erkki liikanen : the proposed regulation on structural measures for banks comments by mr erkki liikanen, governor of the bank of finland and chairman of the highlevel expert group on reforming the structure of the eu banking sector, on the european commission ’ s proposal of 29 january 2014 for a regulation on the separation of certain trading activities from credit institutions. * * * the european commission has today presented a regulatory proposal based on the report of the high - level expert group on reforming the structure of the eu banking sector. in october 2012 our group proposed that proprietary trading and certain risky trading activities including market - making as well as exposures to shadow banking entities such as hedge funds ought to be separated from deposit - taking and lending activities. the commission proposal has the same objectives as the recommendations in our final report. the set of activities which the proposal would affect are also similar. in some respects, the proposed regulation does, however, differ from our recommendations. the commission ’ s proposal includes an outright ban on organised proprietary trading instead of requiring it to be assigned to a separate and separately capitalised legal entity. in this respect the commission proposal resembles the structural reform implemented in the united states. this would allow for regulatory convergence at the international level. as for market - making, risky securitisation and complex derivatives, the proposal empowers the competent authority to require separation when specific conditions prevail and also empowers the competent authority to require separation of other trading activities. the high - level expert group asked the commission to work on the calibration of the thresholds for application of the new rules. the commission has accordingly included the thresholds in its proposal. the proposal would cover the largest and most trading - intense banks in europe. while striving for the same objectives as the high - level expert group, the commission proposal leaves an important role for the future judgment of the competent authorities, the eba and the commission itself. in implementation of the regulation, the commission could grant individual credit institutions derogations from application of the regulation if national primary law in their home country is already adopted and considered at least as stringent as the regulation itself. moreover, competent authorities or member states may decide to impose similar measures also on some smaller banks, or exempt some qualifying banks from the requirement if these banks can demonstrate that they do not compromise the objectives of the regulation or threaten financial stability. these elements of discretion entrust the competent authorities, the eba and the commission with

8 since 1960, the 3 - month treasury yield has moved above the 10 - year treasury yield before every recession except the one in 1990, and, conversely, there has only been one case where the yield curve has inverted and a recession has not followed - - in 1966. this correlation between yield curve inversions and recessions might arise for a variety of reasons. first, let us take a case where short - term rates rise relative to longterm rates. when the fomc is undertaking a deliberate tightening in policy, short - term interest rates typically rise, as do expectations of short - term interest rates in the medium term, while interest rates in the distant future may be less affected. for example, if shortterm interest rates were raised to stabilize temporary swings in the economy, the logic of the expectations hypothesis would suggest that long rates would not rise as much. and if tighter monetary policy were to weaken the economy with a lag, this would lead to long rates not rising by as much or at all. second, let us take a case where long - term rates decline relative to short - term rates, perhaps reflecting a flight to safety. if market participants become concerned about a future macroeconomic risk that could lead to a weaker economy, this concern would an earlier paper discussing the predictive power of the yield curve is estrella and mishkin ( 1997 ). in more recent work, bauer and mertens ( 2018 ) emphasize that the predictive content of the yield curve is still largely intact. johansson and meldrum ( 2018 ) and favara and others ( 2016 ), however, argue that adding information about bond risk premiums reduces somewhat the predictive power of the yield spread. - 7tend to lower expected longer - term interest rates, both because monetary policy would be expected to become more accommodative in the future and because market participants may increase their relative holdings of safe assets, such as treasury securities. in this case, longer - dated treasury yields may fall, and if short - term interest rates do not adjust commensurately, the yield curve will invert ahead of a weaker economy. turning to current conditions, the spread between the 10 - year and 3 - month treasury yields has declined from 375 basis points in early 2010 to about 125 basis points in the first quarter of this year. while that represents a considerable flattening, the current spread between the 10 - year and 3 - month yields is only about 20 basis points narrower