World Future Council response to the public consultation of the European Commission on the structure of the EU banking sector
The structural reform of banks cannot cope efficiently with severe problems such as high leverage in the financial system and excessive risk taking. There is neither evidence nor plausibility that the reduction of intra-group subsidies through separating deposits from trading activities will lead to shrinkage of the financial sector. Banks refinance themselves primarily, if not solely, through lending activities within the financial sector. Therefore procyclical and opaque credit intermediation chains, including the re-pledging of securities and overly complex financial innovations, make appropriate risk premiums impossible.
De Larosière has already pointed out:
“Separating or ring-fencing retail or market activities does not improve their risk management nor does it eliminate excessive risk taking – even in traditional retail activities – or the possible involvement of banks in the formation of asset bubbles. It does not address investment banking or market risks either, which may still require a bailout if they turn to be systemic.”
(De Larosière, Jacques (26/9/2012); Seductive simplicity of ring-fencing, in: Financial Times.)
Instead, key to addressing these problems are debt brakes for the financial sector, a preventive testing of financial innovations (finance TÜV) and a scalable financial transaction tax to slow down systemically risky volatility.