Stakeholder consultation May 17, 2013 Brussels Stakeholder consultation Important disclaimer: This presentation expresses the views of the Commission services and does not necessarily reflect the official position of the European Commission. The views expressed in this presentation do not prejudge the final position of the European Commission

I Problem definition & justification for EU action

What is structural reform? Activity restrictions on a deposit-issuing entity within a large and complex banking group => address "too important to fail" concerns. Restrictions on the economic, operational, and legal links between entities within a large banking group =>address "too complex to fail" concerns. Restrictions on the connections within and between banking groups =>address "too interconnected to fail" concerns.

Why structural reform? (1/3) Reduce complexity, interconnectedness, and size of large and complex banking groups, in order to Improve recovery and resolvability in the bad times, facilitate supervision, management, and market monitoring in the good times. Reduce implicit taxpayer (cross)subsidies (guarantees) Reduce risk-taking incentives Curtail balance sheet expansion and transactions/trading orientation Reduce competition distortions. Reduce probability and impact of failure (including negative failure externalities). Improved corporate governance and reduced cultural problems and conflicts of interests.

Why structural reform in addition to everything else? (2/3) Ambitious and broad reform agenda: CRD IV/CRR, BRRD, EMIR, FTT, MiFID, fundamental review trading book capital requirements, Banking Union, etc. Structural reform complements and can increase the credibility and effectiveness of the regulatory reform agenda, depending on its design: BRRD: increase resolution options to authorities upon failure, target a broader set of objectives (facilitating supervision, management, and market monitoring, aligning incentives, etc.) CRD IV/CRR: target a broader set of objectives(reducing complexity and interconnectedness directly at root) Banking Union: risk mutualisation may increase implicit subsidies, all else equal.

Why structural reform at the EU level? (3/3) Avoid the costs for cross-border banking groups of uncoordinated, divergent and national reforms. Avoid circumvention and ensure the effectiveness of reform Avoid competition distortions and safeguard the EU internal market in financial services. Ensure the success of EU Banking Union (≈ mutualisation of risks). => Mandate for structural separation follow-up given in the European Commission College debate of 6 March 2013: Support for a European framework for action to preserve the integrity of the single market, while maintaining a certain degree of flexibility; Need highlighted for a sound impact analysis. Focus on: Comparison of different structural reform options in terms of costs and benefits. Assessment of complementarity relative to reform agenda.

II Thresholds/De Minimis

Balance Sheet Items: Definitions

The SNL Sample

Trading Activities: Definitions

Thresholds: Results

Separation:Options Ex-post separation subject to constrained discretion by the supervisor Ex-ante separation subject to evaluation by the supervisor Ex-ante separation

III Activities and strength of separation

Activities to be separated from deposit bank to trading entity: stylised options "Narrow" trading entity and "broad" deposit bank Activities to be separated: proprietary trading and exposures to VC/PE/HF "Medium" trading entity and "medium" deposit bank Activities to be separated: proprietary trading, exposures to VC/PE/HF, and market making "Broad" trading entity and "narrow" deposit bank Activities to be separated: all wholesale and investment banking activities Specific issue: Deposit bank's ability to directly provide clients with certain risk management services. 21/09/2018

Strength of separation Three broad, not mutually exclusive, forms: Accounting separation Functional separation (i.e. subsidiarisation) Legal separation Economic separation Governance separation Operational separation Ownership separation (i.e. prohibition of certain business lines) 21/09/2018

Strength of separation: stylised options Functional separation with economic and governance links restricted according to current rules Functional separation with tighter restrictions on economic and governance links Ownership separation 21/09/2018

Stylised classification of structural reform choices Strength fence  Location fence “Functional separation 1” (Current requirements)   “Functional separation 2” (Stricter requirements) “Ownership separation” “Narrow” Trading Entity/ “Broad” Deposit Entity E.g. Proprietary trading + exposures to VC/PE/HF (PT) Option A ≈ FR, DE (baseline) Option B ≈ US swaps push-out Option C ≈ US Volcker “Medium“ Trading Entity/ “Medium“ Deposit Entity e.g. PT + market-making (MM) Option D ≈ FR, DE (if wider separation activated) Option E ≈ HLEG (Liikanen) Option F  “Broad“ Trading Entity/ “Narrow“ Deposit Entity E.g. all investment banking activities Option G  Option H ≈ US BHC ≈ UK Option I