European Commission to probe structure of banks

LONDON/BRUSSELS (Reuters) - The European Commission launched a review of its policy on bank structure on Monday, a move that follows hard on the heels of Britain's radical plan to ring-fence the assets of savers against losses from risky investment banking.

The review will be headed by Erkki Liikanen, the governor of the Bank of Finland, the commission said, kicking off a process that could herald more intrusive regulation and upset governments that want to maintain responsibility for their own banks.

So far, new European Union rules for banks have been limited to setting the amount of capital they should keep to cover losses or to regulating how they trade.

But Michel Barnier, the French commissioner in charge of financial reform for the EU, is pushing for ever deeper reforms.

He outlined plans last year for the committee to look at, among other things, Britain's plans to ring fence the deposit-taking arms of its domestic banks with extra capital.

"I expect this group to make all the recommendations as regards the structure of EU banks it deems necessary to strengthen financial stability and enable banks to fully play their role in favor of the Single Market and European growth," Barnier said in a statement.

TENSIONS

Few expect the new group, which is due to report back by the middle of the year, to recommend splitting lenders into separate retail and investment banking arms.

Germany and France, for example, are keen defenders of the universal banking model where retail and investment banking operations are under one roof.

The EU has also rejected calls from the United States to copy its Volcker Rule, a U.S. reform which curbs proprietary trading at banks.

The launch of the group comes at a time of heightened tension between Brussels and many European capitals.

"This is a welcome step but while the European Commission does have the power to impose structural changes on EU banks, the proposals will have to overcome strong opposition from the banks and some member states," said Sony Kapoor, a financial expert with think tank Re-Define.

The introduction of a new EU authority to supervise banks across the bloc has already angered the British government, which fears it will gradually gather powers strong enough to sideline UK supervisors such as the Bank of England.

Last December, Britain approved wide-ranging proposals to shake up the country's banks, forcing lenders to form barriers between their retail operations and investment arms to protect savers.

Liikanen is seen as a potential candidate for the European Central Bank's executive board and has served as Finland's finance minister.

His two stints as a European commissioner will serve him well in navigating potential reforms of EU financial regulation. The Finnish government did not have to rescue any of its banks during the financial crisis.

(Reporting by Huw Jones and John O'Donnell; additional reporting by Sakari Suoninen; Editing by Dan Lalor, and Andrew Callus)