'Common sense prevails' as EU finance ministers agree Vickers exception to bank restructuring plans

Out-Law News | 23 Jun 2015 | 12:02 pm | 2 min. read

Large banks that are already subject to national rules addressing the risks posed to customer deposits by their trading activities would not be required to further restructure to comply with European law, EU finance ministers have said.

Banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that "common sense would appear to have prevailed" in the finance ministers' proposed structural reforms for the biggest and most complex EU banks (110-page / 435KB PDF). The final text, which will form the basis of negotiations between the incoming Luxembourg Presidency and the European Parliament, would exempt banks based in the UK and other member states that had already passed rules 'ring-fencing' banks' deposit-taking activities.

However, Anderson said that large UK banks would still need to confirm "what steps, if any, in addition to the Vickers reforms will need to be undertaken by UK banks to fully comply with the EU measures, and what timeframe will UK banks be allowed to fully comply with both regimes".

UK banks that take in more than £25 billion in 'core' deposits from individuals and small businesses will be required to formally separate their deposit-taking activities from their riskier investment banking activities by 1 January 2019. Affected banks will have to 'ring-fence' these core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities that are "associated with trading and financial interconnectedness" of the wider banking group.

The EU proposals were drafted in response to a report published in October 2012 by a group chaired by Erkki Liikanen, the governor of the Bank of Finland, although they do not go as far as the Liikanen proposals. They would require affected banks to separate 'proprietary' trading, using the banks' own capital, from related trading activities. Banks would not generally be required to separate other trading activities from their core functions unless these present "excessive" risk, in which case national regulators would be able to order mandatory separation or require banks to hold more capital to cover the risks of failure. Trading banks would also be prevented from taking retail deposits eligible for the national deposit protection scheme.

The new regime would only apply to those banks deemed to be of 'globally systemic' importance due to their size or their interconnection with the wider financial markets, as defined by the EU's Capital Requirements Directive; or to banks that meet certain trading thresholds. The rules would apply to two 'tiers' of banks, with those whose trading activities were worth more than €100bn over the last three years subject to stricter reporting requirements, more thorough risk assessments and different supervisory actions than those that did not meet this threshold. Banks with retail deposits worth less than €35bn or less than 3% of their total assets would be exempt from the new requirements.

The draft agreed by the ministers sets out two different methods for implementing the new rules "in order to take fully into account the different regulatory and business models across the Union". This would either involve the separation of proprietary trading activities, as identified by national regulators; or the ring-fencing of core retail banking activities "in accordance with national law". The UK and other member states opting to go down this route may be required to provide regular information to the Commission to help it "monitor and assess" their implementation of the rules.

Following objections from the French government, the final text also refers to the "special circumstances" surrounding the proposed rules which will mean that banks already complying with national rules on ring fencing will not have to also comply with EU rules.

This carve-out "is in no way a precedent for future financial services regulation" and "cannot be construed neither as providing for exemptions for some of its provisions nor as allowing for a differentiated geographical scope of its application", according to the text.