In an interview with German financial newspaper Handelsblatt on Wednesday, EU Commissioner Michel Barnier provided an update on the European Commission's proposals on structural banking reform. He said he was going to put forward a legislative proposal for reform at the European level by the end of the year, and indicated that the proposal would prefer harmonisation over national flexibility: "we need to take care that national rules do not differ too much from each other so that comparative competitive conditions for banks are preserved".
Commissioner Barnier is reported as saying legislation was urgent because diverging initiatives in some member states could undermine the EU's common market. Barnier's comment refers to the recent multiplication of national initiatives in which UK, France, Germany, the Netherlands and Belgium has each passed, or else is preparing, its own law. The IMF and FSB have also expressed concerns about the effects of cross-border inconsistencies resulting from different national rules and the G20 has asked the FSB to look at the consistency of national proposals and the potential implications for financial stability.
Commissioner Barnier also pointed to structural reform in the US: "I want to act now since things in the US have started moving. We must not deviate too much from the Americans". Regulators in the US are currently specifying the details of the Volcker rule, which prohibits banks that take retail deposits from engaging in proprietary trading and from owning or sponsoring hedge funds or private equity funds.
The legislative proposal for structural banking reform in the EU will be a response to the Liikannen report, which in October 2012 set out proposals on reforms to the EU banking sector. The European Commission's response has been much anticipated. These are not Commissioner Barnier's only recent comments on the matter – he said something similar, although less specific, at the BBA Annual Conference in mid-October. But they are particularly significant given the continued uncertainty about how and when the Commission will respond.
Commissioner Barnier indicated that the proposal might go beyond existing national laws and proposals, in order to effectively counter "the most speculative activities".
Contrary to the expectations some have of a light touch set of European guidelines, the comments add weight to the concern that the European proposals may not be entirely consistent with the way in which some banks are intending to implement their national requirements. This risk certainly exists in the UK, where the UK government has proceeded with its own reform in its Banking Reform Bill, presumably on the basis that the EU proposals won't cut across it. Key will be whether the proposals come in the form of a Directive or Regulation.
There are a series of strategic and operational questions that banks will need to explore before settling on a solution. There are many different ring-fencing configurations which are likely to be compliant with the rules, each of which will have its benefits and drawbacks. Banks need to understand and assess the options and, while national initiatives have driven the structural reform activities of banks to date, Commissioner Barnier's proposals may see a shift of focus towards Europe in the coming months. We must wait and see.
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