Reforming the structure of the EU banking sector

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Screen Shot 2013-09-02 at 15.56.57In May this year, the EU Commission published “Reforming the structure of the EU banking sector”, a consultation paper which represents a follow-up to the recommendations made by the Liikanen High-Level Expert Group (the “HLEG”) in its report of October 2012, setting out different options for structural reform of the European banking sector (structural reform proposals similar to ring-fencing the retail bank operations of large banks in the UK).


Our sister organisation in Germany, Monetative, have submitted their response to this consultation paper.

Here you can read the Monetative response in German.

Screen Shot 2013-09-02 at 16.22.21Here you can read their response translated to English.

Many thanks to our volunteers Martin Ternes and Simon Robinson for the translation!



And below you can read also “translation into plain English” by Michael K., guest author:


The story so far:
Some forces in the EU are trying to sell us a pseudo-separation of investment banks. Buyer beware!

Question: Do these reforms solve anything?

In a nutshell: YES, if…
Long answer: For the reforms to solve anything, they must create a new playing field in which floundering banks are not rescued with OUR money. When things go pear-shaped, and (part of) a bank can no longer pay its bills (“insolvency”), it must be shut down or sold off. There’s a big IF attached.

The big IF: Are the investment units really separated? Or is it just an accounting fiddle?
Look out for phrases such as “separate ownership” and “separation of operations”. They are good signs.
“Separate accounting and reporting” on the other hand equals “fig leaf”.

Does this end too-big-to-fail?
Not a sausage.
[Adapted from Wikipedia: a bank is too-big-to-fail when its collapse would also kill the economy. Therefore, these banks have to be rescued. It’s a free insurance policy.]
Until we change the way in which our money is created, or limit the size of banks, not to mention the size of the banking sector in relation to our entire economy, too-big-to-fail will never die.
The EU Paper ignores this.

Next Question: Does the Paper have a solution to prevent risk spreading?
Answer: Yes…partly.

If we stop banks from creating money, we are safe.
(In technobabble: Banks should not be allowed to “offer direct primary loans”, “loans created from bank deposits”, to investment banks or units.)
Lending out money that already exists (“secondary loans”) is not a problem.

Failure to take into account when, where and how money is created is a recipe for disaster – both today, as well as in the system proposed by this Paper!

Learn these three terms, and you are one step ahead of both the UK Independent Commission on Banking (Vickers Report), as well as the High-Level Expert Group (Liikanen Report) – ready?
What the Paper calls “service banking = the actual payment systems, cash and electronic transfers
RCB = retail and commercial banking (what we commonly call “banks”; they create money)
WIB = wholesale and investment banking (really dodgy; creating money to play with oneself)
Creating a firewall around WIB is a no-brainer – it goes without saying. But there is still an obscene lack of policy makers working on ways to separate service banking from RCB.

This is a bit like making the question of whether we want to have roads dependent on the health of Toyota. Again, the key phrase to look out for is “separate ownership.”

However, in the current fractional reserve banking system it is only partially possible to detach service banking. RCBs would still create money (“bank deposits”, German: Giralgeld). And although WIBs would not, there is no reason to assume that this isn’t where some of the bank-created money will end up..

Conventional wisdom has been to pump money into the system through quantitative easing.

Thus, the Ultimate Question is “How to create money?”

This is where Positive Money, and the many similar organisations around the world come in.

Last question: Is there a sunny side?
YES there is!
Some of the proposed changes (“Combining Medium&Medium”) could perhaps help slightly.

However, they require massive bureaucracy that wouldn’t be needed in a “Sovereign Money” or “Positive Money” system. The EU Paper shows our regulators’ awareness of the problem, but also their reluctance to live up to the challenge. Unless there is more pressure from the population, new laws will provide nothing more than lip service. Stick to business as usual if you believe bankers to be naturally prudent and responsible towards
the common good.


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  • dazed and confused

    I’m curious about the text in footnote one:
    “reserves bearing interest” – just a detail, I know…but does this mean we PAY THE BANKS FOR DOING US THE FAVOUR OF ACCEPTING OUR FREE MONEY?
    Please, someone: tell me I misread this!

