How Will Euro Banks Be Restructured?

Various proposals for banking regulation changes in Europe are currently under consideration and could result in the drastic restructuring of EU banks.


One of the proposals comes from an EU-mandated group which is led by Erkki Liikanen, the governor of Bank of Finland. Liikanen’s group offered non-binding suggestions that would have EU banks move trading activities, such as market-making, into a unit that’s separate from deposit collecting and that’s capitalized separately. The EU banks would also face extra rules on bonuses.

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The European Central Bank has not yet adopted Liikanen’s proposal, and may not do so. The ECB stated Monday morning that “an impact assessment needs to be carried out” as the Liikanen group’s proposals “may have a significantly different impact across the EU, given differences in the structure of the banking sectors.”

The ECB has not downright rejected the Liikanen group’s proposals, but emphasized that the plans needed to be reassessed as there could be consequences to the real economy of member states and in relation to divergent funding costs. Other banks, like Deutsche Bank AG and Credit Agricole SA have lobbied against the Liikanen group’s proposals…


The ECB may not fully reject the Liikanen group’s proposals, but it does seem more interested in alternative proposals from the European Commission. The ECB seems interested in keeping market-making activities allowed within deposit-taking arms, which Liikanen’s proposals wouldn’t allow.

The European Commission’s own proposals would allow market-making to continue in banks’ deposit-taking arms and wouldn’t force banks to issue a debt that could be written down or converted to equity if the lender was struggling. Instead, focus is on regulators having more “bail-in” powers at insolvent banks, which would impose losses on bondholders at those banks. Though the European Commission’s proposals have received more favor from the ECB, the ECB still wants the plans to be further analyzed and evaluated.

The Liikanen group’s proposals would break up some of Europe’s biggest banks in order to protect taxpayers from banking troubles, but could fail to do so if the bank is “too systemic, large, and interconnected,” according to the ECB. The European Commission’s proposal provides “legal certainty and incentives for investors to better monitor banks and reduces implicit government subsidy for the too-big-to-fail entities,” according to the ECB.

More news will come later on this topic when the Liikanen group announces its evaluations, and when the European Commissions makes its decision on how to proceed with the banking reforms.

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