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Finance

Controversial plans to reform Europe's banks

A new EU report proposes ways to stop big banks from having to be rescued by taxpayers. It says they should be smaller and get rid of risky investment business - but that's not what banks want.

As executive director of the European Banking Federation, Robert Priester represents the powerful bankers' lobby in Brussels. But he smiles as he says that he doesn't consider himself and his colleagues to be that influential. He is more reserved when it comes to the task he and his colleagues face: reforming Europe's banks in the wake of the eurozone crisis by splitting them up.

"We are a little bit skeptical and worried: it's not that straightforward or easy in practice to draw a line between what is considered investment banking, with usually a bad connotation, and what is considered retail banking, with what is considered a good connotation," he said.

For a long time, he said, it was thought that universal banks that offered a wide range of products and services were sensible and important financial players: "We'll have to see if [the separation] is technically feasible and legally practical."

New structures in the banking sector?

The deputy director of Brussels think-tank Bruegel, Guntram Wolff, recognizes that there are legal and practical problems with the idea of splitting the banks up as the report by a group of experts under the head of the Finnish central bank, Erkki Liikanen, proposes. But, like them, he recognizes that the banking system has become too big and too complex.

Liikanen
Photo:Kimmo Mäntylä, Lehtikuva/AP/dapd

Liikanen's proposals have not been welcomed by the banks

"We are at the start of a phase in which the whole banking system and the individual banks will have to undergo restructuring," he told DW. "The Liikanen report is one possible way in which one can imagine such a restructuring."

But he's not yet sure whether splitting the banks into investment and consumer banking divisions is the best structure for the eurozone banks.

Keeping a close eye on the banks

Meanwhile, Priester has spied a variety of opinions among the experts in the Liikanen group. The report mentions another solution: some of the experts could imagine leaving the banks in one piece while subjecting them to closer control.  So is he just trying to move the debate in a direction the banks would prefer? Priester is evasive.

"We understand the concern of policymakers that certain banks are perhaps too complex or too large for a particular member state," he said. "Of course it will be necessary to look at that very carefully."

Aerial photo of the City financial district of London, 
Photo: Dominic Lipinski/PA

Britain has its own ideas about controlling its financial district

But he also points to another problem: in Britain, with its important financial center, the Vickers Commission has also proposed that capital market activities should be separated from the retail business - but the two divisions would remain under one roof, with the retail business highly protected and the investment banking business allowed to do more or less as it liked.

It was not clear how the Liikanen report could be made to conform to the Vickers reforms, Priester said. It's a question of "trying to find a level playing-field, a single rule-book and an internal market that works for all 27 countries" in the EU.

Too many reform plans?

Wolff doesn't see that as the first priority, since most of the new regulations, such as the new banking supervision, would only apply, at least initially, to the 17 eurozone countries. But it is precisely these innovations that Priester is not happy about.

"This is something we will have to examine quite carefully, not just to see whether the Liikanen report in itself is harmful or perhaps not," he said, "but also to put the Liikanen reform proposals in perspective with many of the rules that are currently being put in place."

The headquarters of the European Central Bank 
PHOTO / JOHANNES EISELE/AFP

Is the ECB adequately equipped to deal with supervising banks?

Among those new regulations is the new common banking supervisory authority, which should come into existence in 2013 and exercise oversight over all 6,000 banks in the eurozone, controlling their accounts and having the right to withdraw their banking licenses. The task is to be carried out by the European Central Bank (ECB) - and that is also controversial. The bank is responsible for monetary policy in the eurozone. Bankers including Jens Weidmann, head of Germany's central bank, the Bundesbank, warn that could lead to a conflict of interest.

ECB not the right institution?

Wolff says that the new bank supervisory agency will have to be very effective, and that means it must have enough qualified staff to be able to supervise at least the most important banks at a European level. Nothing would be gained if national supervisory institutions dominated in the end.

"I'm worried that there are probably not enough competent staff at the European Central Bank," Wollf said.

So the European banking sector has a raft of reforms ahead of it. The Liikanen plans will now go through a long consultation process, in which everyone will be able to make comments and state objections. But many observers doubt whether, at the end of the process, the Liikanen proposals will still be recognizable.

DW.DE