EU group proposes mandatory bank ring-fencing
Law firm warns UK could be forced to go along with EU ruling.
If the European Union follows recommendations to require banks to ring-fence their investment arms, making them separate legal entities from their deposit-taking business, the UK could be forced to go along regardless of decisions made by national regulators.
In a lengthy report published yesterday (2 October) by the High-level Expert Group on reforming the structure of the EU banking sector, chairman Erkki Liikanen proposed that all proprietary trading and all assets or derivatives associated must be assigned to a separate legal entity within a banking group.
This separate entity could itself be a bank or investment firm, and would also include any loans, loan commitments or unsecured credit exposures to hedge funds and private equity investments.
Paul Edmondson, partner at law firm CMS Cameron McKenna, warned: “It is clear that UK banking reform is going to be driven by Europe. If Brussels goes down the route of separating bank trading books the UK won’t be able to prevent that being enforced here. What happens now to the proposed UK ring fence?”
However, the group recommended such a separation should only be mandatory if the activities mentioned above made up a “significant share” of the bank’s business or could have a significant impact on financial stability.
Mr Edmondson added: “It is plain that mandatory separation of a trading book may not be the end of the matter for a bank. Recovery and resolution plans may require further activities to be removed from the deposit-taking bank.”