Commenting on the European Commission’s proposed regulation to improve the resilience of EU banks, Giles Williams, regulatory partner at KPMG, said:
“The proposed regulation has two main elements; the prohibition of proprietary trading and structural separation of trading activities from insured deposits.
“Although well trailed, the big surprise is the total ban on proprietary trading which goes beyond the original Liikanen proposals. From a UK perspective, this is the only part of the proposals that is likely to affect UK banks. UK banks will never be able to rebuild their propriety trading activities.
“The key challenges for management will be policing the boundary so they don’t stray into proprietary trading and applying the correct dividing line between retail and investment banking. The extremely complex and lengthy regulations introduced in the US to implement the Volcker rule show how difficult this is in practice.
“From a broader European perspective, the proposals would represent a major constraint on how large banks can operate. This marks a further step towards the end of the universal banking model.
“The structural separation of core deposit-taking and trading activities is both complicated and costly. This involves not only the creation of entities that are legally, economically and operationally separate, but also the continuous internal policing of the boundaries between these entities.
“Overall, the European Commission has tried to reconcile these proposals with existing regulations passed in individual member states. The principle of derogation is welcome.
“These proposals signal an intentional push of risky trading activity into the shadow banking sector, which is likely to be the next target for regulation.”
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