Abstract
One of the problems perceived to be at the heart of the global financial crisis was an amalgamation of various commercial and investment banking activities under one entity, as well as the interconnectedness of the banking entities with other financial institutions, investment funds, and the shadow banking system. This paper focuses on various measures that aim to structurally separate the banking entities and their core functions from riskier financial activities such as (proprietary) trading or investments in alternative investment funds. Although banking structural reforms in the EU, the UK, and the US have taken different forms, their common denominator is the separation of core banking functions from certain trading or securities market activities. Having reviewed the arguments for and against banking structural reforms and their varieties in major jurisdictions, including the EU, UK, US, France, and Germany, the paper argues that a more nuanced approach to introducing such measures at the EU level is warranted. Given the different market structures across the Atlantic and the lack of conclusive evidence of the beneficial impact of banking structural reforms, the paper concludes that the withdrawal of the banking structural reforms proposal by the European Commission has been a prudent move. It seems that in the absence of concrete evidence, experimenting with structural reforms at the Member-State level would be less costly and would provide for opportunities for learning from smaller experiments that could pave the way for a more optimal approach to banking structural reforms at the European level in the future.
Highlights
The financial market turmoil of 2007–2009 triggered a process of financial regulatory reforms, the effects of which are yet to be fully appreciated
Most of the above-mentioned costs can be put into two main categories: the costs arising from the impact of structural reforms on economies of scope and diversification and the costs arising from the impact on the banking business models and profitability
The only conclusion that may be derived from the above observations is that it is believed that in the absence of ‘any strong evidence in favour of conglomeration, structural reform is a good way to respond to interconnectedness in financial markets’,241 as the evidence is not clear that imposing structural reforms can contribute to financial stability, so adequate care must be taken in introducing such measures, in particular at the EU level
Summary
The financial market turmoil of 2007–2009 triggered a process of financial regulatory reforms, the effects of which are yet to be fully appreciated. The core banking functions involve maturity, liquidity and credit transformation.. Banks provide liquidity to the real economy by providing firms with liquid loans (credit).12 These functions give rise to maturity and liquidity mismatches, which are often at the heart of banking crises. The non-core banking functions (investment banking activities) are by their nature opaque and often speculative, which make their monitoring and supervision rather challenging. The policy objective from banking structural reforms is to protect the systemically important core banking functions from the risks originating from the more speculative but non-systemic investment banking activities. It introduces the concept of structural regulation, puts the banking structural reforms into the broader concept of structural regulation and discusses its necessity within the banking context.
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