Tags: EU | Anti-Bailout | Plan | bank

EU Group Seeks Bank Firewalls, Bonus Rules in Anti-Bailout Plan

Tuesday, 02 Oct 2012 09:12 AM

European Union banks would be forced to push much of their trading activities into separately capitalized units and face extra bonus rules under plans proposed by an EU-mandated working group.

The group, led by European Central Bank Governing Council member Erkki Liikanen, also calls for a toughening of Basel bank capital rules and for lenders to issue debt designed to be written down in crises. The recommendations are part of a detailed blueprint to protect taxpayers from bailouts.

“The report underlines the excessive risks taken by banks in the past,” Michel Barnier, the EU’s financial services chief, said in an e-mailed statement. The European Commission “will look at the impact of these recommendations both on growth and on the safety and integrity” of lenders, he said.

U.S. and British regulators have also proposed structural changes to banks in a bid to curtail risks. U.K. Chancellor of the Exchequer George Osborne plans to force large lenders to separate their consumer and investment banking operations in an overhaul that the Treasury estimates may cost as much as 7 billion pounds ($11.3 billion) a year.

U.K. Labour Party leader Ed Miliband said Sept. 30 that he may go further and break up banks if he wins the nation’s 2015 general election.

‘High Risk’

Under the Liikanen group’s plan, lenders would transfer trading they conduct on their own behalf and other “high risk” activities to a separately capitalized unit, according to documents e-mailed by the commission.

This so-called trading entity would have to be “legally separate” from other parts of the bank. It also wouldn’t be allowed to finance its activities through deposits covered by government guarantees, according to the documents. It would be allowed to be part of the same holding company as the rest of the business.

The high-risk activities would include, among others, unsecured loans to hedge funds and private equity investments, according to the documents.

Activities that could remain outside the trading unit would include interbank lending, mortgages and small business loans, as well as some hedging activities for non-bank clients.

The separation rule would apply to banks with available- for-sale assets worth more than 100 billion euros ($129 billion) or amount to more than 15 percent to 25 percent of a lender’s total assets, according to the documents. Supervisors would also carry out other assessments before applying the measure, while the “smallest banks” would be exempt.

Realistic Timetable

“The review creates even more uncertainty for U.K. banks,” Jeremy Jennings-Mares, capital markets partner at law firm, Morrison and Foerster LLP, said in an e-mail before the Liikanen-group report was published.

“What banks need more than anything now is certainty and a realistic timetable to be able to properly plan for the effect the proposals will have on their business in the long term,” he said.

On pay, regulators should consider setting “absolute levels to overall compensation,” including banning bonus pots that exceed fixed dividends, according to the documents.

The group also called for a share of bonus awards to be in debt that can be written down if a lender gets into difficulties.

Consideration should be given to plans by the European Parliament to set limits on how far bonuses can exceed fixed pay, according to the report.

Barnier set up the so-called Liikanen group earlier this year to examine possible rules on bank structure.

The group’s 11 members included Jan Vanhevel, the former chief executive officer of KBC Group, and Zdenek Tuma, a former governor of the Czech National Bank. Its recommendations are non-binding and will be weighed by Barnier.

“This is an important report that will inform our policy on regulating the financial sector,” Barnier said.


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European Union banks would be forced to push much of their trading activities into separately capitalized units and face extra bonus rules under plans proposed by an EU-mandated working group.The group, led by European Central Bank Governing Council member Erkki Liikanen,...
EU,Anti-Bailout,Plan,bank
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2012-12-02
Tuesday, 02 Oct 2012 09:12 AM
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