01 September 2014

Leon Orr

Leon Orr - Rule Financial

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The likelihood and implications of a European ring-fence

12 October 2012  |  2861 views  |  0

Ring-fencing is never out of the news long at the moment, and the recently published Liikanen report, an EU-commissioned report on European banking, has now defined its version of implementation. It recommends that investment bank trading activities are placed in a separate legal entity from their retail banking activities; that this separate legal entity would have to hold its own capital, and could not, if it failed, bring down the retail banking division.

There are obvious similarities to the Vickers report on UK banking which will result in the retail banking activity being 'ring-fenced' from the investment bank for major UK banks by 2019. On top of this, France's finance minister, Pierre Moscovici, has discussed an aggressive timeline whereby ring-fencing is brought into legislation in France by the end of this year. Whilst it is at an early stage, if ring-fencing does become mandatory across Europe, it will require changes to the way in which those affected banks structure their activities. It will also force affected banks to re-examine their portfolios and potentially move out of the areas which will become non-profitable.

Just like their counterparts in the UK are doing in the wake of the ICB report, the affected banks would have to give careful consideration to:

  • Which products they can trade with which customers, in which legal entities
  • What their optimal future organisation structure is (including support functions such as operations, risk, finance and I.T.)

With the Volcker rule being implemented in the US and the Vickers report in the UK, banks face the headache of interpreting three sets of rules, all being implemented along different timelines. UK banks, in particular, face the onerous prospect of having to anticipate how the Liikanen report will map onto the Vickers report. While awaiting clarification from the regulators, UK banks will be losing time with their restructuring plans to comply with the ICB proposals.

As with all change, there will be winners as well as losers. With competitors leaving certain markets, there are opportunities for those who remain. Mergers or acquisitions may also result, driven by the need for greater economies of scale to offset the increased cost of trading.

The EU could write legislation as early as the middle of next year, however, questions still remain as to how Liikanen’s proposals will safeguard universal banks from collapse. BNP Paribas claims that the proposals exclude universal banks at present, rather focusing on consumer protection, over corporate banking.

There is clearly a desire amongst legislators to bring ring-fencing into action, however the guise in which it is implemented remains to be decided.

TagsRisk & regulationRetail banking

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Leon Orr

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Principal Consultant

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Rule Financial

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I am a programme manager and work for Rule Financial. I specialise in change management and IT sy...

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