concentrations and counterparty exposures in trading activities, as discussed in the other recommendations, are the means to further containing systemic risks. it is also important that the development of capital surcharges for systemically important institutions as well as macro - prudential tools such as caps on loan to value ratios ( ltvs ) is continued. an obvious danger lies in the possibility that structural measures, together with higher capital and liquidity requirements, may drive an increasing part of banking to the shadow banking sector. if this implies that market expectations of implicit public guarantees shift to the less regulated shadow banking sector, then the fundamental problem has not been solved. this is a matter that needs further consideration and needs to be constantly monitored. proactive measures may need to be taken. the role of banks in financing the european economy banks play an important role in the society. banks have a pivotal role in providing finance to households and firms. it is particularly so in europe where the banks ’ role in corporate finance has traditionally been large. the banks ’ role in corporate finance is central especially for small and medium sized enterprises ( smes ). the continuous and smooth supply of banking services to smes is also essential to large corporations because smes are often subcontractors to them. it is of utmost importance that regulatory reforms as a whole support and strengthen the banking sector ’ s ability to continue to provide these socially vital financial services efficiently and in a stable manner. the reputation of banks and the public trust that they rely on has been severely dented during the latest financial crisis. this has hurt not only banks themselves but also the economies and societies of europe and the whole western world. see e. g. goodhart ( 2011 ) : “ the vickers report : an assessment ”. bis central bankers ’ speeches trust and public acceptance must now be restored, and the proposals which the high - level expert group has submitted for the consideration of the eu commission will contribute to this end. achieving this important aim will benefit the banking industry and our societies at large. bis central bankers ’ speeches

market making under the proposed volcker rule ”. see e. g. the squam lake report ( 2010 ). bis central bankers ’ speeches however, if the bank were not able to prove that its required recovery and resolution plan was credible, separation of certain banking activities could be imposed. in the second avenue, separation of retail and investment banking would be imposed. separation would be consistent with research which emphasizes that capital requirements are not sufficient to limit excessive risk - taking incentives induced by deposit insurance if risks are difficult to measure and risk profiles can be changed rapidly. 12 sufficiently wide separation of investment banking activities would also avoid definitional problems which arise, for example, when the dividing line is pursued between proprietary trading and market making. 13 eventually, the group converged to the following five proposals to be implemented at the eu level. 1. proposal for mandatory separation the group proposes a mandatory separation of certain trading related activities according to the following three principles. first, if the share of proprietary trading, market making and certain other securities - related businesses in the balance sheet exceeds a given threshold, banking groups must organize these businesses to a separate legal entity ( “ trading entity ” ). second, the trading entity must be separately capitalized and must not be funded by insured deposits. and third, the deposit - taking part of the banking group ( “ deposit bank ” ) is not allowed under any circumstances to support the trading entity either directly or indirectly by making transfers or commitments to the extent that its capital adequacy including capital buffer requirements would be endangered or that the general limits on large exposures would be violated. the threshold above which separation is required must be low enough so that the volume of activities below the threshold can be considered insignificant from the viewpoint of financial stability. the other businesses that must be separated are loans, loan commitments, or unsecured credit exposures to hedge funds ( including prime brokerage ), sivs and other such entities of comparable nature. private equity investments must also be separated. the client - driven trading positions against which the bank has hedged itself do not have to be separated. also, securities underwriting does not have to be separated but it is important that risks in long - term positions possibly arising from underwriting are carefully monitored by supervisors. all other banking businesses are allowed to the deposit bank unless firm - specific recovery and resolution plans require otherwise. only the deposit bank is allowed to provide retail payment services. the trading entity can engage in all banking activities which are