Too-big-to-fail banks: will they be restructured, and if so, how much?

The legislative proposal to restructure banks that are too risky for the financial system and would have to be bailed out if they fell into crisis is still highly disputed in the European Parliament (EP) and the Council of Finance Ministers (ECOFIN). The EP’s ECON committee did not vote on a compromise text in March due to very divergent opinions. While left-leaning parties want a benchmark that would lead to automatic separation of the riskiest parts of a bank into a different legal entity than the part responsible for basic banking functions, right-leaning parties want a far less automatic separation and have given supervisors the mandate to assess each bank separately. A compromise text is not expected before late March 2015, and a vote in the ECON not before mid-April.

Progress in the ECOFIN is also proceeding at a slower pace than planned. German and French government amendments foresee minimum reforms, e.g. merely separating and not banning betting on own account (proprietary trading), and providing a good deal of discretion to national supervisors, in line with their national reforms. In contrast, the UK has introduced a much stricter separation, or “ringfencing”, based on the Vickers Commission, and is looking to opt out of any weaker EU law. The Netherlands has been in favour of automatic separation and in its 2014 annual (opens in new window) report(opens in new window) , the Dutch Central Bank just proposed capping the size of European Banks. There are not many national debates about this issue, but FW blogs expressed some critical views (see here(opens in new window) , for instance).