EU banking reforms will not require split between lending and trading activities, say reports

The Commission is due to publish its response to the 2012 Liikanen Report on the structure of banking before the end of next month. However its draft proposals will not include the mandatory restructuring recommended by the Bank of Finland Governor, according to the Financial Times, which said it has seen a copy.

Banking reform expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that banks in the UK were "eagerly awaiting sight" of the Commission's proposals. Large banks in the UK will be required to 'ring fence' their retail banking activities from their investment banking operations from 2019 under the Banking Reform Act, which received Royal Assent last month.

"Whilst it is not clear what form these reforms will finally take, it is apparent that UK banks will be required to comply with both the Liikanen and the Vickers proposals in one form or another," he said. "The big question for these banks will be what synergies can be achieved between the two regimes when implementing their requirements."

Erkki Liikanen published his recommendations to the Commission in October 2012. They included the general separation of banks' trading and retail activities, as well as giving the European Banking Authority (EBA) the power to separate additional activities performed by a failed bank as part of its recovery and resolution plan.

According to the Financial Times, the Commission's draft proposal would allow larger banks to choose to separate their lending and trading activities in a "less costly and restrictive" way to that originally set out by Liikanen. National supervisors would also be given the power to decide whether certain trading activities pose a 'systemic risk' that should be separated, based on metrics to be designed by the EBA. Smaller banks would be exempt from any separation requirements, the FT said.

In addition, national supervisors would be given the option to set tougher standards subject to approval from the European Commission. This would apply to the UK's banking reform programme, which follows the recommendations of Sir John Vickers' Independent Commission on Banking (ICB), according to the FT. Once in force, the UK reforms will require banks to ring-fence their retail activities from the riskier investment and trading activities of the wider banking group. Ring-fenced banks will need to be legally and operationally distinct entities from non ring-fenced banks, and will not be able to hold or own the capital of other non ring-fenced entities within the group.

The European Commission will also propose a "narrowly defined" version of the US Volcker rule, which bans proprietary trading, according to the Financial Times. Proprietary trading occurs when a bank trades stocks, bonds, derivatives or other financial instruments with its own money rather than its customers' money, so as to make a profit for itself. The ban would apply to around 30 of the largest banks, regardless of whether they have opted to ring-fence their lending activities, according to the FT.

The European Parliament and member states are not expected to reach agreement on the Commission's proposals before the end of 2015, according to the FT. The Commission currently anticipates that the proprietary trading ban would apply from 2018, and that any separation of banks would follow from 2020.