Safeguards Against Speculative Banking - NYTimes.com Bank bailouts were supposed to be followed by financial reform to limit the banks" destructive power. Instead, bailed-out banks are bigger than ever and have resisted reforms to limit their size and complexity. The lack of progress, however, may yet give way to change. A new report by a European Commission-appointed committee of experts, led by Erkki Liikanen, the governor of Finland's central bank, makes a strong case for having large banks segregate traditional banking activities from risky trading operations. Such reform would help to ensure that everyday functions, like taking deposits and lending to businesses, could not be derailed by losses on speculative trades in securities and derivatives. Equally important, it would reduce such trading because banks would no longer be able to use government-insured customer deposits to support their trades. Less trading would reduce systemwide risk, because it is the trading relationships among banks that can cause one bank's losses to cascade throughout the system. The Liikanen recommendations also offer hope that regulators will eventually be able to agree on banking reforms that apply internationally. If the European Union passes them into law, they will apply throughout the 27-nation bloc. Moreover, the recommendations echo policies, championed by the British economist John Vickers, that are being adopted in Britain. And they reflect the spirit of the Volcker Rule in the United States, which would prohibit federally insured banks from speculating in securities and derivatives. Those efforts still fall short of a global consensus on how to make banks safer, but they do indicate a trend, supported by top banking experts around the world. That is not to imply, however, that anti-speculation reforms are a done deal. The Liikanen recommendations face an arduous legislative process, including technical and legal challenges to make them consistent with other emerging Pan-European bank reforms. The Vickers reforms have been watered down as they have been put in place. The Volcker Rule has yet to be finalized. Nor does this trend imply that the reforms go far enough. The plans need to be paired with strong regulation of the derivatives market to ensure transparency and fair dealing in the trading that does occur. The euro crisis has demonstrated the continued instability of the global financial system. Other revelations - from JPMorgan Chase's "London Whale" losses, to manipulation of the Libor benchmark interest rate by some banks, to vast money laundering schemes - show recklessness and untrustworthiness in the industry, and the need for stronger regulation than many policy makers were willing to consider in the immediate aftermath of the financial crisis. The banks will surely resist the reform proposals. But policy makers should respond by making them tougher, not weaker.