* Liikanen group recommends structural change to make banks
* Regulators at European Commission to consider the
* Lobby groups warn against changing bank structure
By John O'Donnell
BRUSSELS, Oct 2 An EU advisory group called on
Tuesday for banks' traditional deposit-taking business to be
legally separated from higher risk activities, drawing fire from
the industry even though it stopped short of demanding a full
break up of lenders.
Recommendations of the group, set up by the European
Commission, aim to shield taxpayers from having to fund further
bailouts and to protect savers from any more banking collapses
after more than five years of crisis.
In their report, the group argued for a "legal separation of
... particularly risky financial activities from deposit
taking", including banks' trading on their own behalf as well as
"activities closely linked with securities and derivatives".
Such reforms, if written into EU law, would have major
consequences for many of the continent's top lenders.
"Our objective was that the trading activity of the banks
would not be so big that it could topple the group," said Hugo
Baenziger, a committee member and who, as chief risk officer of
Deutsche Bank, helped to steer one of Europe's biggest
investment and retail banks through the crisis.
The group's report to the Commission drew on elements of
banking reform in Britain and the United States.
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 arms of the group
collapsed, some banking experts say.
It would affect European banks such as Britain's Barclays
, Deutsche Bank and France's BNP Paribas
and Credit Agricole, which engage in retail banking
alongside riskier trading in stocks, debt and other securities.
The industry's strongest critics have said these businesses
should be conducted by entirely separate banks.
Bank lobby groups were critical of the report. The
Association for Financial Markets in Europe, a group that
represents big banks including HSBC and Deutsche Bank, cautioned
against radical structural change, arguing that regulation and
markets were already altering banks.
"We do not believe that further changes to the structure of
the banking industry are necessary," said Simon Lewis, the
group's chief executive.
The German Banking Industry Committee, which represents
German banks, also criticised Liikanen's recommendation to curb
trading, which it said would hamper risk management.
Uncertainty over whether the report of the group, which was
led by Bank of Finland Governor Erkki Liikanen, will be
implemented is likely to compound investors' nervousness in an
industry where new rules are already set to curb banks'
Liikanen underscored the need for reform. "In Europe,
banking is critical," he said as he outlined what he described
as a "design" that could be introduced over the long term to
limit runaway risks in banking. "It's more important to the
European economy than any other area of the world because
financing of the economy ... goes through the banking."
Property crashes in Spain, Ireland and other EU countries
have led to huge losses for banks, and the group said real
estate lending should be underpinned by larger capital reserves.
An audit of Spanish banks last week found they needed an
extra 59.3 billion euros in capital largely due to losses on
property lending, and the euro zone has already agreed to lend
up to 100 billion euros to fund this.
The group also called for a mechanism to impose losses on
bondholders in the case of a bank's bailout or collapse,
suggesting that bankers should accept this risky type of bond as
part of their bonus.
Although the report will fuel a debate about reforming banks
it is unlikely that the Commission, the EU's executive, will
respond soon with new regulation.
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 support banks jointly.
"This report will feed our reflections on the need for
further action," said Michel Barnier, the European Commissioner
in charge of regulation, who will now consider the findings.
"We are going as quickly as possible," he told reporters,
commenting on the regulatory drive. "Because the big worry for
the financial sector, for companies and for citizens is that
they need a stable framework as quickly as possible."
For now, 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
New rules that demand banks set aside capital by holding
back profits will make them less risky for shareholders and
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.