This morning, Jan Pieter Krahnen, Director of SAFE and the Center for Financial Studies, and Michael Kemmer, General Manager and Member of the Board of Directors of the Bundesverband deutscher Banken (Association of German Banks), talked about the future of the universal bank model in the House of Finance. The event was second in a discussion series on structural reforms in the European banking sector. The series aims to debate the report of the Liikanen Commission of which Jan Krahnen was a member.
Krahnen presented the Liikanen group’s recommendations on the issue of universal banking. The report suggests spinning off all trading activities of major banks in order to separate the financial structures between retail business and trading business. “In our view, both businesses should be financially independent and have to take their respective risks by themselves”, said Krahnen. But contrary to public opinion, the Liikanen Report does not call for a “Trennbankensystem” or a breaking up of universal banks.
Michael Kemmer defended the current universal bank model including the trading business. He expressed the fear that disbanding the traditional structures could throw the European banking system off balance. In addition, he warned about incentive and competition problems that could occur as a consequence of the "cliff-effect", resulting from the fact that the recommendations of the Liikanen commission include a size threshold. For example, smaller banks could feel encouraged to expand their trading business. During the discussion with the audience, also possible legal problems with existing shareholders and creditors were touched.
The discussants also disagreed on the timing. In the face of the prevailing problems in the European banking sector, Jan Krahnen said, a fast implementation of the Liikanen recommendations was necessary. In contrast, Michael Kemmer pleaded to first wait for the implementation of the regulatory measures which are only now under way, such as "Basel III" and a common banking authority, and to assess afterwards the need for further reforms.
Contrary to their hopes, however, both discussants fear hasty political decisions. Kemmer said he expected a quick political plan already within the next three months. He especially cautioned against separate action by Germany and France. Jan Krahnen was afraid that governments could agree on a “Liikanen light” solution and only spin off banks' proprietary trading. "This would require a lot of energy but be of little advantage", he said.
