Little restructuring of too-big-tofail banks by the European Parliament and Council of Ministers

On 22 December 2014, Gunnar Hökmark, the European Parliament’s rapporteur for the EU’s reform to restructure too-big-to-fail banks, released his draft report(opens in new window) . The report will amend the Commission’s proposal. The Parliament’s responsible committee (ECON) will vote on the report on 23 March 2015 and a plenary vote is indicated for 28 April.

According to Finance Watch(opens in new window) , the Hökmark amendments would prevent separation between basic banking and speculative banking activities because they would “make bank structure reform ineffective” and “substantially weaken the objectives, scope, definitions, mechanism and sanctions in the Commission’s original proposal.”

The amendments would have the following effects, amongst others:

• The bank restructuring law will not be applied equally in all EU countries because national authorities will be allowed to decide on important differences.
• Many fewer banks would be covered by the law, possibly only five in the entire EU.
• A separation of a bank would only be required in cases in which the resolvability of a particular bank is threatened, but not if there is a general threat to financial stability.
• The risky relations between banks and investment funds, including speculative hedge funds, would be relaxed.
• Derivative trading would be separated less from basic banking, which would mean higher risks for the part of the bank that is to be bailed out in times of crisis.
• Rules reducing the risks from large credits to other banks would be significantly weakened.
• Prohibition of trading and speculation at the bank’s own risk (“proprietary trading”) would be significantly weakened.

The ECON committee is under heavy pressure from the financial lobby. Therefore, the Hökmark draft raises concern that the committee will buckle under this pressure. The parallel deliberations at the Council of Finance Ministers might weaken the proposed law further, as different governments have openly voiced opposition to the further restructuring of banks. The entire law is even at risk of being withdrawn.