Policymakers want to rein in excessive trading risks in the EU
banking sector, whose assets total some 43 trillion euros ($59
trillion), that could threaten depositors if trades go wrong and
potentially put taxpayers on the hook in a rescue.
Yet the EU proposal, seen by Reuters on Monday, has already been
described as a watered-down measure designed to ensure approval
across the bloc and which is less rigorous than equivalent "Volker
Rule" regulations being introduced in the United States.
Despite its language banning proprietary trading — where banks trade
on their own account and not on behalf of a customer — one financial
industry lobbyists called the proposal a "cop-out compromise".
The lobbyist said it gives countries like France and Germany leeway
to avoid splitting up their big universal banks into separate
deposit-taking and more risky investment banking operations.
Brussels had already signaled it would stop short of too radical
measures given political unease over breaking up big banks and
giving a competitive advantage to non-EU rivals.
The proposal is being finalized by EU financial services chief
Michel Barnier, who will formally publish it as a draft law within
weeks, with further changes possible before then.
"Barnier does not want to make any waves during the remainder of his
term," one financial industry official said. Barnier's term ends
when the current commission is replaced on October 31.
The proposal would apply to all the bloc's banks, but proprietary
trading would only be banned at about 30 top lenders, defined as
having total assets of more than 30 billion euros, or who are
already deemed to be "globally systemic" such as Barclays, BNP
Paribas and Deutsche Bank.
Proprietary trading is defined narrowly, so a bank can continue to
trade on behalf of customers and make markets, or quote buy and sell
prices in securities.
"Accordingly, desks, units, divisions or individual traders
specifically dedicated to taking positions for making a profit for
(their) own account, without any connection to customer activity or
hedging the entity's risk, would be prohibited," the proposal says.
Some trading activities, like lending to private equity funds, deals
involving derivatives and complex securitizations, and typically
carried out for customers, may also have to be carved out into
The United States has gone further and has just approved its Volcker
Rule, which imposes a mandatory ban on leading banks from making
bets on securities or other assets on their own account. The rule
will take effect in July 2015, but is being challenged by U.S. banks
in the courts.
With the European Parliament going to the polls in May and a new
European Commission appointed by October, approval of what will be
highly contested legislation is unlikely before 2015 and won't take
effect until about 2017.
Barnier's proposal seeks a pan-EU approach that would allow national
initiatives in the pipeline to continue, and draws on a report from
Finnish central bank governor Erkki Liikanen.
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Liikanen recommended a mandatory separation of a bank's
deposit-taking activities from significant proprietary trading, but
France, Britain and Germany, representing a large chunk of EU
banking assets, have already taken unilateral steps to tackle risks
Britain, for example, is introducing its "Vickers" reform which
requires deposit-taking arms of banks to be ring-fenced, or
protected with an extra cushion of capital.
The EU proposal sets out "derogations" or exemptions from an
automatic proprietary trading ban, so Germany, for example, won't
have to necessarily physically split up Deutsche Bank.
Exemptions would be allowed if a national supervisor introduces
special measures to ensure the effective separation of certain
activities to prevent financial instability, a wording financial
experts say gives countries leeway.
Alexandria Carr, a regulatory lawyer at Mayer Brown in London, said
Barnier was seeking a compromise with everyone.
"It (the measure) seeks to compromise between Volcker and Vickers,
to compromise between the lobbying of the consumer associations and
the financial sector, and to compromise between the positions of the
UK on one hand and France and Germany on the other," said Carr.
"It remains to be seen whether the proposal that the Commission
publishes will take a more defined position but, on the present
draft, the concern must be that in seeking to please everyone, the
Commission will please no-one," Carr said.
Some financial experts have also interpreted the proposal as
exempting huge banks like HSBC because of its global structure based
on country-focused subsidiaries.
The proposal also seeks to stop banks from circumventing any ban by
preventing them from holding stakes in hedge funds that could take
trading bets on their behalf. ($1 = 0.7330 euros)
(Editing by David Holmes)
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