in turn have dramatic implications for e. g. funding costs. bis central bankers ’ speeches differences between the proposals of independent commission on banking and highlevel expert group “ the difference in the location of the ring - fence is important,... ” john vickers has made very insightful comments on the compatibility of the proposal of his group, the independent commission of banking with the proposal of the high - level expert group. i have a few comments on this theme : – icb and hleg proposals started from different directions ; the approach taken by icb started from the narrow banking philosophy, whereas hleg focused on the most volatile parts of banking business. however, the groups ended up with qualitatively similar proposals. – as john vickers has stated already, the main question as regards the position of the ring - fence is “ where should securities underwriting be ; in the investment bank ( such as in icb ) or in the deposit bank ( as in hleg )? ” another difference is that icb ’ s proposal includes geographical restrictions as non - eea customers cannot be served by the deposit bank. this highlights the focus on the viability of the uk banking sector in the icb. – hleg is based on the view that underwriting is closely connected with corporate banking and thus naturally belongs to the deposit bank. from the corporate client ’ s perspective, issuing a bond is an alternative way of financing to taking a bank loan. from the bank ’ s perspective, there are similar elements in both, because both involve a customer credit quality assessment, although in underwriting the bank ’ s own position taking is normally quite limited. – it is true that a promise of market making can be an important complement to a successful underwriting of a bond. however, separate entities within the bank group can well provide the underwriting and market making services without any additional cost to the customer. hleg did emphasise the importance that authorities require additional separation if that is needed to make the recovery and resolution plans credible, a measure that would bring the hleg separation proposal closer to the icb ring - fencing proposal. the proposals are also somewhat different with respect to the height of the ring - fence. the icb included restrictions on cross - ownership, for example. as suggested by the parliamentary commission of banking, tasked with the pre - legislative review of the bill, the ring - fence will now be “ electrified ” by giving authorities reserve powers to require full separation. “...

pentti hakkarainen : debate on “ re - evaluating the universal banking model : can the volcker, vickers or liikanen rules make banks safer? ” remarks by mr pentti hakkarainen, deputy governor of the bank of finland, at the 4th future of banking summit, organised by economist conferences, paris, 26 february 2013. * * * thoughts on the reasons why the universal bank model exists, i. e. why it is valuable “ there are benefits from combining different business lines under one roof ” there are a number of reasons why banks combine several business lines under one roof : – strive for optimal use of capital – diversification of risk as distribution of profits and losses of different business lines are less than fully correlated – synergies from combination of different expertises – servicing the multiple needs of clients, especially in the case of corporate clients ( one - stop - shopping ) there is now one way of structuring a universal bank. e. g. some universal banks have numerous business lines under one legal unit, whereas other universal banks operate as a holding group of separate companies. the business lines or legal units can be defined based on e. g. business areas or functions and / or geographical reach. the way banks aim to be structured is crystallised in the strategy, but e. g. m & a history and ability to achieve organic growth has had a great impact on how universal banks are structured today. “ however, some banks already see the value of applying a universal bank model where various business activities are clearly structured and business lines are legally separated ” even without regulation requiring so, many banks already manage different business lines separately, which closely resembles a structure with different legal units. – banks find management, risk management and hr / recruiting easier if the business is separated along logical units, i. e. functions / activities which fall naturally together. – from a risk management perspective, portfolios are already managed separately. – in some cases an important driver for legal separation of businesses is “ disaster management ”, i. e. keeping particularly risky or vulnerable business in a separate legal unit thus making it easier to divest / withdraw without exposing the rest of the operations for contagion by cutting linkages rapidly. there are also benefits of being organised along separated business lines. – the pricing of internal funding of business units can be arranged at arm ’ s length with risk - adjusted transfer pricing. – allocation of economic capital can be done by business line and even