EU ring-fencing and the defence of too-big-to-fail banks

Abstract

Bank ring-fencing is the attempt to separate 'higher risk' banking activities from those activities seen to be more socially useful to the real economy. It is also an important post-crisis regulatory response to the moral hazard dilemma surrounding Too Big To Fail banks. Since national governments bore the worst of the costs of rescuing the largest banks it is therefore reasonable to assume that the authorities would have the greatest incentive to promote tough ring-fence reform. In confrontation with the EU's Liikanen Group and the EU Commission however, France and Germany established a weaker set of national reforms. Our article asks why these national governments pursued a set of laws that were more accommodating to their largest banks than the EU proposals? We argue that France and Germany were defending market-based banking in their largest universal banks. What is most significant though is that they were therefore defending the ability of their largest banks to hold large volumes of trading assets which, in the view of the EU Commission and others, was a major cause of the financial crisis. Our conclusions have important implications for the Varieties of Capitalism literature and suggest that the direction of change in these countries will continue to be towards further marketbased banking, despite the associated costs revealed by the crisis.

Post‐crisis reforms in banking: Regulators at the interface between domestic and international governance

“…Introduced in the UK, ring‐fencing is another approach to simplify banking structures and reduce risk exposure in the deposit‐taking banking entity. The UK reforms require a clear separation of deposit‐taking and investment activities in different legal entities (James ; Hardie & Macartney ; Spendzharova ).…”

The Conundrum of Solving ‘Too Big to Fail’ in the European Union: Supranationalization at Different Speeds

“…Furthermore, national governments were less exposed to negative spillovers in the case of bank structures, because they could take unilateral domestic action to tackle this problem. Indeed, the British, French and German governments passed domestic banking structural reforms in the aftermath of the 2008 financial crisis (see Hardie and Macartney, ; James, ). We show below that these governments sought to minimize their compliance costs and negotiate EU rules compatible with their domestic status quo.…”

“…It is noteworthy that the preferences of the French, German and UK governments strongly resembled those of their domestic banking industry and did not change over time. The French and German governments were concerned about the costs of compliance for banks and the broader negative effects that stricter EU banking structural reforms would have on the viability of the universal banking model, which is very important for continental banking systems (see Hardie and Macartney, ; Howarth and Quaglia, ). The Franco‐German joint response to the public consultation on EU banking structural reforms, stressed that ‘[a]ny structural banking reform must respect the diversity of the European banking system, including the business model of the savings banks as well as the mutual and cooperative banks’ (Joint German and French Response, , p. 2).…”

“…Likewise, the UK government sought to ensure that the forthcoming EU legislation did not add further requirements to the already adopted ring‐fencing reforms (Hardie and Macartney, ; Howarth and Quaglia, ; James, ). This stance resonated with the preferences of major UK‐based banks, such as Standard Chartered, Barclays and the Royal Bank of Scotland (RBS).…”

“…In the realm of bank structural reforms, the proposed EU legislation (not agreed yet) introduces only minimum harmonization of national legislation. Furthermore, it does not create new EU institutions or stipulate a transfer of powers or competencies from the national level to the EU level (Hardie and Macartney, ). Concerning the reform of bank resolution, two pieces of legislation were adopted.…”