LONDON (Reuters) — Germany and France
have attacked European Union plans to curb banks' ability to take
market bets with their own money, warning that this could jeopardize
a delicate economic recovery, a paper seen by Reuters showed.
Next week, the European Commission will unveil a blueprint to
challenge the power of big banks, tackling one of the biggest risks
exposed by the 2007-2009 financial crisis.
The paper does not bear an author's name but five financial industry
and government sources told Reuters that Germany and France,
together with Italy, were behind it.
It sends a warning shot from the euro zone's top economies to
Brussels not to overstep the mark in a way that could challenge
their national champions, such as Deutsche Bank <DBKGn.DE> or BNP
Paribas <BNPP.PA>.
It also underlines growing tensions with Brussels on financial
reform, weeks after a proposal from Brussels to set up a system of
banking union was watered down by EU members states, including
Germany.
The European Commission is due to formally propose the draft law to
rein in excessive trading risks on January 29, to apply lessons from
the financial crisis that forced taxpayers to bail out lenders that
had taken excessive risks.
Leaked versions of the draft law propose banning proprietary trading
at banks above a certain size.
Proprietary trading refers to banks taking bets on markets with
their own money rather than a client's. Other types of trading such
as complex securitization and derivatives may also have to be
separated from a bank's deposit-taking arm.
"This approach could result in a lot of activities useful for the
financing of the economy ceasing to be provided by European banks
and migrating to third country players or to the shadow banking
system, jeopardizing the financing of the economy in a crucial
recovery phase," the paper says.
Shadow banks refer to non-banking firms that deal in credit such as
broker dealers and some hedge funds.
The German and French finance ministries declined to comment.
Italy's representation in Brussels did not immediately respond to a
request for comment.
FRAGMENT MARKET
Financial industry officials said the paper is widely seen as an
attempt to fend off new rules that would prevent so-called universal
banks from losing the benefits of having all operations under the
same roof.
The paper said there were good arguments for preserving the
universal banking model, adding that a ban on designated proprietary
trading alone runs the risk of being ineffective.
"The draft regulation defines proprietary trading in nominal terms,
without going into the detailed characterization which is necessary
for effective implementation."
Instead, speculative activities could be separated on a "functional
basis", the paper said — meaning rather than splitting up banks.
"In this context, we suggest a middle course according to which
certain activities have to be separated (proprietary trading) while
others (market making) should be subject to supervisory judgement
based on the appropriate metrics, not automatic thresholds," the
paper added.
National exemptions from having to separate non-proprietary trading
could fragment the bloc's market, the paper added.
Germany and France are already introducing reforms to curb trading
risks, but they are less strict than the EU plans, while Britain
says its changes are at least as tough.
The draft law will have to be approved by EU states and the European
Parliament before it becomes effective from 2017.
It will be Europe's counterpart to the Volcker Rule that takes
effect in the United States in July 2015 to ban leading banks from
proprietary trading and which is being challenged by banks in the
courts.
(Additional reporting by John O'Donnell
in Brussels, Mark John in Paris and Matthias Sobolewski in Berlin;
editing by Chris Vellacott and Pravin Char)
