Recommendations of the Liikanen Report appear to have been generally accepted as best practice, but banks still need to re-evaluate their governance practices. 

The final response of European officials to the Liikanen Report – which was headed by Finland’s central bank governor Erkki Liikanen and which published its wide-ranging recommendations on the EU’s banking sector in October 2012 – is still anyone’s guess. And bankers are unlikely to find out before the term of the current European Parliament ends in May.

Yet much of what the Liikanen Report suggested appears to have been accepted as best practice by European regulators, at least in principle. Credit Suisse and UBS recently announced plans to create Swiss subsidiaries, the cue for which was likely Liikanen’s idea that major trading activities are legally separated from deposit-taking arms. Analysts have little doubt that big banks elsewhere on the continent will follow suit.

Moreover, banks and their supervisors seem to agree that the use of bail-in bonds as a resolution tool and higher risk-weightings for certain assets – both Liikanen ideas – are needed.

One core recommendation – that banks implement corporate governance reforms – has been quietly ignored so far, however. Among Liikanen’s suggestions, regulators should make banks carry out proper evaluations before they approve management and board candidates, restrict overall levels of bonuses and disclose more about the profits and losses of each of their divisions. Regulators should also have the power to impose lifetime bans on the executives of failed institutions.

While banks might justifiably quibble at the specifics, the idea that they need to seriously change their governance practices should not be scorned. As the Liikanen report noted, the financial crisis “has clearly highlighted that the governance and control mechanisms of banks failed to rein in excessive risk-taking”.

Rectifying that will go a long way towards ensuring that bank failures are rarer and that, when they do happen, the fallout is mild. Hiking capital requirements and separating risky businesses from ones deemed less so are necessary for making Europe’s financial system safer. So is improving governance. It should not be forgotten.

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