Standards (IFRS), which the ECB fears are too loose.
“The recognition and measurement of financial instruments under IFRS should not be the only basis for separation as it may provide sufficient discretion for banks to, for example, restructure financial transactions and use the scope provided by accounting rules to circumvent separation rules,” said the report.
The ECB also worried that harmonising risk weighting guidelines could backfire.
“This could lead to reducing diversity or inadequate risk assessments and potentially triggering similar response from banks to market developments, thus increasing the risk of the amplification of market swings,” it warned.
But the ECB broadly welcomed the proposals to take the taxpayer off the hook for bank failures.