Reforming the Structures of the EU Banking Sector: Risks and Challenges

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The paper discusses the rationale for implementing structural reforms in the banking sector in Europe aiming at separating risky/speculative from retail banking activities. From a financial stability point of view, while acknowledging that there is no optimal banking structure, we argue that any attempt to reform banking structure should address the following challenges: (i) Preserve the benefits of the universal banking model;(ii) Draw effective and welfare-improving lines between speculative and economically needed banking activities; (iii) Finally, ensure the viability of the trading entity to avoid two pitfalls: the inception of systemic trading entities and the migration of activities outside the regulated sector (shadow banking).
JEL Codes: G21; G28.
Keywords: Ring Fencing; Bank Business Models; Banking Regulation.