–Adds Comments By Michel Barnier In Last 3 Paragraphs

BRUSSELS (MNI) – A high-level expert panel has advised EU
regulators to force large universal banks to separate important parts of
their securities trading operations from their consumer and corporate
lending activities and suggested limits to bankers’ bonuses.

In a report presented to the European Commission on Tuesday, the
expert group, chaired by Finnish central bank governor, Erkki Liikanen,
said that the EU should follow some of the principal bank-sector reforms
already being pursued by Britain and the U.S. and ensure that banks’
riskier activities are cordoned off from their “socially most vital”
functions such as deposit taking and lending.

Business that should be legally isolated and independently
capitalised include not just banks’ proprietary trading desks but also
their market-making activities on behalf of clients and prime brokerage
business units, which service hedge funds. Such separated trading units
should also be restricted from paying dividends if they fail to meet
certain capital requirements.

Risk-management trading for corporate clients, by contrast, need
not be separated.

Supervisors should only consider ordering mandatory separation for
banks that have a relatively high 15%-to-25% proportion of their assets
of tied up in such business lines, or an absolute capital commitment of
E100 billion, the Liikanen group recommended.

The recommendations do not spell the end for the universal banking
model, the report’s 10 authors, which include central bankers,
regulators, economics, business leaders and former bankers, argued.

“Separation also aims to maintain banks’ ability efficiently to
provide a wide range of financial services to their customers,” says the
report. “For this reason, the separation is allowed within the banking
group, so that the same marketing organisation can be used to meet the
various customer needs.”

“The proposal addresses the core weaknesses in the banking sector,
while retaining the key benefits of the universal banking model and
allowing for business model diversity,” says the report.

Addressing EU efforts to create a legal framework to deal with
failing banks that aims to ensure that banks’ shareholders and
creditors, rather than taxpayers, pick up most of the bill, the Liikanen
group recommended that the proposed “bail in” requirement being debated
by lawmakers be limited to only a certain category of debt instruments.

“A clear definition would clarify the position of bail-in
instruments within the hierarchy of debt commitments in a bank’s balance
sheet, and allow investors to know the eventual treatment of the
respective instruments in case of resolution,” the report says.

Attacking the executive remuneration culture in the banking
industry, the report’s authors also argued that a share of bankers’
bonuses be made up of such “bail in” eligible bonds and that bonuses
should not exceed regular pay. Banks should also be forbidden from
paying out more in bonuses than dividends.

The Liikanen report also suggested that EU regulators examine
banks’ property lending practices, suggesting that the current level of
capital committed to the business was low compared to the losses
incurred by real estate crises.

EU Internal Market Commissioner Michel Barnier said the Liikanen
report would form the “cornerstone” of the Commission’s work but that
Brussels would first launch a six-week public consultation, followed by
a full analysis, before taking the recommendations any further.

The Commission would also have a central role to play in
“calibrating” some of the recommendations, such as when authorities
should step in to separate certain businesses, Barnier said.

Any legislation based on the report’s proposals would be written to
apply to all the EU’s 27 member states and would likely come before next
summer, he said.

–Brussels Bureau, +324-952-28374; pkoh@mni-news.com
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