Bank Structural Reform

Background

At EU level – as at national level in many European and other jurisdictions – extensive debate continues on whether there should be structural separation of banks. Such measures are seen as a means to protect the interest of retail (and other small) customers and/or as one of the range of tools necessary to enable banks to fail without requiring taxpayer support and without endangering the broader financial system.

On 29 January 2014, the European Commission adopted a proposal on bank structural reform that will mainly apply to credit institutions that are considered to be systemically important and complex to resolve. The proposal introduced an outright ban on proprietary trading but exempted certain private equity funds from this restriction. The exemption applies to those private equity funds that are closed-ended and unleveraged and to those venture capital funds that are EuVECA designated.

While several new ideas have emerged during negotiations between the European Parliament and the Council-  such as a permission for banks to invest in all kinds of AIFs up to a certain threshold of their own funds, the two institutions never managed to find an agreement.

As a result, the European Commission ended up withdrawing its proposal in October 2017.

Invest Europe Position

The commercial relationship between banks and private equity is extensive and varied, and can include banks acting as limited partner investors in funds through to the provision of lending to private equity-backed portfolio companies. How banks are structured and any restrictions on their ability to offer certain services to the private equity industry (or impact on the pricing of those services) has the potential to impact directly on Invest Europe members.

The European Commission’s proposal on structural reform of the banking sector was initially broadly welcomed by Invest Europe because it explicitly recognised the potential benefits of private equity and venture capital as sources of finance for the European economy. While banks would have been prohibited from engaging in proprietary trading (i.e. trading for their own profit using the bank’s balance sheet) if the proposal had been adopted, they would have been able to continue to invest in private equity.