On 29 January 2014 the European Commission published a proposal for legislation which would impose structural changes on the EU's banking sector. This is not the only legislation with such an objective. Since the financial crisis, a number of jurisdictions, including the US, the UK, France and Germany, have introduced legislation to separate retail and commercial banking from wholesale and investment banking in an attempt to re-structure banks that have been called "too big to fail".

Until recently, there were two main approaches to bank structural reform: the US Volcker rule's outright prohibition of certain activities and the functional separation of certain activities (ring-fencing) employed in the UK, France and Germany. The EU's proposal, if adopted, will introduce a third approach to bank structural reform: an approach that combines elements of the Volcker rule and ring-fencing but is arguably inconsistent with both approaches. Like the Volcker rule, the EU draft legislation proposes to have extraterritorial effect and to apply to EU branches of non-EU banks and non-EU subsidiaries of EU banks, as well as to banks actually established in the EU.

This article considers the EU's proposal and looks at how it may affect banking groups that are headquartered both inside and outside the EU.