Wednesday

17th Aug 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.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

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The two had been separated until 1999, when US president Bill Clinton repealed the law dating back to 1933 which had prohibited savings banks to do risky investments.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

Brussels: 'Banks should pay for banks'

The EU commission has unveiled proposals to change the too-big-to-fail rationale that has seen billions of euros of public money pumped into ailing banks.

EU reaches deal to protect bank savings

EU lawmakers have agreed the first €100,000 of savings per depositor and per bank will be guaranteed if the bank gets into difficulty.

Brazil pitches itself as answer to Ukraine war food shortages

Brazilian president Jair Bolsonaro is pitching his Latin American country as the answer to the world food crisis following the war in Ukraine. The traditional wheat importer has now exported three million tonnes of the grain so far in 2022.

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  2. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries
  3. Nordic Council of MinistersNordic and Canadian ministers join forces to combat harmful content online
  4. European Centre for Press and Media FreedomEuropean Anti-SLAPP Conference 2022
  5. Nordic Council of MinistersNordic ministers write to EU about new food labelling
  6. Nordic Council of MinistersEmerging journalists from the Nordics and Canada report the facts of the climate crisis

Latest News

  1. Germany rejects visa ban for Russian tourists
  2. Iran responds to EU's 'final text' on nuclear deal
  3. Model minority myths
  4. EU must make public who really owns its fishing fleets
  5. Germany needs to cut gas use by 20% to stave off winter crisis
  6. Europe's wildfire destruction set to hit new record
  7. How Putin and Erdoğan are making the West irrelevant
  8. Defying Russian bombs, Ukraine football starts 2022 season

Join EUobserver

Support quality EU news

Join us