EU Banking Reform

Structural reform of the EU banking sector

On 29 January 2014, the European Commission published its long-awaited proposals for structural reform of EU banks in the form of a draft regulation. The draft regulation suggests the banning of proprietary trading and the separation of high-risk trading activities from banks' core services.

Background to the proposed regulation

In February 2012, the European Commission established a High-level Expert Group ('HLEG') to examine possible reforms to the structure of the EU's banking sector. In agreement with President Barroso, Commissioner Barnier appointed Erkki Liikanen - Governor of the Bank of Finland and a former member of the European Commission – as the chairman.

The Group's mandate was to determine whether, in addition to ongoing regulatory reforms, structural reforms of EU banks would strengthen financial stability and improve efficiency and consumer protection and, if so, to make proposals as appropriate. It published its report in October 2012.

Legislative proposals

On 29 January 2014, following circulation earlier in the month of a leaked version, the European Commission published its long-awaited proposals for structural reform of EU banks in the form of a draft regulation.

In drafting its proposals, the Commission took into account the "Liikanen" report, as well as existing national rules in some Member States, global thinking on the issue (Financial Stability Board principles) and developments in other jurisdictions.

The proposals will apply only to the largest deposit-taking EU banks and groups (although non-deposit-taking investment banks may be included if they are part of a deposit-taking group).

The draft regulation will:

  1. Ban proprietary trading (i.e. trading on own account for the sole purpose of making profit for the bank) in financial instruments and commodities and also owning/investing in hedge funds from Jan 2017.
  2. From July 2018, grant supervisors the power and, in certain instances, the obligation to require the transfer of higher-risk trading activities (such as market-making, complex derivatives and securitisation operations) to separate legal trading entities within the group ('subsidiarisation') with prescribed rules aimed at ensuring that the separated trading entity is economically, legally and operationally separate from the rest of the banking group.

To prevent banks from attempting to circumvent these rules by shifting parts of their activities to the less-regulated shadow banking sector, the structural separation proposed measures were accompanied by proposals to improve the transparency of shadow banking. The Commission's transparency proposal offers a set of measures that aim to enhance regulators’ and investors' understanding of securities financing transactions (STFs)i.

Timeline and details of the proposed new rules

Before the intended 2017/18 commencement, the Commission's proposal may be amended substantially by either or both of the European Parliament and the Council.

The following EC FAQs explain the latest proposals in detail:

To view all accompanying documentation, please visit the Structural reform (Liikanen report) section of the EC website.

iSecurities financing transactions (SFTs) include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions and buy-sell back or sell-buy back transactions. The main SFTs are securities lending and repos.

Last updated: 1 May 2014