Taming Europe’s Banks

In the month since the European Commission unveiled its blueprint for banking reform, significant resistance has emerged, with some warning that European banks’ competitiveness would suffer, and others demanding stronger mitigation of banking risk. Meanwhile, Europe’s capacity to avoid another financial meltdown hangs in the balance.

PARIS – Last month, the European Commission unveiled its much-anticipated blueprint for banking reform, aimed at reining in risk-taking by the European Union’s largest banks. But the proposal has met significant resistance, with some warning that it would erode European banks’ competitiveness, and others arguing that it is inadequate to mitigate banking risks effectively. How this debate unfolds will have profound implications for the EU’s future.

According to Michel Barnier, the EU commissioner spearheading the reform effort, the proposed measures – including regulatory authority to divide banks’ riskier trading activities from their deposit-taking business, and a ban on proprietary trading by the largest banks – would enhance financial stability and protect taxpayers. But the draft regulation falls far short of the recommendations made by a high-level expert group in 2012, which included an impermeable wall between banks’ speculative-trading business and their retail and commercial banking activities.

Nonetheless, many claim that Barnier’s proposal goes too far. Perhaps the strongest reaction came from Bank of France Governor Christian Noyer, who called the proposals “irresponsible and contrary to the interests of the European economy.”

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