Swedish authorities reject banking separation in Liikanen submission

Proposals that include the possible break-up of universal banks into separate retail and investment banking entities were rejected by the Swedish authorities in their response to the Liikanen Report on Tuesday.

The extended consultation period for the EC consultation paper “Reforming the structure of the EU banking sector” ends next week, and responses from Nordic authorities, associations and institutions feature among the many responses made so far.

A joint submission by the Swedish Ministry of Finance, FSA (Finansinspektionen) and Swedish National Debt Office rejects a key point raised by the High-Level Expert Group on Bank Structural Reform (led by Bank of Finland governor Erkki Liikanen), namely a separation of retail/commercial (RCB) and wholesale/investment banking (WIB) operations, along the lines of the Volker Rule in the US and the Vickers Report in the UK.

“The authorities believe that a mandatory structural separation will most likely impede on the possibility for non-financial companies to secure financing and liquidity and will thus have unintended negative effects on the real economy,” the Swedish authorities argue.

“Experiences from the present crisis, as well as from Sweden’s history, show that severe financial crises rarely originate from WIB activities,” they add.

They argue that bank failures have more often involved traditional bank lending, not least to real estate segments.

“Conversely, it could be argued that a universal bank with a broader combination of both WIB and RCB services is generally more resilient to financial shocks,” say the Swedes.

The Danish central bank says in a submission that the case for such structural reform has not been made, while the Association of Danish Mortgage Banks (Realkreditrådet) says that the EU would be better advised not to force its banks to follow regulations that “have been conceived in Basel for big, international banks”.

It says that the mission of the Liikanen Group, of considering ways it can further “the objective of establishing a safe, stable and efficient banking system serving the needs of citizens, the EU economy and the internal market”, could be served if the EU would allow specialised institutions, such as those involved in housing finance, “to do what they are best at”.

The association thus argues that a single rulebook for all EU credit institutions should be reconsidered, with a “European housing finance model” ring-fenced and balanced book institutions, such as Danish mortgage credit institutions, subjected to separate supervision.

“It will be facilitated by their limited scope of activity and the transparent funding system,” says Ane Arnth Jensen, Realkreditrådet managing director, in the association’s submission. “This is not in breach of the level playing field, because they follow a very different business model, which excludes any mismatch risk, and their requirements should be measured out accordingly.

“One could imagine that commercial banks that are active in housing credits would form subsidiaries specialising in these activities. The potential positive effect on European welfare and financial stability would be very considerable.”