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EU urges banks to separate trading from lending operations

In a latest round of recommendation to strengthen the oversight and reduce risk for major financial institutions, the European Union has urged banks to separately carry out risky trading activities and lending operations.

Suggested by Bank of Finland governor Erkki Liikanen-led panel of financial experts, the move would affect large retail banks in Germany, Spain, France and the 24 other EU countries.

Pointing out the activities, which should be bifurcated, the report said that proprietary trading of securities and derivatives, and similar risky ones should be separated from retail banking and lending operations.

In its proposal, the experts also highlighted that the decision should be mandatory only if an institution’s assets held for trading and available for sale exceed 15% to 25% of the bank’s total assets, or €100bn ($128.88bn).

Liikanen said, "Separation of these activities into separate legal entities within a group is the most direct way of tackling banks’ complexity and interconnectedness."

Additionally, the panel suggested that deposit-taking banks should be permitted to trade in derivatives for liability management, sales and purchases of assets to manage a liquidity portfolio and use of foreign-exchange and interest-rate options or swaps to hedge risks.