EU reveals new crackdown on biggest banks

Tim Wallace
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BANKS across Europe will be split by new ringfencing rules, and be forced to hold more capital against mortgages in EU plans outlined yesterday.

The new plans are aimed at making banking safer, but lawyers warned they will increase banks’ costs, hitting consumers and the wider economy, as well as causing confusion as they do not match incoming UK rules.

Finnish central banker Errki Liikanen also wants bail-in bonds, so creditors will bail out banks that get into trouble, and plans to force banks to cut back their links with each other to stop any collapse spreading.

Liikanen wants to push trading and investment activities into separate legal entities within the banking group, deeming these too risky to be tied in with retail banking.

But that does not match up with incoming UK rules which seek to ringfence the retail arm instead.

“As Liikanen recommends the plan should have ‘harmonised implementation across member states’ questions will arise as to whether Liikanen is compatible with Vickers, and, if not, which takes precedence,” said Ernst and Young’s Thomas Huertas.

However the Treasury insists there should be sufficient flexibility within the Liikanen proposals to accommodate the Vickers rules, telling UK banks to press on with their plans.

The report also called for the creation of bail-in bonds, and for bonuses to include such instruments so that staff lose out if a bank goes under.

However, Liikanen suggests “such debt should be held outside the banking system,” worrying some observers.

“If banks cannot put the money in, this will come from sovereign wealth funds, insurers and pension funds who may demand a higher coupon, pushing up the cost of bail-in instruments,” said KPMG’s Giles Williams.

“And although this step is trying to reduce interconnectedness in banking, it means if a bank goes bust, more insurers and pension funds will lose out, and I am not sure that is better for the system.”


■ The report calls for the legal separation of banking activities seen as “particularly risky” from deposit taking, including banks trading on their own behalf as well as “activities closely linked with securities and derivatives”.

■ It also recommends the introduction of a mechanism to impose losses on bondholders in the case of a bank's bailout or collapse – including the idea that bankers should be given bonds carrying some of the risks as part of their bonuses.

■ Liikanen wants real-estate lending by banks to be underpinned by larger capital reserves, to avoid a repeat of the property crashes during the financial crisis that left many lenders open to huge losses.

■ The report was commissioned by the European Commission back in February, when top regulator Michel Barnier asked the Finnish central bank governor to shield taxpayers from having to fund further bailouts and to protect savers from any more banking collapses.

■ Barnier said yesterday that the report would “feed our reflections on the need for further action," implying that imminent new regulations are unlikely.