With a few days to go until the publication of the Liikanen report on bank structural reform, proposals designed to limit, separate or ban certain activities are attracting much attention. Some observers see this kind of reform as the main antidote to the financial crisis, as a tool to avoid future crises and even as a barrier against unknown financial risks. This is a mistake.

The main objective of structural reforms is to protect taxpayers by limiting the possibility of banks, which explicitly or implicitly benefit from a public safety net, becoming insolvent. Such proposals also aim to improve the governance of financial groups and to make it easier to resolve a failing bank.

Separating or ringfencing retail or market activities may look attractive because of the apparent simplicity of such measures and because they seemingly create a separation between activities vital to the economy and those that may be left to go bankrupt. But a closer analysis reveals many shortcomings.