Business World

Wednesday 20 September 2017

Banks 'should keep risky loans separate'

Sarah DiLorenzo

Europe's banks should create a firewall between their traditional retail banking operations and more risky investment banking ones and force executives to personally take losses if their bank fails, a new expert report has suggested.

Government and real-estate debt taken on in boom times -- when both were considered safe -- have plummeted in value. That's left many banks going hat in hand to their governments for rescue loans. But European governments are themselves struggling with high debt and are in many cases having difficulty helping their banks.

On top of the strain on governments, the struggling banks aren't lending, worsening the already poor state of the economy.

As part of efforts to break the link between banks and countries and ensure Europe's debt crisis never repeats itself, the European Union is strengthening its banking regulation.

It is considering making the European Central Bank a supervisor for all 8,000 banks in the 17 countries that use the euro.

It is also looking at regulation that would force creditors of failing banks, such as bondholders and shareholders, to take losses rather than having governments pour in taxpayer money.

The report builds on these suggestions.

Michel Barnier, a European commissioner charged with improving banking regulation, said he will study what impact the report's suggestions would have on banks' ability to lend.

The most significant recommendation is that banks should separate their risky investment banking operations, like proprietary trading, from their more traditional retail operations, which lend to customers.

Irish Independent

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