. limits on trading activities will also reduce the counterparty risks of deposit banks. thirdly, simpler structures can make it easier for the management and board to understand and manage, and for outsiders to monitor and supervise, banking institutions. this can enhance the effectiveness of both market discipline and financial supervision. fourthly, separating deposit banking and trading entities can also reduce the mixing of the two different management cultures. returning to a culture where the relationship to the bis central bankers ’ speeches customer is highly valued and the focus is on the long - term viability of the business is of great importance. compatibility with other regulatory initiatives it is important to understand that our proposals to the commission are meant as complementary to already on - going reforms. let me give two examples. on one hand, the mandatory separation of proprietary trading and market making from deposit banking, which we proposed, complement capital requirements : both can serve to restrict deposit banks ’ risk - taking. on the other hand, mandatory separation can support the commission ’ s proposal for the bank recovery and resolution directive by making it easier to apply in practice. more generally, the three elements – capital requirements, recovery and resolution, and structural measures – were central to the thought process of our group. comparison of mandatory separation and other suggestions by avoiding the decoupling of proprietary trading and market making, the proposal differs from the volcker rule in the united states. the proposed mandatory separation in the eu can take place within a banking group, whereas the volcker rule prohibits proprietary trading from the entire banking group. when comparing the proposal of the high - level expert group and the proposal presented by the uk ’ s independent commission on banking ( icb ), we can say that the proposals started from different directions but their results are qualitatively similar. the approach taken by the icb started from a narrow banking philosophy, while the high - level expert group focused on the most volatile parts of banking business. the main difference in the position of the ring fence is that the high - level expert group proposal allows securities underwriting by the deposit bank, whereas the icb proposal forces it out of the ring - fenced deposit bank. the solution of the high - level expert group is based on the view that underwriting is actually closely connected with corporate finance and prohibiting it would hurt the universal banking model. another difference which stems from the different starting points is that, in the icb proposal, higher capital requirements are recommended for the ring - fenced deposit banks. as will

erkki liikanen : the future of central banking – proposed bank structures speech by mr erkki liikanen, governor of the bank of finland and chairman of the highlevel expert group on the structure of the eu banking sector, at a conference on “ the future of central banking ”, copenhagen, 30 january 2013. * * * introduction in the process of reaching the final proposal, our group considered two avenues as a possible way forward. in the first avenue, the main instruments were additional, non - risk - weighted capital requirements on trading activities and banks ’ credible recovery and resolution plans, subject to supervisory approval. such measures would be in line with the ideas of academic researchers who have suggested that a review of capital requirements is the best way to tackle risks in trading, and who have emphasized the need to develop bank resolution and recovery mechanisms. the possibility of conditional structural measures entered this avenue in the following way : if the bank were not able to prove that its required recovery and resolution plan was credible, separation of certain activities could be imposed. in the second avenue, immediate separation of retail and certain trading - related activities 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 the risks are difficult to quantify and risk profiles can change rapidly, as in trading. a sufficiently wide separation of trading activities would also avoid definitional problems that arise, for example, when pursuing the dividing line between proprietary trading and market making. eventually, our group converged to propose mandatory separation, an outcome based on avenue 2. the rationale for mandatory separation to sum up the rationale for separation as a regulatory measure, i would emphasize the following four points. firstly, as i have already suggested, separation is a way of preventing banks with insured deposits from engaging in activities whose risks are potentially high and difficult to quantify precisely, and which are not essential to deposit banking. moreover, as the separated trading entity is not allowed to finance itself with insured deposits, the price of its funding will better reflect its true risks and hence curb incentives to excessive risk - taking. secondly, separation of activities is the most direct instrument for tackling banks ’ complexity and interconnectedness. as banks will become simpler in structure, recovery and resolution will also be easier. moreover, as intra - group financing and subsidies between the deposit bank and the trading entity will be strictly limited, there will be fewer channels of contagion