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Unser Zeichen, Sacharbeiter
BSBV 26/Dr. Rudorfer/of
Re: Consultation on Reforming the structure of the EU banking sector
The Division Bank and Insurance of the Austrian Federal Economic Chamber representing the
entire Austrian banking industry welcomes the opportunity to comment on the
“Consultation on Reforming the structure of the EU banking sector”:
Key remarks
We take a sceptical view of banking structure reforms aiming at the separation of
banking activities. In our mind, a separate banking system will not increase finance
stability as the stability of the financial system is not linked to banking structure. The
financial crisis revealed that both institutions with a broad business model and
specialized banks/ investment banks were affected.
A separate banking system does not offer effective protection against contagion effects
in the case of a crisis, this can better be achieved by an effective and efficient resolution
regime for institutions (preserving at the same time the functions essential for financial
system stability).
Furthermore, the banking structure of a country and its economy are connected. The
predominant Austrian universal banking system is the adequate banking structure to
support the needs of the export-oriented, medium-sized Austrian businesses – a part from
loans, it is standard for many universal banks to offer “investment banking products”
such as liquidity management, payment services, hedging of foreign exchange, credit and
interest risks of clients, syndicated loans and the issue of bonds.
Reply Question Nr 1
To what extent are the current and ongoing regulatory reforms sufficient to ensure a
stable and efficient banking system and avoid systemic crises?
Considering the ongoing financial and debt crisis we welcome all efforts to stabilize the
banking system. We are also of the opinion that there is already substantial financial
regulatory reform taking place specifically addressing various dimensions of financial risks and
enhancing financial stability to an important extent. The current initiatives of banking reform
aim to tackle many of the problems that have been contributing to the crisis and have been
addressed by the FSB and the BCBS as a consequence of the lessons learnt. However presently
we rather see the danger of too many activities in the banking sector legislation which due to
time pressure might have unintended consequences such as unintended deleveraging or
increased refinancing costs.
The CRD IV / CRR will implement new capital requirements to all European banks and is
intended to considerably enhance the stability of banks in the EU. The Basel III Accord will
certainly contribute to a more sustainable and stable banking structure in Europe.
It should be stressed that it seems consequently appropriate to first implement upcoming
legislative rules, like CRDIV/CRR, the amendment of the Deposit Guarantee Directive, Crisis
Management, just to name the most important, before taking further measures into account.
And we must not forget that some reforms have already taken place, like the new European
supervisory architecture.
Indeed, we consider that it would be stringent to concentrate on the implementation of the
current or upcoming regulation which still has to be defined and refined. As a result and once
adopted, we deem it appropriate to have a thorough impact analysis of the coherent financial
architecture to identify then possibly still existing shortcomings as the next step. We would
therefore plead for a step-by-step approach.
However, we are concerned about the cumulative impact of the comprehensive reform
package under way, not just on one country or one bank but specifically on the CEE region as
a whole.
Moreover, the upcoming proposal for a Directive on Crisis Management could be the key for a
controlled resolution of large complex cross border institutions and therefore for a stable
banking system as a whole. Institutions and authorities will be required to draw up recovery
and resolution plans for the event of a material deterioration of their financial situation.
Furthermore the Crisis Management Directive provides resolution measures when an
institution fails and is likely to fail and will enable public authorities to take mandatory
measures in case of resolution. We think that the Crisis Management could be a further step
to ensure a safe and stable banking sector as it provides effective measures in case of failure
whereas in normal times credit institutions are free to choose the most efficient structure
and business model.
Banks which have invested in a long-term presence in the CEE region, have a safe banking
model consisting of deposits and loans for private households and SMEs (classic basic retail
banking). The CEE is the only real growth area within the EU, but it is heavily dependent on
loans, infrastructure and project finance. Negative repercussions of regulation on the
economic potential of this promising region should be avoided, due to the higher dependency
on bank loans than in Western Europe (Western Europe: 70% credit financed 30% bond
financed, CEE: over 85% credit financed, US: 25% credit financed) the impact on that region
will be even higher than for Western Europe.
Reply Question Nr 2
Which structural reforms would improve the safety and efficiency of the banking system
in the EU in the near term? In the long term?
