The European Commission's proposals to separate banks' securities trading activities is likely to put a squeeze on funding and capital for market making, straining secondary market liquidity supply, two associations say.
The Association for Financial Market in Europe (AFME) and the International Swaps and Derivatives Association (ISDA) have submitted a joint-response to the Commission's consultation on the structural reform of the banking sector.
The Commission was taking submissions from 15 May to 11 July on proposals focusing on the structural separation recommended by the Liikanen High-Level Expert Group.
In their joint submission, the associations said plans to separate securities trading activities into separate entities would have a "significant negative impact" on banks' ability to support economic growth.
The move was unnecessary as analysis on the financial crisis uncovered no link between loses experienced by banks and their business models or size.
"As the Liikanen report itself highlights, the crisis was caused by weaknesses in controls, lack of funding diversification, poor risk management and inadequate levels of capital and liquidity."
AFME and ISDA said separation would cause the trading entity to face reduced revenue streams and lower diversity of funding sources. This would lead to rating downgrades of "several notches," increasing the banks' funding costs and collateral requirements from its counterparts.
"The joint associations are concerned that if funding and capital available for market making activities in banks is significantly reduced … secondary market liquidity provision will be significantly impaired."
There was also concern about proposed thresholds based on accounting definitions, relying on publicly available data, with the associations saying they did not believe it would provide the right framework.
Banks structural submissions closed in the same week as European Commissioner Michel Barnier proposed a single resolution mechanism for European Euro-area banks. The plan gives the Commission the power to shut down failing banks.