The High-level Expert Group was requested to consider in depth whether there is a need for structural reforms of the EU banking sector or not and to make any relevant proposals as appropriate, with the objective of establishing a safe, stable and efficient banking system serving the needs of citizens, the EU economy and the internal market. In evaluating the European banking sector, the Group has found that no particular business model fared particularly well, or particularly poorly, in the financial crisis. Rather, the analysis conducted revealed excessive risk-taking – often in trading highly-complex instruments or real estate-related lending – and excessive reliance on short-term funding in the run-up to the financial crisis. The risk taking was not matched with adequate capital protection and high level of systemic risk was caused by strong linkages between financial institutions. A number of regulatory reforms have been initiated to address these and other weaknesses that endanger financial system stability. The Group has reviewed these ongoing regulatory reforms, paying particular attention to capital and liquidity requirements and to the recovery and resolution reforms. Stronger capital requirements, in general, will enhance the resilience of banks; correct, to some extent, the incentives of owners and managers; and, will also help reduce the expected liability of taxpayers in the event of adverse shocks to bank solvency.

The implementation of the new Capital Requirement Regulation and Directive (CRR/CRDIV) will constitute a major improvement in all these respects. Connected to its mandate, the Group also expects the on-going fundamental review of the trading book by the Basel Committee to improve the control of market risk within the banking system. The Group sees the Commission’s proposed Bank Recovery and Resolution Directive (BRR) as an essential part of the future regulatory structure. This proposal is a significant step forward in ensuring that a bank, regardless of its size and systemic importance, can be transformed and recovered, or be wound down in a way that limits taxpayer liability for its losses. The preparation and approval of recovery and resolution plans (RRPs) is likely to induce some structural changes within banking groups, reducing complexity and the risk of contagion, thus improving resolvability. However, despite these important initiatives and reforms, the Group has concluded that it is necessary to require legal separation of certain particularly risky financial activities from deposit taking banks within the banking group. The activities to be separated would include proprietary trading of securities and derivatives, and certain other activities closely linked with securities and derivatives markets, as will be specified below. The Group also makes suggestions for further measures regarding the bank recovery and resolution framework, capital requirements and the corporate governance of banks. The objective is further to reduce systemic risk in deposit-banking and investment-banking activities, even when they are separated.