Saturday

1st Oct 2016

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

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The two had been separated until 1999, when US president Bill Clinton repealed the law dating back to 1933 which had prohibited savings banks to do risky investments.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.

New EU rules on financial products in limbo

A feud between MEPs and the EU commission is threatening to derail financial services regulation that would protect consumers from misleading investment products.

Stakeholders' Highlights

  1. EFAEFA Supports a YES Vote in the Hungarian Referendum
  2. ACCAFinTech Boom Needs Strong Guidance to Navigate Regulatory Hurdles
  3. Counter BalanceWhy the Investment Plan for Europe Does not Drive the Sustainable Energy Transition
  4. Nordic Council of MinistersThe Nordic Region Seeks to Make Its Voice Heard in the World
  5. Taipei EU OfficeCountries Voice Support for Taiwan's Participation in ICAO
  6. World VisionNew Tool Measuring Government Efforts to Protect Children Released
  7. GoogleDid You Know Europe's Largest Dinosaur Gallery Is in Brussels? Check It Out Now
  8. IPHRHuman Rights in Uzbekistan After Karimov - Joint Statement
  9. CISPECloud Infrastructure Providers Unveil Data Protection Code of Conduct
  10. EFAMessages of Hope From the Basque Country and Galicia
  11. Access NowDigital Rights Heroes and Villains. See Who Protects Your Rights, Who Wants to Take Them Away
  12. EJCAppalled by Recommendation to Remove Hamas From EU Terrorism Watch List