30 Jan 2014

Krahnen: Barnier proposal is a step in the right direction

In an article in the German daily “Frankfurter Allgemeine Zeitung” on 30 January, Jan Pieter Krahnen, Professor of Finance at Goethe University, considers the legislative proposal by European Commissioner Michael Barnier to be a step in the right direction.

In an initial assessment, Krahnen, who was a member of the Liikanen Commission, sees the proposal on structural reforms of the EU banking sector, presented on 29 January, as appropriate to bring the effects of the several regulatory innovations, like Basel III or the banking union, into a coherent framework.

In the article he argues: “At first glance the present proposal seems restrained. With regard to scope (only proprietary trading is affected) it falls short of the recommendations made by the Liikanen Commission. But if we take a closer look, we see that the proposal could definitely be effective. It depends on the implementation by the supervisory authority. The proposal delegates the responsibility to prevent systemic risk from proprietary trading to the supervisory authority.”

Krahnen expects that the supervisory authority and affected banks will have a strong interest in transparent and binding requirements for risk assessments by the supervisory authority. He supposes that “the changes in the operations in the trading divisions implemented by banks will prove close to a de facto separation – even if a separation order is not made.” Against this background, a corresponding law could prove to be appropriate to lead to changing business models and corresponding organizational structures in banks.