In October 2012 a group of bankers chaired by Liikanen presented a report on the structure of banking to Internal Market and Services Commissioner Barnier. This so-called 2012 Liikanen Report recommended a mandatory legal separation of certain particularly risky financial activities from deposit-taking banks within a banking group. According to an article in The Financial Times titled ‘‘Barnier rule’ looks like a shadow of what it set out to be’ the plans of the European Commission as presented 29 January 2014 are a weak reflection of the original recommendation. Although the European Commission does intend for a ban on trading on own account for the sole purpose of making profit for the bank, there will be no mandatory separation.
The proposal does grant (national) supervisors the power and, in certain instances, ‘the obligation to require the transfer of other high-risk trading activities (such as market-making, complex derivatives and securitisation operations) to separate legal trading entities within the group’. However it is not recognised that the public interest in the savings function of banks could be lost if the risky activities are not separated from these interests. Under the UK Banking Reform Act, as proposed by the Independent Commission on Banking in 2011, the retail and investment banking 'ring-fence' will be required from 2019. Inspired by this proposal, Huijgen and I suggest the (re-)introduction of a state-owned savings (and loan) bank that safeguards the public interest of savings banks. This because private banks as legal entities are primarily guided by their articles of association and these normally do not enclose this public interest as a specific goal. It is also good to keep in mind that a mere inclusion of the public interest in the articles of association would not guarantee the safeguarding of this public interest because this public interest would not outweigh other objectives enclosed in the articles of association. This is at least true in the Netherlands since the general framework of Dutch company law does not grant the safeguarding of the public interest a higher status than other interests of a company. Hence in the balancing of different interests, the public interest does not necessarily outweigh other interests such as, for example, maximising profit.
The European Commission hopes to prevent, for example, systemic risks by extensive monitoring before it is concluded that a separation is needed. However, the possibility of a separation would not have the same effect on the emergence of risks as a mandatory separation beforehand. The fact thus remains that no real commitment for a separation has been made, at least no full mandatory separation before risks occur anyway.