Tuesday, October 02 11:18:58
Banks should separate their deposit-taking arms from proprietary trading and other risky investment banking work to shield taxpayers from further bailouts and protect savers, an EU advisory group said today.
The report also singles out the risks of property lending and recommends it should be underpinned with larger capital reserves. The group of experts was set up by the European Commission to examine bank structures and was led by Bank of Finland Governor Erkki Liikanen.
Although the suggestions are not binding, they may prompt the EU's executive to write new regulation.
"The group has concluded that it is necessary to require legal separation of certain particularly risky financial activities from deposit taking banks within the banking group," said the report. "The activities to be separated would include proprietary trading of securities and derivatives, and certain other activities closely linked with securities and derivatives markets."
The recommendations, which borrow from policies already being implemented in Britain to ring-fence retail banking and in the United States to curb banks' proprietary trading or taking bets with own money, also back the idea of bail-in debt.
This is a mechanism to impose losses on bondholders in the case of a banks' bailout or collapse. The Liikanen group suggests that bankers should accept this type of bond as part of their bonus.
"This report will feed our reflections on the need for further action," said Michel Barnier, the European Commissioner in charge of regulation and whose officials write the first draft of new laws.
"I will now consider the next steps, in which the Commission will look at the impact of these recommendations both on growth and on the safety and integrity of financial services." (C ) Reuters