EU’s Barnier says big banks must be cut down to size

He objects to UK-based banks flouting bonus rules

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“Too big to fail” banks must be tackled to prevent another economic crisis, the European Union’s financial services chief has said.

Michel Barnier, who has overseen Europe’s biggest post-war downturn, insists that banks must be broken up to prevent traders taking risks that could end in more state bailouts.

Europe’s largest banks would remain “too big to fail, too complex to resolve and too costly to save” if the EU did not adapt its financial laws, he said in an interview ahead of his exit from the role. His successor as Commissioner will be the Conservative peer Jonathan Hill.

Mr Barnier called on the European Commission to press ahead with a restructure; new measures might include breaking up banks, more stringent policing of shadow banking, and benchmark interest rates. The proposed changes were “necessary to make Europe better”, he said.

Germany, France, Spain, Poland and Denmark are among at least 10 countries wary of Mr Barnier’s proposals. Lawyers for the EU have also raised legal concerns over the flexibility of legislation and the wide-reaching impacts of separation plans.

In addition to the separation proposals, Mr Barnier said action must also be taken against British-based banks that had ignored EU caps on pay bonuses to senior employees. He criticised banks including HSBC and Goldman Sachs for bypassing bonus caps by giving out so-called “cash allowances” to senior employees.

“It is important to show a collective, pro-active stance on this important matter and address the claims made that the spirit of European Union law is being disregarded,” he said.

EU rules introduced earlier this year limit bonuses for bankers to 100 per cent of their annual salary, or 200 per cent with shareholder approval, to reduce excessive risk taking.

However, as banking is so vital to the UK economy, Westminster has resisted the EU-imposed limitations and is fighting for the cause in European courts. British financial institutions have also warned that the limit on bonuses could re-direct talented employees to Wall Street, Asia and the Middle East.