Bank Reform In Europe

The global financial crisis has dubious banking practices at its core and when some banks got into the kind of trouble that would send any company to the wall, the tax payer had to step in and foot the bill because they were deemed “too big to fail” by governments. There is widespread concern that excessive risk-taking by the investment arms of some banks could put the (often modest) assets of retail banking customers at risk – this is politically unacceptable.

The EU wishes to see closer fiscal union within the Eurozone and this will require a greater degree of harmonisation of banking within the bloc and probably beefed up responsibilities for the ECB. As part of this drive, an expert group, led by the Governor of the Bank of Finland was asked to see if structural reform of banks was necessary to avoid a future European banking crisis.

The group concluded that the investment arms of banks should be split away from retail banking activities. This is in line with moves underway in Britain and the USA aimed to achieve the same ends. The experts suggested that it may not be sufficient for the investment and retail arms to stay within the same banking group which would be the easiest measure to achieve. They also advocated that bankers’ bonuses should be engineered so that they have a direct financial interest in the well-being of the bank – for instance by paying part of the bonus in bonds.

Another suggestion to emerge from the group was that banks should have more capital on hand to cover property loans – the sub-prime fiasco was the trigger for the global financial crisis, after all. This is analogous to private borrowers being asked to provide larger deposits to secure mortgages in the current economic climate.