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Commission presented normative Proposal following the Liikanen Report

Commission presented normative Proposal following the Liikanen Report aiming towards what could be construed as a kind of European Glass-Steagall Act for the Twenty First Century – However the current political odds do not seem to favor such Proposal.

In the wake of the Recommendations of the Liikanen Report (Liikanen High Level Group formed in February 2012 to examine possible reforms to the structure of the EU banking Sector), the Commission presented in January 29th (2014) a Proposal of Regulation on Structural Measures Improving the Resilience of EU Credit Institutions (COM(2014) 43 Final), which somehow aims to implement those recommendations. The EU as such seems to arrive late at the complex and sensitive discussion of possible structural measures that may, in some manner, revive the spirit of the former US Glass-Steagall Act (which was definitively revoked during the Clinton years in the nineties). In fact, this happens much time after the Volcker measures were discussed in US and the Vickers Commission proposals were, in turn, discussed in the UK (contemplating some form of banking retail ring-fencing). Furthermore, it must also be taken into consideration that in the meantime other EU Member States, like France, Germany and Belgium adopted limited national measures on some forms of separations of certain areas of banking activity.

It is, therefore, natural to consider EU action in this domain since national measures could threaten the free provision of services in this domain.

The EU proposal contemplates forms of separation between the core credit institution and the trading entities to be possibly triggered on the basis of certain thresholds concerning relative size, leverage, complexity, profitability, associated market risk and interconnectedness (whose metrics are still to be set).

Considering the institutional and political changes going on in the course of 2014 (New Commission and new European Parliament arising from the 2014 Spring elections) it remains to be seen if there are political conditions for the final approval of a regime of this kind (also considering the positions stated by various EU Member States in the sense that national acts on the subject should be respected).

Also, the substantive discussion on the merits of some form of separation between commercial and investment banking is far from reaching definitive conclusions or widely shared consensus (empirical research, e.g., is still very divided on the merits of solutions of universal banking and of structural separation). Nevertheless if strict sensu structural separation measures may be considered debatable and even to some extent technically backwards in comparison with more sophisticated discretionary measures that may be contemplated under Pillar II of Basel III, the problem of excessive complexity of banking structures appears to be a real one. The discussion of the January 29th Commission Proposal, even if not leading to a kind of European Glass-Steagall Act for the Twenty First Century, may be a relevant starting point or contribution to address those issues of excessive complexity in an effective manner.

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