  • Vince Richardson

    The problem the EU has and is trying to address is that they have no central bank to back the euro.The ECB is a paper tiger and really does not have the clout it needs to undewrite cross border EU banks.The eurozone is a group of separate national central banks all trying to rob one another.The Germans will not allow this to continue and until they do the eurozone will continue to struggle,.

    The EU can have as many meetings and publish as many reports as it likes but until they resolve this the euro is doomed.Maybe Merkel will relent after she is reelected in September.I am sure she will as she wants to save the euro.This is above all else a political issue not an economic one.

    That said once she has done that,they will face the usual problem associated with fractional reserve banking(and the German banks are still rife for that).They will thus keep on making the same mistakes we in the UK,and the rest of the so called developed world have experienced with our crazy banking and monetary system.

    Plus ça change, plus c’est la même chose

  • Robert

    “Until we change the way in which our money is created, or limit the size of banks, not to mention the size of the banking sector in relation to our entire economy, too-big-to-fail will never die”.

    True, but these two alternative preconditions are not the only ones which can be predicated (although the writer assumes that they are). There is at least one other alternative precondition, independent of either of the two cited, namely to separate the payments system from banking operations proper (by which I mean:- making loans and financial intermediation).

    The Banking Commission in its analysis of what had caused the banks to be regarded as too big to fail laid great stress upon those banks’ central role in – indeed as things stand monopoly of – the provision to our economy of means for the making of (almost all) payments. When a big bank collapses (invariably a sudden event if it results from a run on that bank, as it usually does) anyone with an account with that bank becomes unable either to make or to receive payments ie to get access to the means whereby to carry-on their normal daily lives. Furthermore, customers of other banks to whom payment is pending from account-holders of the failed bank are unable to get that money or (if they are debtors of the failed bank’s account-holders) to pay them. Not only does this catastrophically disrupt daily life for the numerous account-holders of the failed bank but may also have hardly less serious (even though less immediately disruptive) effects for a far wider circle among customers of other banks even – possibly – to the extent of triggering a run on another (sound) bank or banks. It is this dire possibility of contagion which forces the authorities’ hand because – if once allowed to set-in in earnest – it will become impossible to halt at any stage until meltdown of the entire banking system is reached, which they dare not risk happening.

    If a practical, non-bank, alternative means for making and receiving payments were to become available, government-backed (ie 100% reserved), it would follow that – to the extent that significant migration to it from the banks (for payment-system purposes only, be it noted) took place – the threat to the payments system as a whole of the failure of a single bank would have been caused to be reduced. This could conceivably go so far as to cause the authorities no longer to fear that the failure of a single large bank might result in a breakdown of the entire payments system (with its incipient threat of meltdown of the banking system as a whole). And since this fear was in fact a major spur for government interventions in the past, this ought to mean – all other things being equal – that the likelihood of interventions of the TBTF variety in the future would have been much reduced were such a change to be made and be successful in its aim.

    Such a non-bank alternative (and a very successful one) did in fact exist for a time in the UK: it was called “The National Giro”. Why should it not be able to be revived, given sufficient determination?

  • Robert

    To pursue a separate, parallel, line to my previous comment:-

    Adopting Liikanen terminology, Vickers recommended and the UK govt accepted segregation of “service banking” (aka transaction accounts) plus “RCB” from “WIB”, but not segregation of service banking from both of the others.

    PM: “But there is still an obscene lack of policy makers working on ways to separate service banking from RCB”
    I heartily agree. That is precisely the aim of the revival of the National Giro (ie Service Banking pure and simple) that I advocate.

    But, unlike PM I think that this can and ought to be campaigned-for on its own merits, independently of what does or doesn’t happen within the banking sector proper and of whether or not fractional reserve banking is perpetuated.

    I also suggest that – if it happened, and succeeded in weaning the bulk (or at least a critical mass) of service banking business away from the commercial banks – it would matter a good deal less, and possibly cease to matter at all, whether or not RCB were separated from WIB. The combination of the two is what’s called “a universal bank”, and it’s not necessarily all bad IMO.

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