According to experts, European investors’ money should no longer be used by banks for financial speculation on the stock exchanges. This is one of the measures to prevent new banking crises.
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European Commission Expert Group led by the head of the Bank of Finland Erkki Liikanenom declared the necessity of the banks to separate risky investment banking operations from their more traditional retail operation. According to experts, European investors’ money should no longer be used by banks for financial speculation on the stock exchanges. This is one of the measures to prevent new banking crises.
Recommendations of the group established by the European Commission are intended to protect taxpayers from having to fund further rescue and protect depositors from the destruction of the banking system after more than five years of crisis. As conceived by Erkki Liikanen, all banking businesses can remain under the roof of one of the holding company, but the risk businesses must be in one law firm, and traditional businesses - in another. Various capital reserve requirements should be applied to these organizations. The initiators of the reform want to ensure that the clients’ service does not become a support for the investment banking business.
The reform will not affect smaller banks, whose assets do not exceed EUR 100 billion, as well as those whose share of investment assets does not exceed 15-25% of the total. Such big banks as the British Barclays, German Deutsche Bank and French BNP Paribas, who are engaged in risky stocks, bonds and other securities trading will have to change their business model.
The expert group also recommended the European Commission should draw attention to the risks in lending mortgages. Excessive lending revalued property was the main reason of the banking crisis that led to the global credit crisis in 2008. To avoid these mistakes, Erkki Liikanen’s experts recommended to increase reserve requirements for over-active real estate lenders.
Liikanen’s report is now submitted for discussion within six weeks for public consultation. By December, the commission will review its conclusions. "The European Commission will examine the impact of these recommendations on the growth, the security and the integrity of financial services, and then decide to implement them," - said the European Commissioner for Internal Market, Michel Barnier.
The French Banking Federation (FBF) has warned that any reform of the banking system should be brought in line with the purpose of financing the economy and warned against the "disappearance of certain activities beneficial to the market economy."
The financial advisor Dmitry Chernavski supports these views. The adoption of this reform, says Dmitry Chernavski, will change the current structure of bank financing. "This factor may have adverse consequences for the real economy", - notes Dmitry Chernavski.
According to the Head of PwC, Kevin Barrows, Liikanen’s proposals on the banking sector services contain bold plan of structural reforms in the EU financial system. "The separation of operations does not reduce the risks in the banking sector, but it helps to avoid disruption to the critical functions of a bank to work with deposits and lending," - emphasizes Kevin Barrows.