EU structural regulation of banking

Abstract

The European High-Level Expert Group under Erkki Liikanen has produced a well-researched and informed report on the financial crisis within Europe which contains important recommendations for reform. This builds on the work of Paul Volcker in the US and the Independent Commission on Banking in the UK under Sir John Vickers and provides an intelligent intermediate, compromise position on ring-fencing. Liikanen has concluded that European banks should be required to ring-fence their proprietary and high-risk activities having considered that the other reforms currently being developed will be inadequate to deal with the perceived additional systemic threats present in the markets. The report also contains a number of further recommendations on supplemental separation, bail-in instruments, capital adequacy, governance, institutional architecture, competition and competitiveness. This adds further weight to the emerging official regulatory consensus on ring-fencing although a number of difficult issues still remain to be fully resolved especially on market efficiency, resolution and crisis management.