The state of economy wins big European banks reprieve from break-up

It is more than four years since leaders of the top 20 economies (G20) pledged after the collapse of Lehman Brothers to make the financial system safer through sweeping changes.

But talk that reforms would entail splitting up banks – to hive off riskier businesses and ensure no firm was “too big to fail” – has cooled as policymakers fret that this would make it harder for lenders to supply credit to sluggish economies.

As a result, Germany is opting for modest reform by capping risky trading activities rather than asking for them to be divested, whatever the circumstances, according to a draft law.

France also wants to curb risky trading, while Britain plans to go further and force its banks to wrap their deposit-taking arms with extra capital to survive shocks that might come from the investment banking side of their business.

This idea was backed by Finnish central bank governor Erkki Liikanen to implement at the European Union level, but the bloc’s financial services chief Michel Barnier was reported yesterday to be against doing anything that could harm banks’ ability to serve the economy.

The dilution of such measures, creating a ‘Liikanen lite’, is representative of a more widespread rolling back of what had at one stage been seen as more deep-seated changes.

The Basel Committee of banking supervisors from across the world agreed this month to ease their rule requiring banks to build up cash liquidity buffers from 2015, saying they did not want to hamper lenders from helping recovery.

The G20’s focus has already shifted from regulation to spurring growth, with few voices warning this risks allowing banks to get off scot free from changing the way they operate.

The European Union and United States, representing the bulk of global capital markets, have yet to put in place formally all the bank capital and derivatives rules they and other world leaders agreed they would by last month. “Maybe in reality the detail is difficult and there are persistent economic conditions which favour taking a slightly more measured approach such as with liquidity,” said David Hiscock, a senior director at the International Capital Market Association, an industry body.

“These are modifications to the G20 programme, but no one has said we should rip all this up.”

In any case, a disconnect has emerged between introduction of rules and what is happening on the ground, as banks are already taking steps to get ahead of changes.

“Regulators are not waiting for the rules to be in place to enforce them as we are seeing a fast-forward of supervisory behaviour,” said Etay Katz, a financial lawyer.

The Basel III accord approved by world leaders was due to come into force this month and require banks to triple their pre-crisis capital reserves to at least 7 per cent by 2019.