More German banks will be impacted by EU Liikanen rules splitting retail and investment arms

5 February 2013

A new draft ‘Liikanen’ law proposed to force Europe’s major retail banks to separate retail and investment banking activities is likely to affect more of Germany’s banks than originally envisaged, with potentially adverse impacts on the available technology budgets and shared service capabilities of banks.

According to a German government official, the proposals could impact on up to a dozen of Germany’s largest banks, rather than just two or three as originally thought. At the start of October 2012, a high-level advisory group, led by Bank of Finland governor Erkki Liikanen issued a report to the European Commission (EC) on potential reforms to the European banking system, which would include a strict separation between investment banking and retail banking.

The Liikanen proposals would also require banks to hold more capital against some of their risky businesses and to have debt that could be converted into equity and used to recapitalise an ailing bank. At the time of the report’s release last year, based on the share of total assets held for trading, Deutsche Bank, Landesbank Baden-Wuerttemberg and Commerzbank were identified as the big German banks most likely to be affected by such changes.

A draft bill is now due to go before German chancellor Angela Merkel’s Cabinet on 6 February, however, which would require all the country’s deposit banks to separate out proprietary trading, lending and guarantee activities to hedge funds, as well as any bank high-frequency trading (HFT) activity when such associated instruments and activities exceed €100bn or 20% of the bank’s balance sheet value. According to the government official, the regulations would apply only to banks whose trading and non-trading activities combined amount to €90bn or more, but extend beyond the trio affected by Liikanen.

German banking legislation is particularly in focus ahead of the country’s federal elections, scheduled for 22 September. Merkel is being challenged by the Social Democrats leader, Peer Steinbrueck, who first proposed a separation of German bank’s investment banking and retail operations and has criticised the government’s draft law as inadequate.

The developments in Germany coincide with UK chancellor George Osborne’s warning that Britain’s ‘big four’ banks face a “complete separation” of their retail and investment operations if they flout the new UK ring-fencing rules designed to separate these activities into separate operational units.

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