Major banking law to be presented by end of month

  • Belgium’s top moneyman confirms that the country will soon have new banking legislation
  • Without waiting for Europe
  • The reform is inspired by BNB proposals

Finance minister Koen Geens wants to move quickly. “Belgium will have legislation reforming its banking structure without waiting for the European Commission’s proposal,” he said this weekend. The European Commission has been working on the subject for months, but commissioner Michel Barnier has indicated that a text will not be presented until November. “That’s too late for us,” Geens said, after having decided to present draft legislation in the near future. “Not this week, but by the end of the month,” one source close to the government told us.

This major reform will include traditional protection of banks’ activities and will launch “popular loans,” savings bonds or term accounts specifically designated to finance public projects such as schools and infrastructure. From the point of view of market rates, though, this kind of savings instrument does not seem to be attractive: savings have been fleeing savings bonds and term accounts due to low earnings.

1 Why reform?

The major banks’ troubles in 2008 were due at least in part to the fact that their speculative activities hit bottom to the point of threatening their very existence. Big banks are indispensible to the country’s economy because of their classic banking activities, such as receiving deposits and granting credit. They had to be saved, but that was an expensive proposition for the state’s finances. That led to the need for reforms, already in place in France, Germany, the United Kingdom and the United States. If major banks have to be rescued again, the state would not only have to save classic banking but also speculative activities, since the two are so intertwined.

This reform makes banks nervous. “The reform must achieve a balance between the need for greater control of risk and assuring banks that they may continue to provide their services to the economy,” warns Michel Vermaerke, managing director of Febelfin, the banking lobby. “Don’t forget that in Europe, 80% of business loans are made by banks. In the United States, that number is only 25%. In Belgium, banks have changed significantly since the crisis,” adds the head of Febelfin. “They have trimmed down their balance sheets by over 30%, they’ve increased their reserves by 35% and have very limited speculative activities for their own accounts. In addition, the National Bank holds veto power to forbid banks from maintaining strategies that are too risky. I believe that is unique in Europe.”

2 Why now?

The government’s socialist wing in particular is in favor of this reform. Prime Minister Elio Rupo has declared that a law will be voted on before the end of the year. Predictably, the government has asked the National Bank, which has policed banks since 2011, to study the problem. Even if the idea of protecting traditional banks and moving speculative activities into a specific legal entity seems simple at first, it is not so in practice. There are several important questions: Will Belgian banks, four fifths of which are held by foreigners, be transformed into simple branch banks to escape restrictive regulation? Is market-making a speculative activity? Is managing products to cover their own risk, such as changing rates, or offering these services to clients a speculative activity?

3 What kinds of reforms?

The BNB submitted its report this summer and it includes eight resolutions, of which two are particularly significant. First, if a bank wants to continue speculative activities, it must increase its reserves relative to those activities. In other words, it may not continue to speculate with borrowed money, as was done in the past. If these speculative activities are truly sizeable, the BNB thinks it would be appropriate that they be moved to a specific legal entity. Second, the BNB thinks that deposit banks should not be authorized to trade their own accounts beyond a certain level of their own funds. When trading activities go beyond this level, they should be transferred to a separate entity that is prohibited from accepting deposits. The government will base its work mainly on these proposals.

PIERRE-HENRI THOMAS

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