Despite the recent defeat in the European Parliament of a pared down version of the original ‘Liikanen’ rules that would force banks to ring-fence trading activities, Finance Ministers have now agreed on their version, heaping pressure on MEPs to complete their discussions.
Although seen as watered down, the agreed approach will still place significant requirements on many banks to gather dat aand report on trading activities. Comprehensive risk management and governance procedures will have to be demonstrated and will likely require costly investment in systems and resources. The definition and calculation of trading activity for use in thresholds will be difficult and it might be challenging for the EBA to produce quickly. As supervisor of many of the affected banks, the ECB is likely to ensure rigorous implementation and is given a significant new power.
Coming on the heels of other financial regulations to make banks safer and less interconnected, many have argued that further steps to force some banks to separate their trading and retail operations was unnecessary. In the new climate in Brussels, where jobs andgrowth is the mantra, anything damaging to the banking sector’s ability to lendto the economy is seen with less enthusiasm than in the post-crisis world whenthe proposals were originally designed.
This was the view taken up by the MEP leading negotiations in Parliament; but a moderate approach that would give national authorities considerable discretion over whether to step in and forcering-fencing was rejected by a politically left and Green caucus of MEPs. This means that Parliament has to start its negotiations again; something which has not occurred on any other major financial reform package.
MEPs who rejected the more moderate approach to ring-fencing are now under pressure as Parliament and member states’ proposals must align for the rules to go through. The deal on the table is that banks will be allocated to one of two tiers; the largest whose trading assets exceed €70 billion or account for more than 10 percent of total assets will be subject to additional reporting and monitoring. Any that hit predefined thresholds without suitable mitigating options, could be told to hold additional capitalor forced to ring-fence trading activities by national authorities.
Mandatory forced separation has been dropped and the UK’s in-progress ‘Vickers’ retail ring-fencing approach has been protected in a one-off carve out of the rules – on the condition that they are fully implemented – otherwise the EU rules will apply. Whether other countries could attempt to also use this exemption is unclear.
The full scope of who is in and what will be calculated in the trading assets is still some-what unclear. Definitely in-scope are credit institutions and groups that either are deemed of global systemic importance or exceed certain relative and absolute accounting-based thresholds in terms of trading activity or absolute size – minus any assets and liabilities of insurance and reinsurance undertakings or nonfinancial units.Member states can require smaller banks to fall into scope if desired althoughbanks with retail deposits below €35 billion are excluded. The Commission can exempt subsidiaries of EU groups in jurisdictions where it deems equivalent rules apply and national regulators can exempt EU subsidiaries if they are autonomous. Also excluded are groups where minimal impact from trading-related losses would impact eligible protected deposits. Intra group exposures of the credit entity to trading entities is limited to 25 percent, other than in conditions approved by the national regulator and EBA.
Given the Finance Ministers were unanimous in their agreement for this approach, it seems unlikely that MEPs have much room to manoeuvre – without the risk of starting the entire proposal again. Given this pressure it seems likely that Parliament will move swiftly to vote again, and the rules could be agreed by the end of the year.