Thursday

20th Jan 2022

Banks should separate deposits from risky trading, group says

  • Belgium's Dexia bank was bailed out twice by taxpayers. It is now called Belfius. (Photo: Valentina Pop)

An expert group advising the EU commission on Tuesday (2 October) said banks in Europe need to separate their entities dealing with deposits from those trading with risky investments, in order to prevent a re-run of the 2008 financial crisis.

"We have to end this system where profits are private and costs are public," Finland's central bank chief Erkki Liikanen and former EU commissioner said during a press conference when presenting the results of his expert group, comprising academics, bankers and consumer rights advocates.

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The group had been tasked by EU financial services commissioner Michel Barnier last November to come up with proposals which may result in new legislation.

Barnier said he will immediately start a six-week public consultation on the report, after which he would proceed with "calibrating" the proposals into a draft bill.

The main and most controversial of the five proposals within the Liikanen report is to separate banks' activities dealing with people's savings from investing in risky financial products.

The two had been separated until 1999, when US president Bill Clinton repealed the law dating back to 1933 which had prohibited savings banks to do risky investments. The consequence was a blossoming of complex and risky bets - the so-called derivatives - into a multi-trillion market that grew far bigger than the traditional markets where people buy and sell products, stocks or currency.

Bets on the real estate market in the US that were sold all over the world as part of packaged and re-packaged investments blew up in a major financial crisis in 2008, followed by a global economic crisis and now the euro-crisis.

But banks resist the move to prevent them from tapping on people's savings when conducting profit-making business and warn of capital freeze and the risks of doing such radical moves at times when the economy badly needs financing.

Even within the Liikanen group, views diverged. In the end, the proposal says that while separating the two activities, they can still remain within the same banking group. In addition, separation would only occur when more than 15-25 percent of the bank's trading activities were high-risk.

Within the European Parliament, British MEP Sharon Bowles who chairs the economics committee said that there is "some resistance" to separating banks' activities. "But I maintain it is still the case that such plans need to be in place at an early stage, and then reinforced with subsequent proposals," she said in an emailed statement.

But to people dealing with banks' balance sheets on a daily basis, the Liikanen proposals risk causing more damage than good.

“We are not convinced that any of these proposals have a sound basis. It is doubtful whether it is possible to identify types of banking which are not important or are especially risky," the international association of accountants (ICAEW) said in a press release.

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