Liikanen calls for cap on loan to value ratio to stop bubbles

Tim Wallace
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THE BIGGEST banks in Europe should face tougher capital requirements as well as controls on the size of loan they can give, Finnish central banker Erkki Liikanen said yesterday.

The top finance official earlier this month published major new plans to shake up the regulation of the banking sector, including calling for ring-fences to separate banks’ retail and investment operations.

“It is important that the development of capital surcharges for systemically important institutions as well as macro-prudential tools such as caps on loan to value ratios is continued,” Liikanen said.

And he called for the European authorities to create a series of tough stress tests which would aim to ensure banks would not pose a systemic risk to the sector if they fail, minimising the damage to the economy as a whole.

His overall goal is to create a situation where “no taxpayer money is under threat of being used in a bailout”.

“If a bank’s recovery and resolution plan is not acceptable, a more comprehensive separation of activities can be required under the proposed mandatory separation,” Liikanen explained.

“For example, a wider separation might have to cover all trading-related assets.”