Natixis comments on Liikanen Commission report into banking activities
Analysts at Natixis say that the main risks to banks in the wake of the Liikanen Commission report remain the calculation of market RWAs and the weighting of property loans.
The Liikanen Commission recommends placing trading activities in separate legal entities, but does not really call into question the universal banking model. The revised calculation of market RWAs and property exposures is still the main uncertainty weighing on banks.
The Liikanen Commission, headed by Bank of Finland governor Erki Liikanen (pictured), was set up by EU Internal Markets Commissioner, Michel Barnier, to examine whether it would be pertinent to bring in additional regulations governing the way in which banks are structured in a bid to reduce systemic risk.
The commission published its report yesterday. It is recommending five main measures, one of which would involve placing trading activities in separate legal entities. This proposed reform, which is a long way off being adopted, does not call into question the synergy allowed by the pooling of liquidities at universal banks. However, it could highlight substantial flows between the various activities of universal banks, and first and foremost those in France (BNPP, SG and CASA) as well Deutsche Bank.
The commission recommends separating out all trading activities (proprietary trading AND market-making) and hedge fund/venture capital financing activities. It would be left up to the European Commission to decide on the threshold above which the separation of such operations would be mandatory; the Liikanen commission envisages a separation in the case of banks where assets taken at fair value (trading + AfS) amount to more than €100bn or more than 15%-25% of total assets. According to our calculations (figure 1 and 2), the main banks in our sample should be above these thresholds. The trading entities would be bound by sector regulations in their own right.
The commission also wants to see the creation of rescue plans and crisis resolution plans at each bank, as well as an increase in loss absorption capacity through the introduction of CoCos (contingent bonds convertible into shares in the event of a crisis) and improved governance and oversight of banks. It is also calling for an indepth review of: 1/ the calculation of market RWAs, which tend to vary too significantly; and 2/ the weighting of property loans. These loans are at the root of a string of major crises; the objective would be to take better account of loan-to-value (LTV) and loan-to-income (LTI) criteria.
It could be tricky to have these recommendations adopted, given that they differ from the proposals made by the Vickers Commission regarding legal set-up (separating out trading activities vs. domestic retail activities). The European proposals are supposed to be applicable to the EU as a whole, including the UK.