The Structural Reform for EU Banks: Does it Works
33 Pages Posted: 3 Sep 2015 Last revised: 30 Nov 2015
Date Written: September 2, 2015
The European Commission adopted a proposal on bank structural reform in January 2014 (EC Proposal). After an 18-month debate, financial ministers eventually agreed on a text, ‘proposal for a regulation on structural measures improving the resilience of EU credit institutions’ on June 19, 2015 (BSR). The envisaged structural reform under the BSR included two tiers: (i) the first tier mandatory separation of trading-oriented activities from the core credit institution; (ii) the second tier of separation on a discretionary basis. This paper seeks to provide an overview and assessment of the two tiers of the BSR within the context of the EC proposal and the US Volcker Rule and the UK Vickers rule. It considers: (1) the strength and the scope of the separation of both tiers; (2) its capacity to achieved the balanced objective between reducing the ‘probability of failure’ and reducing the ‘impact of failure’. On (1), the strength of the text is less robust than the EC proposal, due to reducing the original Volcker style prohibition rule to a ring fencing style in the first tier and changing the principle-based delimitation of exception, and the application of second tier ring fencing rule is also apparently watered down due to the narrowed scope of the tier 2 banks and its strength on curbing subsidization. On (2), the BSR mainly stresses reducing the ‘probability of failure’, but not much the ‘impact of failure’, i.e. it does not provides material provisions on cooperation between structural reform and resolution reform. Putting aside other technical leaks in enhancing stability and safety of banks, that cast significant doubt on its capacity to enhance resolvability.
Keywords: Strength of separation, scope of separation, probability of failure, impact of failure, supervision, and resolution
JEL Classification: K22
Suggested Citation: Suggested Citation