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Erscheinung:10.12.2012 08:26 AM | Topic Recovery/resolution Interview with BaFin's Chief Executive Director Raimund Röseler

“The Liikanen Report takes a holistic approach”

For some time, considerable efforts have been made at global, European and national level towards better equipping banking systems to deal with a crisis. Attention is currently focused primarily on the Liikanen Report and the G20 decision to require global systemically important banks to develop recovery plans.

“How should the European banking sector be structured in future?” That was the Commission's question to an expert group chaired by the governor of the Bank of Finland, Erkki Liikanen. The most important proposal is that retail banking activities should be segregated from trading activities within universal banks. BaFin's Chief Executive Director Raimund Röseler gives his perspective in this interview.

Mr Röseler, how do you see the Liikanen Report's proposals currently being discussed at EU level and in the member states?

The report of the group of experts chaired by Mr Liikanen is a thorough and in-depth study of key aspects of financial market regulation and the “too big to fail” problem. The “too big to fail” problem has still not been solved despite all the work regarding recovery and resolution plans. Instead, both the size of the banking sector and concentration within it has grown since the start of the crisis. The proposals by the Liikanen group of experts are an important contribution to tackling this problem. It is well worth considering the proposals in detail and without any bias. Difficult questions need to be answered before we can set about implementing the proposal. But that doesn't mean that we shouldn't look for answers to these questions.

The report centres on the proposal of segregating trading activities from traditional banking operations without breaking up universal banks. Does that go far enough to mitigate the risks?

I don't think that we can eliminate the interconnectedness in the banking sector just by implementing this proposal. The risks won't automatically disappear just because we segregate individual business activities. That's why the proposals also want to ban credit relationships with certain financial market players such as hedge funds. However, the segregation of trading activities from the retail banking business could contribute to reducing the complexity of large banks. Incentives for the banks to improve the transparency of their structures could also be created. This makes the Liikanen proposals an attractive alternative – particularly as the report takes a holistic approach.

What do you mean by that?

The proposals don’t stop at a segregation of trading activities from the rest of a bank's operations. This measure is only a supplementary element, which is closely linked to higher capital requirements and improved corporate governance, and also to the future resolution regime. The supervisory authorities would have to prepare efficient and credible resolution plans and they would get considerable ex-ante powers of intervention – up to and including economic and organisational separation of critical business activities. The recovery plans which systemically important banks will soon have to submit will help us here.

The G20 has only required global systemically important banks to do this. Why does BaFin want domestic systemically important institutions to submit recovery plans too?

We view recovery planning as a type of extended risk management which better equips banks against crises. If credit institutions and supervisory bodies consider ahead of time what will need to be done in an emergency, they can then act more quickly and effectively. That's why it's important for all the major German banks to submit recovery plans for our critical review. Together with the Bundesbank, BaFin has drafted a circular that will help the institutions to develop their recovery plans. Market participants were invited to comment on a draft in November.

The Liikanen Report contains not only the approaches mentioned above, but also a proposal on remuneration requirements. What do you think about that?

The proposal is largely within the scope of what CRD III requires and what is also currently being discussed for CRD IV. This is true, for example, of linking variable remuneration to fixed remuneration. As soon as the European requirements, in particular those of CRD IV, have been finalised, they will be fully transposed into German legislation. One element is new: the expert group's proposal to pay a fixed, mandatory component of variable remuneration in the form of bail-in instruments. This should put a stop to “gambling for resurrection,” i.e. institutions close to insolvency using high-risk strategies in a last-ditch effort for recovery. In addition, such remuneration in instruments could provide incentives to employees that are more like those of an owner with a long-term interest in the businesses’ sustainable development. This is a welcome step. However it's important that the incentives should be carefully calibrated, particularly as the bail-in instrument has not yet been finally decided.

The proposals are on the table – what is the next step?

The wealth of good ideas should now be implemented with a view to what we want to achieve. The goal must be to make the system more secure. From my point of view, it is right that the report focuses on the large institutions and the firms with a high proportion of trading activities. The stricter requirements will thus only apply to institutions which are so large and interlinked that they could present a danger to financial market stability. Most medium-sized and smaller institutions, on the other hand, will not be impacted.

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