On 19 June 2015, the EU Council – in its Economic and Financial Affairs formation – agreed its negotiating position on structural measures to improve the resilience of EU credit institutions. In particular, the proposal for the Banking Structural Reform Regulation.
The incoming Luxembourg presidency will start negotiations with the European Parliament as soon as the latter has adopted its position.
The draft regulation builds on the recommendations of the “Liikanen report” published in October 2012. It would apply only to banks that are either deemed of global systemic importance or exceed certain thresholds in terms of trading activity or absolute size. Despite recent regulatory reforms in the banking sector, these credit institutions and groups remain too-big-to-fail, too-big-to-save and too complex to manage, supervise and resolve.
The draft regulation aims to reduce excessive risk taking and prevent rapid balance sheet growth as a result of trading activities. It sets out to shield institutions carrying out activities that deserve a public safety net from losses incurred as a result of other activities. It provides for the mandatory separation of proprietary trading and related trading activities and establishes a framework for competent authorities to take measures to reduce excessive risk taking.
Trading activities other than proprietary trading would be subject to a risk assessment. If a competent authority finds that an excessive risk exists, it could require trading activities to be separated from the core credit institution, or demand an increase in the core credit institution’s own fund requirements, or impose other prudential measures. Trading entities would be prohibited from taking retail deposits eligible for deposit insurance.
According to the Council’s text, the regulation would apply to global systemically important institutions (in accordance with Directive 2013/36/EU on capital requirements) or to entities with total assets of at least €30bn over the last three years and trading activities of at least €70 billion or 10% of their total assets. These banks would be allocated into two tiers, depending on whether the sum of their trading activities during the last three years exceeds €100 billion or not. Stricter reporting requirements, a more thorough risk assessment, and different supervisory actions would apply to banks exceeding the threshold.
The regulation would not apply to institutions with total eligible deposits (under Directive 2014/49/EU on deposit guarantee schemes) of less than 3% of their total assets, or total eligible retail deposits of less than €35bn nor to sovereign debt instruments (as proposed by the Commission).
But in the Council’s text, a review clause has been further elaborated to specify that the Commission would review the sovereign debt exclusion taking into account developments at European and international level.
To accommodate existing national regimes, the Council text provides two options for addressing excessive risk stemming from trading activities: either through national legislation requiring core retail activities to be ring-fenced, or through measures imposed by competent authorities in accordance with the regulation.