Handelsblatt Exclusive

E.U. to Push for Bank Breakups

European Commission Vice-President Valdis Dombrovskis addresses a news conference at the EU Commission headquarters in Brussels, Belgium, July 27, 2016. REUTERS/Francois Lenoir
European Commission Vice President Valdis Dombrovskis, who is also responsible for financial regulation, wants to get tougher again with banks.
  • Why it matters

    Why it matters

    Policymakers around the world are trying to balance the concerns of the financial industry with those of taxpayers, who don’t want to be on the hook for another bank bailout.

  • Facts

    Facts

    • The European Commission has proposed legislation that would require banks to show their risky investment banking activities don’t pose a threat to the wider bank.
    • The legislation was shelved last year after disagreements emerged in the European Parliament.
    • E.U. Commissioner Valdis Dombrovskis, in charge of financial regulation, now says he remains committed to the reforms and will help the parliament sort out its differences.
  • Audio

    Audio

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It’s been the frustration of politicians ever since the 2008 financial crisis: Banks that are “too big to fail,” and which governments could be forced to bail out at any moment if another crisis hits.

One of the hottest questions in financial regulation is exactly what to do about it, and one of the long controversial fixes is forcing banks to separate their risky investment banking activities from traditional commercial and retail banking.

The European Commission now plans to revive exactly this kind of legislation, Handelsblatt has learned, pushing once again for reforms that were shelved amid disagreements in the European Parliament last year.

“It is important that we work together towards an approach that ensures a balanced and meaningful reform, that strengthens financial stability but at the same time does not damage the financing of the wider economy.”

Valdis Dombrovskis, E.U. Commissioner for financial regulation

E.U. Commission Vice President Valdis Dombrovskis, who is also responsible for financial market regulation, said the commission is “still committed to finding an agreement” in a letter to European parliamentarian Gunnar Hökmark dated September 13 and seen by Handelsblatt.

Mr. Dombrovskis, who took over the financial regulation portfolio in the aftermath of the Brexit vote, suggested in the letter a meeting with skeptical parliamentarians who have to approve any legislation proposed by the E.U. executive arm, to help reach a solution.

Sources within the European Parliament suggested that while lawmakers are prepared to meet, there still remain major differences between the conservative and social democratic parties on the issue.

“It is important that we work together towards an approach that ensures a balanced and meaningful reform, that strengthens financial stability but at the same time does not damage the financing of the wider economy,” Mr. Dombrovskis wrote.

The legislation has long been sharply resisted by the European banking lobby. In terms of countries, France has been most strongly opposed as it has several large banks like BNP and Societe Generale that could be affected.

A compromise seemed likely about a year ago, requiring banks like BNP and Deutsche Bank to prove that their investment banking activities don’t pose a risk to the rest of the bank. But the deal collapsed amid opposition from French socialists, who backed the larger French banks in fear of any legislation that could force them to split off or ring-fence some of their operations.

A number of countries around the world have adopted similar legislation since the financial crisis, either forcing banks to separate their retail and investment operations, or at the very least prevent banks from trading on their own accounts – a practice known as proprietary trading.

Asked to respond to the latest news that the legislation may be revived, a spokesperson for the European Banking Federation told Handelsblatt it was “very concerned about the plan to separate banks.”

 

Ruth Berschens is Handelsblatt’s Brussels bureau chief. Michael Brächer is a financial correspondent for Handelsblatt based in Frankfurt. To contact the authors: Berschens@handelsblatt.com and brächer@handelsblatt.com

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