European Union: Does Volcker + Vickers = Liikanen?

EU Proposal For A Regulation On Structural Measures Improving The Resilience Of
  1. On 29 January 2014 the European Commission published a proposal for a regulation of the European Parliament and of the Council "on structural measures improving the resilience of EU credit institutions"1. This proposed legislation is the EU's equivalent of Volcker2 and Vickers3. It was initiated by the Liikanen report4 published on 2 October 2012 but the legislative proposal departs in a number of ways from the report's conclusions. There are two significant departures: the legislative proposal contains a Volcker-style prohibition, which also departs from the individual EU Member States' approach, and, although the proposal contains provisions which mirror the Vickers 'ring-fencing' approach they are not, in direct contradiction to Liikanen's recommendation, mandatory.


  1. Post financial crisis, various jurisdictions have started to overhaul bank regulation and supervision. Bank structural reform is part of that agenda and involves separating retail and commercial banking from wholesale and investment banking, as well as outright prohibitions. The objective is to protect core banking activities and depositors from the 'riskier' trading activities, which have been deemed as 'socially less important', by reducing the risk of contagion spreading from trading activities to traditional retail banking and protecting the deposits of individuals and small businesses in the case of bank failure. In addition, bank structural changes are intended to reduce complexity and so improve the resolvability of banking groups. The EU has been concerned about banks which it terms "too big to fail", "too big to save" and "too complex to manage, supervise and resolve". It has been concerned that failure of these banks would be detrimental to the financial system in the EU as a whole. The EU also believes that these banks have an unfair advantage over smaller banks: it believes that the presumption that they would be bailed out rather than be allowed to fail provides an implicit guarantee which impacts their funding costs and leads to moral hazard and excessive risk-taking. These concerns and beliefs have led to a variety of legislative proposals and legislation.
  2. Different jurisdictions have taken different approaches to bank structural reform. Reference has already been made to the UK and US legislation but France5 and Germany6 have also adopted legislation and the Belgian coalition government reached a political agreement in December 2013 on structural reform of its banking sector which it aims to finalise before elections in May 20147. One of the fundamental differences between the US and the approaches of the individual EU Member States has been the US preference for prohibition (or owner separation) as opposed to the EU Member States' preference for ring-fencing (or functional separation / subsidiarisation). This difference means that the activities which the US has prohibited cannot be carried out within a banking group at all whereas the activities on which the EU Member States have focused can be carried out within a distinct trading entity which is separate from the retail and commercial bank entity. The EU's legislative proposal, by including elements of both approaches, blurs this distinction and creates a third approach to bank structural reform which is consistent with neither the US approach nor the approaches of the individual EU Member States.
  3. The second significant difference in the approaches taken to date relates to the activities which the different jurisdictions have regulated. Broadly speaking, the US approach has prohibited proprietary trading, sponsoring private equity and hedge funds (known as "covered funds"), investing in covered funds and loans (known as "covered transactions") to covered funds with which the banking group is involved. Proprietary trading is defined widely but there are a number of helpful exclusions and exemptions which narrow the scope of the prohibition, including a number of exclusions and exemptions to reduce the extraterritorial impact on non-EU banks, although, of course, there are conditions with which compliance is necessary before reliance can be placed on the exclusions and exemptions. There are similar exclusions and exemptions relating to the prohibitions on sponsoring and investing in covered funds and on covered transactions with covered funds. The Volcker rule is examined in detail in our legal reports "Final Regulation Implementing the Volcker Rule"8 and "The Volcker Rule – Application to Securitization Transactions"9.
  4. The UK approach (Vickers) focuses on a wider range of investment and wholesale banking. By prohibiting deposit-taking entities from 'dealing in investments as principal'10, it requires most of the derivative and trading activity currently carried out by wholesale and investment banks to be carried out by a trading entity wholly separate from the retail bank. The French and German approach follow the ring-fencing approach of the UK but, like the US, have a narrower focus. Their approaches reflect the agreement reached by the two countries to push forward arrangements in the EU for the separation of "speculative activities" from deposit- related and customer-orientated activities. Thus the French legislation provides that proprietary trading and unsecured financing to alternative investment funds ("AIFs") above a certain threshold (the "speculative activities") must be carried out by a trading subsidiary separate from the retail banking entity. Similarly, the German legislation specifies certain high-risk activities (above a certain threshold in terms of overall trading activity), including proprietary trading, credit and guarantee business with certain AIFS (or equivalent funds which are high leveraged or engaged in short selling) and certain forms of trading in one's own name with the exception of market-making that must be ring-fenced and transferred to a separate trading entity.
  5. Finally and amongst those jurisdictions that have chosen the ring-fencing approach, there is some difference in the strength of the ring-fence or the degree of functional separation required. The UK requires the ring-fenced body ("RFB") to be legally, economically and operationally independent, to interact with the rest of the banking group on an arm's length basis and to have its own capital and liquidity resources. The Prudential Regulation Authority ("PRA") will make additional rules to ensure the integrity of the ring-fence and the independence of the RFB. The German legislation requires the RFB to be legally, economically and operationally independent, to interact with the rest of the banking group on an arm's length basis and to have its own capital and liquidity resources, but does not give any guidance on how this should be achieved or should interact with German corporate law.

