Buba open to Liikanen bank proposal, some reservations - Dombret

BERLIN Feb 27 (Reuters) - Germany's Bundesbank largely supports a European Union proposal to separate some high-risk trading operations within banks from their deposit-taking arms but has some reservations, Bundesbank board member Andreas Dombret said.

Dombret was due to appear on Wednesday before the financial committee of Germany's lower house of parliament, the Bundestag, and he made his comments in a statement prepared for delivery before the committee.

An EU advisory group, led by Bank of Finland chief Erkki Liikanen, proposed last October that banks separate their deposit-taking arms from proprietary trading and other risky investment banking to shield taxpayers and to protect savers.

"The general direction of the Liikanen report - essentially to retain the system of universal banks but to increase the ability to wind up banks - is right from our point of view," Dombret said in the prepared statement.

"But the proposal to separate (units of banks) also entails disadvantages and several difficulties," he added.

Dombret pointed to difficulties in the regulatory implementation of such separation and said a cost-benefit analysis was needed before implementing the proposal.

He also questioned whether the stability gains would be as high as the Liikanen group assumed since splitting the business arms could reduce contagion within a bank but could in turn increase contagion on the market.

"All in all, one has to be aware that the functional separation can only be one element in a whole bundle of measures needed to secure financial stability," Dombret said.

"Appropriate capital and liquidity are decisive for a credible resolution regime which includes creditors' liability and in the end makes an involuntary exit from the market a realistic scenario and a credible threat."

The Liikanen proposal was a response to concerns sparked during the global financial crisis that retail banking is highly vulnerable to troubles engulfing the investment banks. (Reporting by Annika Breidthardt, editing by Gareth Jones and Patrick Graham)