Too big to fail: Structural Reform of EU Banking Sector

The sheer size and complexity of EU banks was one of the biggest problems during the crisis. They are too big to let them fail. A reform proposal is trying to change this.

How did we get here?

The youngest economic and financial crisis was also caused by the sheer size and complexity of banks in the European Union. These financial players had become increasingly larger and more essential to the financial and economic system, so that politicians seemed unable to let them go bankrupt not knowing the consequences for the European economy. Thus, many banks had to be saved with taxpayer money.

 

Why is this important for me?

The new rules (together with many others) aim at avoiding an economic and financial crisis like this one from ever happening again. Banks have to reduce their engagement in particularly risky activities in order to avoid that they have to be saved with taxpayer money once again. With additional accompanying measures concerning the shadow banking sector, then Commissioner Barnier tried to keep certain financial transactions from being transferred into shadow banking as a way to circumenvent the new rules for the conventional banking sector.

 

What's the content?

Michel Barnier, former European Commissioner for Internal Market and Services, published a proposal to reform the EU banking sector. It tries to stop the biggest and most complex banks from engaging in the risky activity of proprietary trading - meaning the trading of financial products among banks themselves. However, these rules will only apply to the 29 biggest banks in the EU.

Furthermore, a compulsory separation of trading activities - meaning that investment banking within a bank is completely separated from the day-to-day business - as proposed by the preparatory Liikanen Report, published by a high-level expert group in 2012 - was not part of the proposal by former Commissioner Barnier. The new rules may only give to financial markets supervisors the power to require banks to separate certain potentially risky trading activities from their deposit-taking business. In addition, Barnier has also proposed accompanying measures aimed at increasing transparency of transactions in the shadow banking sector.

 

What's happening with this legislation in the future?

In May 2015, the draft report - shepherded by the Swedish MEP Gunnar Hökmark - was rejected in a vote in the Committee on Economic and Monetary Affairs (ECON) with 30 votes against and 29 in favour. Hökmark’s draft had some 90 amendments to the Commission’s original proposal, allowing for more national discretion concerning regulation. The rapporteur feared over-regulation, but other MEPs thought the bill was too toothless. Now the legislation has to be re-shaped by the committee - with its first failure showing the difficulty of building consensus around such complex financial issues. In the meantime, Member States have already agreed on a common position. Now, we are waiting for progress...

 

Related Bills:

Financial Transaction Tax: Making banks pay for the crisis

Access to a Basic Bank Account for Everyone

Public list of company owners to fight money laundering

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