The Banking Structural Reform (BSR) shall make the financial system more resistant and less dependent on state aid in times of crisis. In order to achieve this, major system relevant banks shall separate high-risk trading activities from their deposit and lending business. However, in his draft report, the rapporteur responsible in the European Parliament, the Conservative MEP Gunnar Hökmark, has massively watered down the proposal by the Commission on BSR.

The Banking Structural Reform is an important pillar to prevent any repetition of the last financial crisis. The envisaged aim is to establish a stable and resistant financial system, which is able to survive in times of crisis without the taxpayer having to come to the rescue. That is why tighter limits have to be set for system relevant banks and why it has to be determined far more clearly how and in which high-risk speculations they may participate. The background for this development is the experience made during the last financial crisis, when banks, which were regarded as “too-big-to-fail” had to be bailed out by states with subsidies worth billions.

Measures against another financial crisis

To avoid such a situation in future, the European Commission has adopted a catalogue of measures. One of the last and most important pillars is the Banking Structural Reform. It is the declared aim of this reform to prevent major banks from exploiting their system relevance in order to participate in particularly risky financial transactions. The certainty that in the end these banks have to be bailed out by the taxpayer, gives them a competitive advantage on the market: due to these implied state guarantees they are in a better position to engage in high-risk transactions.

Separation of high-risk trading activities and deposit business

In order to put a stop to this, the proposal by the Commission supports the idea that banks, classified as global system relevant institutions, are prevented from continuing to operate in the particularly risk-carrying proprietary trading. Apart from that, the Banking Supervision may ask a financial institute to separate certain high-risk trading activities from their deposit business. However, prior to this, the Banking Supervision must always examine whether the institute poses a potential danger for the financial stability.

Watering down of the Banking Structural Reform

Parliament is now discussing the proposal. Last week, the Swedish Conservative MEP Gunnar Hökmark has published his draft report on the legislative proposal of the Commission. Unfortunately, he comes out in favour of the major bank lobby groups. In his draft report, Hökmark presented 90 recitals, which would result in a watering down of the draft. Due to the recitals, the number of banks affected by the Commission proposal would be reduced as significantly fewer banks would be rated as system relevant. Another point of criticism is that the great interconnection of major banks would remain intact, which means that once again there might be a domino effect in a crisis. Just like in the past financial crisis this would mean that major banks in case of economic problems could entangle each other in a downward spiral. The Parliament has two weeks to also bring in recitals.

Further information:

Proposal of the Commission on the Banking Structural Reform

Draft report by Gunnar Hökmark on the Commission proposal on BSR

Criticism by Finance Watch on Hökmark draft proposal