* Liikanen to give view on dividing retail, investment banking
* European Commission to receive recommendations on Tuesday
By John O‘Donnell
BRUSSELS, Oct 2 (Reuters) - An EU advisory group will on Tuesday recommend reforms that could include splitting banks’ retail business from their investment operations to protect savers and host nations from the kind of risk-taking that triggered the financial crisis.
Bank of Finland Governor Erkki Liikanen, who led the group of academics and experts set up by the European Commission, will announce their verdict on how best to reform bank structures in the wake of the crisis that began five years ago.
Making a separation between retail banking and high-risk businesses such as trading could be among the proposals Liikanen will make to stop crises in investment banking dragging down high street banks and the savers and businesses who depend on them.
Michel Barnier, the European Commissioner in charge of regulation, will give his initial response to journalists after Liikanen outlines the recommendations at a press conference at 1030 GMT.
Legally separating or ring-fencing investment banking would make it easier for the part of the bank that holds savers’ deposits and lends to businesses to keep running even if other parts of the group collapsed, some banking experts say.
It would affect European banks such as Britain’s Barclays , Germany’s Deutsche Bank and France’s BNP Paribas, which engage in high street banking alongside riskier trading in stocks, debt and other securities.
One source familiar with the group’s work recently said separating retail banking from the high-risk business, dubbed “casino banking” by critics, would be part of the proposals, though this could change in the final report.
But European policymakers, struggling to contain the regional debt crisis and associated banking troubles, are set to give priority to creating a banking union that would eventually allow euro zone countries to jointly support banks.
Brussels is expected to pursue safeguards such as larger capital reserves for risky business or rely on new powers to be granted to the European Central Bank to keep banks in check.
Setting aside capital by holding back profits, for example, makes banks less risky for shareholders and taxpayers.
The European Commission, which writes the first draft of all regulation before it goes to the bloc’s countries and parliament for approval, is not expected to act immediately on the recommendations, one EU official said.
The United States, is pursuing its own structural reforms through the introduction of curbs on proprietary trading, where banks trade for their own benefit and in doing so take on risk.
Britain chose safeguards for depositors by shielding that part of a bank’s business after Royal Bank of Scotland’s rush to extend its investment arm resulted in the largest state bailout of the crisis in Europe.
A panel of experts headed by John Vickers, a former chief economist at the Bank of England, recommended that the retail arms of banks be “ring-fenced” by a cushion of extra capital beyond the international norm and with “independent governance to enforce an arm’s length relationship”.
The British government has said it will implement his recommendations.