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EUROPE'S DEBT CRISIS HAS CAUSED A number of ruptures in
the once-mighty single market. Investors have pulled money out
of hard-hit peripheral countries and fled to the blocs
northern core; the European money market has fragmented along
national lines, making it harder for banks in the periphery to
fund themselves; and regulators are demanding that financial
institutions hold larger capital buffers in each country.
Now the European Union is bracing for the rise of a new
series of barriers this time inside the
regions leading banks. An advisory group led by Finnish
central bank governor Erkki Liikanen last month recommended
that major banks be required to place their proprietary trading
and market-making activities into separately managed and
capitalized subsidiaries. The proposal aims to insulate the
banks deposit-taking and lending operations from their
riskier market activities and reduce the potential need for
future bailouts like those many governments extended during the
global financial crisis of 2008 and 09.
The Liikanen report echoes the findings last year of the
U.K.s Independent Commission on Banking, with a twist.
The U.K. panel, headed by Sir John Vickers, an economist and
head of All Souls College, University of Oxford, recommended
that British banks be required to ring fence their
deposit-taking businesses in separate subsidiaries to protect
them from the risks of investment banking. But however the
fence is constructed by walling off market activities or
walling off retail banking the practical effect is
likely to be similar in terms of added costs and managerial
complexity for Europes big universal banks, analysts say.
But unlike the so-called Volcker rule in the U.S., which will
ban banks from trading for themselves and investing heavily in
private equity, the segmentation proposed by European
regulators will allow banks to continue their full range of
Yet for all its popularity in Europe, ring fencing is
proving very difficult to implement. Liikanens proposal
is only a few weeks old, and its not yet clear whether
Michel Barnier, the EU commissioner for internal market and
services, will introduce legislation to adopt it. The U.K. has
embraced the concept for more than a year, but regulators and
politicians are months away, at best, from adopting legislation
that would put it into practice.
The Vickers commission studied the industry for a year
before proposing its ring-fencing solution in September 2011.
The government of Prime Minister David Cameron endorsed the
commission report immediately, released a white paper in June
outlining how it intended to adopt ring fencing and published
draft legislation last month, but the bill is moving slowly
through Parliament, and lawmakers and regulators are struggling
to define essential features of the new regime. Im
still not clear as to what ring fencing will actually
mean, says Ian Gordon, a banking analyst at Investec
Securities in London. There are more questions than
answers at this stage.