Banks should ring-fence risky investments

Banks in the European Union should separate their risky investment activities from the retail side of their business, a high-level expert review group has told the European Commission today.

The group, headed by the president of Finland's central bank, Erkki Liikanen, said that the ring-fencing of risky activities would protect consumers and the financial system from the sort of turmoil seen in the financial industry over the past few years.

In a statement Liikanen said that, under the group's plan, “deposits, and the explicit and implicit guarantee they carry, would no longer directly support risky trading activities”.

Banking sector analysts say that rules to ensure that retail banking operates separately from riskier trading activities would protect the bank's ordinary savers if parts of the institution collapsed.

If the measures proposed by the independent review panel were implemented it would represent a radical overhaul of the EU's banking sector, but there is little indication that Michel Barnier, the European commissioner for the internal market and services who ordered the independent review, is in any rush to push through new legislation.

He said that the Liikanen report would “feed our reflections on the need for further action”.

He added: “I will now consider the next steps, in which the Commission will look at the impact of these recommendations both on growth and on the safety and integrity of financial services.”

The group also said that it supported bank ‘bail-ins', an idea already being pursued by the Commission that would force bondholders to pay for a bank collapse, rather than taxpayers having to foot the cost of a ‘bail-out'. The panel said bankers' bonuses should be given as bonds with these conditions.

The Liikanen proposals are similar to those proposed in the UK by the Vickers report and in the US by the Volcker rule.