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Liikanen Group – The “High-Level Expert Group” issues its report on the recommendations for reforms in the EU banking sector

2 October 2012

To read the report, click on this link.

Legal separation of banks with significant trading activities

The Liikanen Group (LG) recommends a legal separation of proprietary trading and market-making activities (other than certain exempted activities) from deposit-taking entities. The latter should be sufficiently insulated from the risks of the trading entity. The separation would be mandatory if such activities represent a “significant” share of a bank's business, following a two-stage process:

Stage 1: If a bank’s assets held for trading (HFT) and available for sale (AFS) represent more than 15 to 25% of the balance sheet size (threshold still to be calibrated), or more than EUR 100 billion, the bank is presumed to have significant trading activities and would advance to stage 2 examination;

Stage 2: the decision is left to the discretion of supervisors, based on criteria that remain to be defined.

The purpose of this recommendation is to insulate deposit-taking activities, and the explicit and implicit guarantee they carry, from (riskier) trading activities. The use of derivatives for hedging purposes and buying or selling assets for liquidity management purposes would still be permitted for deposit banks. Similarly, hedging services to non-banking clients, within certain risk limits (exact levels still to be calibrated), can continue to be provided by deposit banks.

Development of effective and realistic recovery and resolution plans

LG supports the Commission's Bank Recovery and Resolution Directive (BBRD) proposal and recommends that banks draw up and maintain effective and realistic recovery and resolution plans.


Increased issuance of bail-in funding instruments

LG recommends that banks increasingly issue “bail-in” funding instruments, with a clear (subordinated) ranking and loss-absorption capacity in case of resolution. Such “bail-in” funding instruments should only be purchased by non-banks.


Review of capital requirements on trading assets and real estate loans

LG recommends a review of capital requirements for trading books and welcomes the recently launched consultation of the Basel Committee in this respect. LG proposes two approaches to improve the robustness of trading book capital requirements: (i) setting an extra non-risk based capital buffer, in addition to risk-based requirements, or (ii) introducing more robust risk-weighted assets.

LG also recommends a revision of capital requirements for real estate related exposures. LG further supports the European Systemic Risk Board’s recommendation to set loan-to-value and/or loan-to-income caps.


Corporate governance reforms

LG recommends further strengthening banks’ boards and management, the promotion of the risk management function, a limitation of compensation for bank management and staff, risk disclosure improvements and the strengthening of sanctioning powers.