Liikanen...but not as we knew it

  1. At the same time as individual jurisdictions were considering bank structural reform to deal with the issues summarised at paragraph 2 above, the EU was considering action, believing that inconsistent national legislation increases the possibility of distortions of capital movements and investment decisions, serves to make the structure and operation of cross-border banks more complex and increases fragmentation. In February 2012, the Commission established a High-level Expert Group to examine possible reforms to the structure of the EU's banking sector, appointing Erkki Liikanen, Governor of the Bank of Finland and a former member of the European Commission, as the chairman. The Group presented its final report to the Commission on 2 October 2012, the Commission examined the possible reform options and their implications and, on 29 January 2014, it adopted a proposal for a regulation on structural measures improving the resilience of EU credit institutions plus a proposal on transparency of securities financing transactions aimed at increasing transparency in the shadow banking sector. This note focuses on the former proposal.
  2. The UK government had considered adding a Volcker-style prohibition to the Vickers ring-fence established in the Banking Reform Act 2013 but rejected it because of concerns that defining proprietary trading as opposed to activities such as market-making was too problematic, the "technical challenges" that the US was experiencing in implementation and the fear that it would distract regulatory attention from the ring-fence. The EU, however, clearly did not share these concerns as their proposal departs from the approach taken by individual EU Member States and contains a Volcker-style prohibition, as well as provisions on ring-fencing. The main points of note are set out in the table below.

The main provisions of the EU proposal


  1. It is proposed that the Volcker-style rule will apply to:

    1. EU G-SIIs (and all their branches and subsidiaries regardless of their location); and
    2. banks that for 3 years have total assets of at least 30 billion euro and trading assets of 70 billion euro or 10% of total assets.
  2. The proposal does not make ring-fencing mandatory but requires national regulators to consider the possibility in relation to each individual deposit-taking bank (termed "core credit institution") depending upon its risk profile. There is a wide definition of core credit institution.
  3. The EU proposal intends to have extraterritorial effect and apply to non-EU subsidiaries of EU banks, as well as effectively to non-EU banking groups with EU branches, unless the Commission deems the relevant non-EU jurisdiction equivalent to the EU regime but, although the stated intention is to create a level playing field in the EU, these provisions raise questions of legality and enforcement. National regulators may exempt a non-EU subsidiary of an EU bank from the ring-fencing requirements of the EU proposal in the absence of an equivalence decision if the relevant national regulator is satisfied that the subsidiary's resolution strategy has no adverse effect on the financial stability of the Member State(s) where the parent and other group entities are established. There is no such additional exemption for EU branches of non-EU banks or in respect of the Volcker-style prohibition.

The rules

  1. The EU Volcker-style rule prohibits proprietary trading (which is said to be narrowly defined), investments in AIFs save for closed-ended and unleveraged AIFs and investments in other entities which themselves engage in proprietary trading or investment in AIFs. This rule is considered in more detail at paragraphs 9 - 19 below.
  2. Unlike Liikanen, the EU proposal does not make separation of trading activities from retail and commercial banking mandatory. Instead it provides that national regulators must consider separation of trading activities (which is very widely defined to include almost all activities save those related to retail and commercial banking) from retail and commercial banking depending on the risk each individual core credit institution presents. The assessment of risk will be carried out on the basis of metrics set out in further legislation drafted by the European Banking Authority ("EBA") and the Commission. Where the risk levels are exceeded and the national regulator determines that there is a threat to financial stability then the national regulator must impose a ring-fence on that particular bank, unless the bank can demonstrate that the regulator's conclusions are not justified. These provisions are considered in more detail at paragraphs 20 - 39 below.

Individual Member State derogations

  1. The Commission may grant individual deposit-taking banks within Member States (not individual Member States) a derogation from the ring-fencing requirements set out in the proposal where national legislation is equivalent to the EU legislation. At the time of writing, it appears that only the UK legislation is likely to meet the requirements of equivalence but that may depend on secondary legislation, which the UK has yet to adopt, which will provide the technical detail of the Vickers rule.


  1. On the basis that the final text of the Regulation is adopted by the European Parliament and Council by June 2015, it is proposed that the provisions will be phased in over a number of years: the Volcker-style prohibition will come into effect on 1 January 2017 and the provisions on ring-fencing will come into effect on 1 July 2018.

To read this Update in full, please click here.

Originally published 26 February 2014


1 See here

2 As implemented in section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 which created a new section 13 of the US Bank Holding Company Act of 1956.

3 As implemented in section 4 of the Financial Services (Banking Reform) Act 2013 which inserts Part 9B (sections 142A – 142Z1) into the Financial Services and Markets Act 2000.

4 See here

5 French law no. 2013-672 of 26 July 2013 on the separation and regulation of banking activities.

6 Trennbankengesetz (German Bank Separation Law) which is included in Article 2 of the Gesetz zur Abschirmung von Risiken und zur Planung der Sanierung und Abwicklung von Kreditinstituten und Finanzgruppen (Law concerning Separation of Risks and Restructuring and Winding-Up of Credit Institutions and Financial Groups), BGBl. 2013 I Nr. 47, 3090. The law was announced on 7 August 2013 and Article 2 entered into force on 31 January 2014, although most of the rules in Article 2 are not applicable until 1 July 2015.

7 The text is not yet available but was approved in second reading on 14 February 2014 by the Belgian Federal Government.

8 See here

9 See here

10 Dealing in investments as principal includes buying, selling, subscribing for or underwriting securities or contractually based investments.

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