Ringing the changes: An EU-wide ring-fence?
Wednesday 14 December 2011 - by Karina Whalley & Andrew Hickley
Viral Acharya, an economics professor at New York University, says ring-fencing requirements are not the priority tool for preventing another financial crisis and should be looked at as part of a group of rules.
"The idea that you want to save the commercial banking from some of the riskier activities it has some merit but I would just put precautionary wind on this whole approach."
British Bankers' Association executive director Paul Chisnall agrees with this view and cited an Adam Smith Institute paper saying ring-fencing is based on a misdiagnosis.
He told Global Financial Strategy: "The idea that you have to separate off investment banking services looks unusual when you bear in mind that most of the financial crisis failures in the UK actually were a result of retail and commercial lending not as a result of investment banking.
"We don't think it is related to the financial crisis and we are surprised Europe would be looking at this," Chisnall added.
The BBA head quoted from a European Central Bank report and from the European Banking Authority, which announced last year that universal banking is seen as a strength rather than a weakness as evidenced by the bank stress tests.
From the ECB's findings, "experience shows that universal banks have been better placed to maintain credit lines than the more narrowly focused banks", said Chisnall.
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