Imposing a regulation on business models/banking structures does in our view not represent
adequate measures to prevent financial crises, contagion effects and the use of taxpayer
funds – these goals can best be achieved by an adequate management of risks, a solid
supervision and an efficient resolution regime. Instead of limiting entrepreneurial freedom by
legal interventions, incentives for a better identification and measurement of risks should be
Modern, continental European banking business is characterized by a close linkage of
customer business and investment banking services, whereby investment banking products
serve predominantly concrete customers’ needs, e.g. the hedging of long-term loans with
fixed interest rate, capital guarantees for investment products etc.
At the European level there a several regulatory reforms in negotiation which aim to prevent
systemic risks and try to make the European banking system more safe. We are of the opinion
that the ongoing regulatory reforms (CRR/CRD IV, Crisis Management-Directive, more
transparency for rating agencies) should be first finalised and after a certain period of time
the impacts of these new regulatory standards should be evaluated before a structural reform
is hastily decided. Although the Commission provides in its proposals an impact assessment for
the future effects of its legislation, the actual consequences of certain provisions may only be
evaluated after application of this provision in a certain period of time.
Moreover we are of the opinion that there is still a lack of legislation for not regulated
financial activities (shadow banks). While in the legislative bodies had focused on the regular
banking sector and made different proposals for bank regulation, there are still not sufficient
rules for the shadow banking sector. Shadow banking has become an integral element for the
systemic risk of the financial sector but still these not regulated financial firms and hedge
funds are not seriously touched by the latest rules.
As long as the regular banking sector remains strongly regulated and there do not exist
comparable rules for shadow banks a safe financial system remains an illusion. Regarding the
trading volume in the non-banking sector it is not comprehensible that this sector is still
insufficiently regulated. Furthermore we see in this unsatisfactory legislative situation the
serious threat that certain banking activities will migrate to the shadow banking sector.
Therefore we think, before reflecting upon any structural reforms, that an appropriate
legislation for shadow banking can contribute to a stable financial system in the near and the
long term.
We should also take into consideration the cost side and the level playing field issue.
We have to take into account that European banks compete at an international as well on a
local level with banks of third countries. To establish a fair level playing field is an effective
sensitive issue in the context of possible new regulations.
Reply Question Nr 3
What are your views on the structural reform proposals to date (e.g. US Volcker Rule, UK
ICB proposal)? What would be the implications of these proposals on your institution and
the financial system as a whole
General remarks
The Vickers Report approach may be suitable for the UK banking market, but it does not take
into account continental EU banking markets’ specificities. The same is true for the Volckers
The European banking structure is based on the universal banking model which entails a
comprehensive provision of banking services and a close relation with customers (loans,
payments, financial advice, insurances, private banking). The European model of universal
banking has survived the crisis quite well compared to other models that focus much more on
pure investment banking. We strongly belief that the essence of the universal banking model,
the close relation with customers, should remain the same in any further changes that are
applied to the EU banking system.
Introducing extremely high capital standards for retail banks, which provide the “safer” core
banking business, however, produces inverse incentive structures and inefficiencies and may
harm financial stability. Banks may be more likely to engage in investment banking than in
vital banking services, which contradicts the overall political goal to refocus banking more
substantially on their genuine role.
US Volcker Rule and the Vickers Report refer to classical group structures where the group
holding company is publicly quoted. However the structure of the EU banking sector is diverse
and not homogenous. In Europe you find different banking models like banking groups, saving
banks, mortgage banks and cooperative banks.
All types of banks have their own structure and are not comparable to the others.
Most credit institutions are applying the so called “all-finance” concept for its customers.
This traditional client-focussed continental European universal banking provides that every
single credit institution provides retail services (deposits and loans) and to a lesser extent
ancillary services to customers such as derivatives, interest rate swaps, real estate financing
or export financing. A bank that provides these services in one entity is more cost efficient
for customers, can better diversify its risk exposures and the customers benefit of this onestop-shop model.
The diversity of the structure of European banks and the universal bank approach of most of
European banks are a strong advantage compared for example to markets with a more
fragmented banking sector and where, as a consequence, investment banks have a bigger
impact on the economy.
We are seriously concerned that the Liikanen group will focus on the “banking sector”
without differentiation. The structure of a bank depends on the business model, the size and
the risk profile of the institution in question. Between the European banking and more
fragmented sectors as well as among European Banks there are important differences
regarding business concepts and company models.
