15/ 11/2013 Michel Barnier, Commissioner for Internal Market and ServicesEuropean CommissionBE-1049 BrusselsBelgium

Cc:Siim KallasAndris PiebalgsCecilia MalmströmOlli RehnAlgirdas ŠemetaConnie Hedegaard

Structural reform of the EU banking sector

Dear Mr. Barnier,

It is with great interest that we have read the responses to the Commission consultation on structural reform of the EU Banking sector. It is clear that there are diverging views on the topic of structural reform. The Commission has a taxing task in balancing the aim to prevent future crises against the agenda for economic growth. In view of this work, we would like to point out to some key factors that are of particular importance for the Nordic/Baltic EU Member States. These factors are also relevant for other economies in the EU.

The Nordic/Baltic economies are small, open economies with a well-functioning social safety net for citizens allowing households to take a longer term view on investments and place their financial assets in asset funds or securities. Institutional investors tend to place a large part of their portfolios abroad, and therefore need to be able to hedge themselves against various risks. Hedging is an important part of asset liability management to reduce risks. Our economies also have a number of large and middle-sized export companies. Several of our countries have not yet

introduced the euro. The markets for government and corporate bonds, covered bonds, interest rate derivatives and foreign exchange derivatives, are, to a large extent, provided by universal banks acting as market makers.

These circumstances make our economies highly dependent on market making and hedging activities of universal banks. They provide services that are socially valuable and essential for the real economy. Without those services, institutional investors such as pension funds and other asset management funds and large export companies would not be able to handle their risks effectively. Large issuers of high quality bonds (government and mortgage institutions) could suffer severely and it could have serious consequences for the local mortgage systems if our banks had to reduce or give up their market making activities.

Furthermore, our own experience tells us that financial crises are usually caused by lending, not by market making or other trading activities of the banking sector. It has not been demonstrated conclusively that the European banking sector – in general – has any structural shortcomings that would justify a mandatory separation.

We do not believe that mandatory separation would result in overall benefits for financial stability in the EU. On the contrary, it may undermine the universal banking model, which we believe has several strengths from a stability perspective. For banking customers, mandatory separation is likely to result in a more cumbersome process and more expensive banking products. Furthermore, many of the problems that a structural reform would aim at addressing are already being addressed through other legislation under way.

With that in mind, we have two key messages on the issue of structural reform:

First, mandatory separation is not a good solution to stem disproportionate risk taking or speculative activities. Instead, the focus should be on good risk management and supervision. It is the elements of excessive risk-taking in trading, that policy makers fear could contribute to systemic financial risk in the EU economy – not trading in general. Higher capital requirements, or in extreme cases, separation within the supervisory authorities’ mandate given by the BRRD, would be better tools to handle that risk.

Second, should the Commission, despite our concerns, decide to require mandatory separation, we believe that any such requirement should only apply to banking groups where trading activities represent a significant part of the bank’s business.

Furthermore, our opinion is that thresholds should be set so as not to jeopardize banks’ provision of important risk mitigating services to clients and market making. It would also be important that the thresholds reflect the relevant risks in the banking

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groups that could fall within the scope of a reform proposal. It is a key factor for the integrity of the internal market that thresholds are clear and harmonized across the European Union. The thresholds should be set out in a clear, pre-determined fashion, over time avoiding discretionary decisions with the aim to minimize the uncertainty for those who are part of the banking system. The role of universal banks as providers of hedging and market making services to the real economy needs to be duly considered when setting such criteria. This will support regular banking activities, reduce the concentration risk, and maintain diversification in the universal banking model. Finally, we note that the Commission is working on how to avoid the inclusion of assets held in order to secure compliance with new EU legislation on liquidity buffers in banks. We hope that both of the aspects above will be well accounted for.

Yours sincerely,

Thomas Östros Piia-Noora Kauppi

Jørgen A. Horwitz Idar Kreutzer

Mārtiņš Bičevskis Katrin Talihärm

Stasys Kropas

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