Balancing market liquidity: Bank Structural Reform caught between growth and stability

Abstract

The European Commission’s proposal for a Bank Structural Reform (BSR) aimed at increasing banks’ resolvability through separating risky trading activities from deposit-taking institutions. In contrast to initial plans, the final proposal exempted market-making activities of banks. This exemption, we argue, was brought about by the Commission’s discursive framing of the BSR as a balancing act between stability and growth. Coupled with the incapacity to unambiguously measure the effects of the reform on market liquidity and on growth, this pushed the assessment of market-making from the technical to the political realm, leading to a reproduction of the prevalent market-based banking system.

Keywords:

• Bank Structural Reform
• market-making
• market liquidity

Acknowledgments

We thank Marius Birk, Rebecca Ohanes and the participants of the Luxembourg workshop “Reforming Banking Union” for helpful comments.

Notes

1. Since the Council published its proposal in June 2015, the Parliament was divided on the appropriateness of setting limits to universal banks’ market maker function, reproducing the initial struggle of the Commission to define the scope of the reform.

2. This was the case both in the “roadmap to stability and growth”, published in October 2011 and, the Stability and Integration Report of 2011 stressing that regulators should be careful to “avoid producing unintended consequences for the economy” (EC 2012a, 59).

3. Such reforms aim at “ensuring that the deposit taking bank is not unduly influenced by a short term oriented trading culture and prone to conflicts of interest to the detriment of its customers” (EC 2014e, 3). Therefore, regulators and policymakers need to decide “what activities to separate and how strong the separation should be” (ibid.). The Impact Assessment (IA) of the Commission identified nine possible options (ibid., 6).

4. Those include certain press releases, reports, consultation paper and the IA, all published by the responsible DG (Internal Market and Services) and selected with the focus on their explanatory value of the Commissions understanding of banks’ structures and how to regulate them. Even though the IA was published together with the proposal, it differs markedly in its tone. It rather summarizes the considerations throughout the drafting period which mirrors in the statement further analysed below.

5. We are aware that the documents might be drafted by different authors but this is of secondary importance for the analysis since it aims in the first place to outline the role that has to be assumed by a certain subject. A subject is never the author of the statement but fills its position, its empty place, if it fulfills certain requirements (Foucault 1981, 138, 139).

6. This distinct dispositif makes the problem of bank structures governable (Langley 2014, 13). This should be subject to further research, elaborating which forces account for its occurrence.

7. The proposal provides room for a separation as ultima ratio, meaning a separation of risky trading activities such as market-making and underwriting into separate legal entities, “if problems occur that potentially put the whole bank and the wider financial system at risk” (Krahnen 2014, 1).

8. A distinction can only be drawn upon the “private intend of the trader” who “might legitimately choose to take a long position” (EC 2014c, 60).

9. Hill took the position in June 2014, abdicating in June 2016.