Taming Europe’s Banks

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.”

The positions taken in this complex debate do not align neatly with the traditional left-right political spectrum. Barnier is a center-right Frenchman recommending more public control over private banking activities. (Indeed, stricter banking regulation has been endorsed by all.) And, while Noyer’s position at the central bank makes him independent, he is championing banking-sector autonomy in a country led by a left-wing government. What is at stake is Europe’s capacity to avoid another financial meltdown – one that could be even more devastating than the 2007 crisis.