After the decision to put the 6,000 European banks under the supervision of the European Central Bank, this week we receive a report from a group of high-level experts who, at the request of European Commissioner Michel Barnier, Proposals on a possible evolution of the structure of European banks. Its president, Erkki Liikanen, is a former governor of the central bank of Finland.
The fact that the report is 139 pages is not a problem: the first 88 pages are a document that provides a wealth of excellent information and analysis of the present situation and the initiatives already initiated and the last 30 are valuable annexes . It shows that European banks collectively account for 340% of the European GDP and that this percentage is less than 100% in the United States and Japan. The monopoly of the universal bank is decidedly powerful.
What does the report suggest?
I would be hard pressed to summarize the report’s proposals and admit that it is not easy to read. However, the risks attached to universal banking are not analyzed. The question of the restructuring of certain activities is thus indirectly addressed. One feels that the subject has been difficult, and if the report ultimately advocates a form of separation, it is clearly said that another track has been widely examined and had its defenders, which was limited to internal measures. The project of banking union is no more talkative on this subject.
The main proposal is to separate the trading in a capitalized subsidiary to cover the risks associated with this activity .
- The banks involved in this reform are essentially large banks. Non-traditional activities should account for 15 to 25% of their assets or 100 billion euros. Here we find the legitimate concern “too big to fail”.
- In this case, they must subsidiary their proprietary trading activities and derivatives . One understands the reasoning for derivatives. The US demanded the same outsourcing.
- On the other hand, outsourcing of proprietary trading is difficult to understand. Does Europe continue to allow the depositary bank’s own funds to be traded in speculative products? There is no way to spin off its own funds. Nothing is said about the instruments or about the percentage relative to the capital: the criterion of 25% in relation to the assets would represent 400% of the capital on average. The subject is not covered. The report persists and signs allowing banks to continue speculative activities that are banned in the United States.
- More coercive measures would be taken only within the framework of what is called crisis resolution. Clearly, there are no preventive measures, but if a bank appears in trouble and needs to practice his living will (living will) , firewalls measures ( ring fencing) . The supervisory authorities will therefore, when things go wrong, decree that the bank concerned is in the necessary conditions to activate a firewall. This would have the effect of making the crisis public, and perhaps aggravating it, possibly involving judicial risks against the supervisory authorities, in the ECB and the national regulators. This risk also exists if they do not act on time.
- The constitution of a “cushion”, beyond the requirements of Bale III, for trading activities . The group does not decide on the need for a separation of trading from the main activity. It provides for this separation, in any event, if the situation deteriorates
Prevention is better than cure
It is in this context that the report is poor. It contains only one preventive measure – the filiation of activities on derivatives -, maintains non-banking and speculative activities, while naively hoping to be able to intervene before the crisis breaks out and without having to inject Public funds. The group is more focused on crisis resolution than on prevention. It should be re-read when the system of mutual coverage of banking risks is put in place within the framework of the banking union.
The Liikanen report will be the subject of commentary and it is hoped that they will clarify and improve what is a most difficult exercise. There is a reason why JP Morgan has campaigned for exceptions to the Volcker Rule which cost him $ 6 billion via the (French) whale of London.
The proprietary trading is a time bomb. It has exploded Wall Street and other banks … Do we put ourselves in conditions that probably could not prevent the financial crisis of 2013-2014 .