EU banks must separate deposits from high-risk trading: experts

The report on reforming the structure of the banking sector across the European Union single market was presented to EU Financial Services Commissioner Michel Barnier, and could be taken up in legislative proposals.

"This report will feed our reflections on the need for further action," Barnier said in a statement. "I will now consider the next steps, in which the Commission will look at the impact of these recommendations."

The conclusions by the group of banking specialists chaired by Bank of Finland governor and ex-European Commissioner Erkki Liikanen were published a day before the European Banking Authority issues its final report on banks' implementation of plans to establish temporary capital buffers.

More widely, it was released as European leaders argue over how fast to progress towards eurozone and EU banking-market integration, and how deep that should go -- a technical debate caught up in political disagreement over bailout solidarity among key eurozone governments.

The experts said the Commission's proposed Bank Recovery and Resolution Directive -- one of three key spokes identified in so-called "banking union" alongside cross-border deposit guarantees and top-down supervision -- was "an essential part of the future regulatory structure."

Of the key recommendation for legal separation of activities, Liikanen said in a letter summarising conclusions: "The analysis conducted revealed excessive risk-taking -- often in trading highly-complex instruments or real estate-related lending -- and excessive reliance on short-term funding in the run-up to the financial crisis.

"The risk-taking was not matched with adequate capital protection, and strong linkages between financial institutions created high levels of systemic risk."

Despite some members advocating a softer approach, he said "the group's conclusion is that it is necessary to require legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group."

The aim is to ring-fence the "socially most vital parts" of the banking system, namely deposit-taking, "and to limit the implicit or explicit stake of (the) taxpayer in the trading parts of banking groups."

He said this would itself "facilitate market discipline and supervision and, ultimately, recovery and resolution."

Liikanen suggested that this would not be required unless more than 15-25 percent of banks' trading activities were in the high-risk sector, or that volumes were worth less than 100 billion euros.

There are about 8,000 banks across the EU.