Finance Watch : Too-big-to-regulate

A new statement released by Finance Watch about the "EU’s bank structural reform proposal" - BSR

Brussels, 25 October 2017 – Finance Watch, the independent organisation that defends the public interest in financial reform, deplores the European Commission’s decision to withdraw its legislative proposal for Bank Structural Reform (BSR), as announced yesterday in its 2018 Working Programme.

 

 

 

Separating systemically important banks' retail and commercial banking from their investment banking activities should be a necessary element of overall financial regulation to address systemic risk and reduce the probability of another financial crisis.

The failure of BSR now places the burden of responsibility squarely on the shoulders of supervisors and resolution authorities. It will be up to them, first and foremost, to ensure that systemically important banks are, at the very least, resolvable, i.e. they can be wound down in a crisis in an orderly manner and without triggering contagion.

In theory, recent legislation, notably the bank recovery and resolution directive (BRRD), has provided authorities with sweeping new powers to force banks into adopting structural changes, if necessary, to ensure that they can be resolved safely.

In practice, however, it remains to be seen if any of these new powers are exercised, let alone enforced, in the face of relentless resistance by the industry and rapidly declining political support.

Christian Stiefmueller, Senior Policy Analyst at Finance Watch, commented:

“The demise of the bill is as regrettable as it was – by now – predictable. The fact that not even Vice-President Dombrovskis' intervention one year ago succeeded in reviving the effort is testimony to the iron grip the financial industry's lobby still exerts on governments and legislators.

“Bank Structural Reform would have gone a long way towards solving the "too big to fail" problem. Instead of taking preventive action to contain systemic risk and ward off future crises we have, it appears, chosen to ‘chance it’. A great opportunity to make the financial system more resilient has been missed.”

So far, most of the post-crisis regulatory agenda has focused on improving the micro-prudential framework. While higher capital requirements (CRR/CRD IV) and a new recovery and resolution framework (BRRD), among others, have contributed to improving the resilience of individual banks, comparatively little progress has been made in addressing the systemic risk posed by the size, complexity and interconnectedness of the very largest, systemically important banks.

Benoît Lallemand, Secretary General of Finance Watch, said:

“Ten years after the global financial crisis started, the EU’s banking system is unfortunately still not resilient. We cannot afford to let the regulatory pendulum swing back. Unfortunately, this seems to be precisely what is happening now.”

Separating market-related activities (also known as investment banking) from the traditional lending activities (deposits, loans and payment system) of the largest European banks would:

    * focus large banks on serving the economy again and help capital markets to be competitive and subsidy-free. This in turn would have supported the EU’s ambition for a genuine capital markets union;
    * cut the hidden “umbilical cord” by which public support for deposit banks is used to feed banks’ trading activities. This implicit subsidy unduly encouraged banks' excessive growth;
    * separate two very different cultures: long-term versus short-term. It would in fact avoid a situation where the short-term oriented, deal- based, investment banking culture can negatively influence the long-term, relationship-based culture of commercial banking;
    * bring financial stability and prevent contagion between banks and make resolution possible for all banks – even the very largest. This greatly decreases the risk that taxpayers will once again have to bail out banks;
    * avoid the economy seizing up if one investment bank fails. Separating all trading activities (not just proprietary trading) from commercial banking activities would make it easier for investment banks to fail safely.