A “one-model-for-all approach” cannot be the solution for Europe. Consequently we do not
think that there is a general concept on how a banking group should be structured in Europe.
A separation of retail/commercial banking from investment banking will endanger the service
capability of the continental European banking sector, have a negative effect on the
fulfilment of customers’ needs and favour the renationalization of the banking sector.
In its argumentation the Independent Commission of Banking was clear that the prime driver
of the ring-fence of UK banks has less to do with making banks safer and more to do with
resolving them if they fail. The question is, however, the resolvability of what is outside the
ring-fence – in other words, the complex cross-border investment banking business. Neither
the Volcker Rule nor Vicker’s deal with that issue.
From our perspective the issue of ring-fencing and resolution of ringfenced banks should be
kept separate due to the fact that these are two different issues which should not be
confused in that sense that the ring-fencing discussion should be driven by the resolution view
only neglecting negative effects in going concern situations.
If the ultimate objective of regulatory reform is to get to a position where banks are allowed
to fail, and can fail in an orderly fashion, also after implementation of Vickers or Volcker this
objective would be still far away.
Consequences of the Vickers Report
As a consequence the approach of the Vickers Report would break up the entire structure of
banks in Europe and would delete well experienced structures in Europe.
Moreover according to the Vickers Report banks could pursue all permitted services only
within the EEA. This provision could cause serious harm to cross-border banks which are also
active in non EU Countries. These banks would have to sell all of its entities outside the
European Economic Area even if they only engage in permitted, ringfenced activities. This
approach of the Vickers report makes large parts of the traditional client-focussed
continental European universal banking largely impossible since it would de facto prevent
banks to provide business with non-European Economic Area-subsidiaries or trade and export
financings requested by its clients.
The implementation of the Vickers Report would result for example in a severe instability of
the liquidity flows within decentralised sectors, as cooperative banks would be forced to
place surplus liquidity not inside but outside the Sector. This would, inherently, increase the
risk exposure of the these sectors.
Volcker Rule
The implications of a possible regulation such as the so-called Volcker rule (a part of the
Dodd-Frank Wall Street Reform and Consumer Protection Act) is more difficult to predict
because the concept as discussed in the US is very complex and foresees numerous not yet
specified exceptions. The cornerstones of the Volcker rule are as follows:
Commercial banks are prohibited to conduct ‘trading a covered financial position in a trading
account’. There are a number of exceptions (which are unclear and must still be defined) –
however, many banks (like many other banks in Europe) conduct some sort of trading
activities part of which might have to be ceased under a regulation of the nature of the
Volcker rule.
The Volcker Rule prohibits a banking entity from sponsoring or retaining as principal an
ownership interest in a covered fund (whereby covered funds include issuers defined as
“investment companies” under the Investment Company Act of 1940 (some exemptions) and
commodity pools. As it looks, this would hamper the banks’s activities with respect to its
asset management companies or, at least, to make investments (eg as seed money) therein.
Indirectly, experts estimate that the Volcker rule will cause reduced market liquidity, wider
bid-ask spreads and greater volatility. Ultimately, this exposes any banks holding traded
positions to possible mark-to-market losses.
Reply Question Nr 4
What are the main challenges of your financial institution as regards resolvability? Are you
implementing structural changes to your institution in the framework of your recovery
and resolution planning?
The main challenge for the Austrian banks is the financial burden of ongoing reforms. More
capital, more liquidity, an ex-ante deposit guarantee fund and the upcoming resolution
system will have a substantial impact on the cost structure of banks and on their ability to
lend to the real economy.
Regarding the financing of a proposed resolution fund our position is the following:
Contributing to a European or national resolution fund while at the same time being subject
to a bank levy is unacceptable. Thus it has to be clarified that all bank levies within the EEA
have as a first step to be replaced by the bank’s contribution to a resolution fund.
We are following the ongoing discussion, additionally there is a move of the Austrian regulator
to develop a basis already in the current year for the recovery and resolution planning of the
larger banks. There are preparations of the regulator to develop templates which are still
going on and are not finished at the moment. As there is still significant uncertainty about the
outcome it is hard to predict future developments.
Yours sincerely,
Dr. Herbert Pichler
Managing Director
Division Bank & Insurance
Austrian Federal Economic Chamber

Austrian federal econom chamber