Michel Barnier, the EU commissioner heading up regulatory reform of European banks, has this week signalled that Brussels is set to think twice on ringfencing. Apparently, EU officials are working on a “precise impact analysis” of the Liikanen report.

The principle recommendation of the report is that banks’ trading activities should be tightly corralled into separately capitalised units, in order to protect retail banking operations from contamination. The extreme end of the ringfencing spectrum is that banks should undergo complete legal separation of their investment banking and retail divisions.

However, in light of poor economic data and the fact that the EU is struggling to regain a foothold in the global economy, it would seem that Brussels is thinking twice about imposing measures on European banks that would negatively impact their contribution towards the economy.

Research out earlier this month showed that in the UK alone, banks account for 9.6 per cent of GDP. Along with professional services, financial services employs a massive seven per cent of the British population. This is the sort of economic weight that regulators in the UK and EU cannot afford to ignore – or alienate.

It would seem that Barnier and his team are caught between the rock of public pressure to “sort the banks out” and the hard place of the negative economic repercussions, should hardline regulatory reform be enforced. It is widely thought that if European banks were strong-armed into undergoing expensive restructuring, they would be handing a significant competitive advantage on a platter to their US counterparts.

The sheer cost of the physical logistics of ringfencing – or effectively demerging one division of a bank from another – would be enormous. Untangling corporate systems and the resource that would entail would be significant, not forgetting the compliance procedures banks would need to put in place to ensure the ringfence was policed effectively.

Banks would be in the position where – in order to protect their margins and appease shareholders – they would have to cut costs elsewhere, which would inevitably lead to a significant slash in head count. Brussels may have woken up and smelt the coffee. But the balance between electioneering and pleasing voters and having a smart, sensible approach to the economy, will always be a tough call for politicians.