EU-DIGEST: EU unveils plan to ban banks' proprietary trading

1/29/14

EU unveils plan to ban banks' proprietary trading

The European Union has unveiled a much-delayed plan to rein in banks' proprietary trading and give supervisors the power to split off risky trading activities from safer lending operations in an effort to tackle the risks posed by banks that are deemed "too big to fail."

But following pressure from the banking industry, the proposal stops far short of a forced separation of retail banks from investment banks that was advocated 15 months ago by an EU-appointed group of experts. Officials said the plan was unlikely to be adopted any time soon given that the European Parliament--which must ratify any agreement--is set to dissolve ahead of elections in May.

"It is certainly not satisfactory to bring something out when the last date for accepting legislation was last July," said Sharon Bowles, chairwoman of the European Parliament's influential economic affairs committee. "Nothing will happen on [this] in this Parliament."

Michel Barnier, the EU commissioner responsible for the proposal, admitted Tuesday that the text wouldn't be voted on until the end of this year or early next year.

The blueprint by the European Commission, the EU's executive arm, is the final piece in Europe's lengthy overhaul of its banking system in the wake of the financial crisis, a process that has encompassed fatter capital cushions, bonus caps for bankers and plans for a euro-zone banking union.

Wednesday's proposal is aimed narrowly at a problem that hadn't yet been addressed by the cascade of new EU regulations--so-called "too-big-to-fail" banks, which benefit from lower funding costs because investors assume governments will bail them out rather than let them collapse. It seeks to harmonize laws that have already been adopted in several EU countries to deal with too-big-to-fail institutions, including Germany, France and the U.K.

The commission plans to impose an outright ban on proprietary trading by about 30 of the region's biggest banks, following the example set by the Volcker rule in the U.S., although the latter will apply to all banks. Europe's 30 biggest lenders include HSBC in the U.K., Deutsche Bank and France's BNP Paribas.