October 2, 2012
A European Commission-appointed panel of experts recommended that banks should separate risky financial activities from their deposit-taking operations, spurring the European Union to launch a six-week public consultation to decide whether to proceed with legislation.
If the EU goes ahead, large institutions considered critical to the financial systems in Germany, Spain, France and the 24 other EU countries could be broken up. Retail banks would be stripped of their proprietary-trading businesses and forced to set up separate investment banks for all derivative positions, loan commitments, unsecured credit exposures to hedge funds, special investment vehicles or private-equity investments.
The panel, headed by Bank of Finland governor Erkki Liikanen, concluded that such a split would transform banks into simpler institutions that are easier to supervise, minimizing the risk of them needing taxpayer bailouts and making customer deposits safer. Only the deposit-taking banks would be allowed to supply retail payment services and each bank unit would be subject to its own capital requirements and oversight.
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