Hollande to unveil softened French bank reform

PARIS Tue Dec 18, 2012 6:01pm EST

PARIS Dec 19 (Reuters) - French President Francois Hollande's long-awaited bank reform will be unveiled on Wednesday, almost a year after his campaign pledge of a "long war" against the financial sector.

The overhaul will ultimately hit only a sliver of banks' profit, handing a victory to the likes of BNP Paribas and Societe Generale, according to a leaked draft of the bill, reflecting months of intense lobbying.

The draft reform requires banks ring-fence proprietary trading activities in separate, self-funded entities by 2015, while sparing activities such as market-making, hedging and private-equity financing. Regulatory oversight of their activities will be ramped up.

In principle, this is not far removed from recommendations made in October by a European Union advisory group led by Erkki Liikanen which called for the ring-fencing of a swathe of trading activities. It is also similar to the U.S. "Volcker Rule" which cracks down on proprietary trading.

France's reform defines prop trading so narrowly it leaves much of the riskiness of banks intact, critics say, such as sizeable derivatives portfolios and funding of risky investment vehicles.

"This is worse than a backtrack," said Jerome Cazes, former head of Natixis credit-insurance unit Coface. "It is the minimum you can put in a law without blowing a raspberry to the public."

Socialist lawmakers and senators have defended the proposals, saying they will keep banks in line and protect taxpayers from the cost of bailing them out while, at the same time, protecting the stagnant economy from a body blow.

"The bank reform law will well and truly ... formally separate banks' reckless activities," Socialist deputy Karine Berger said in a column on Sunday, saying critics were "mean-spirited moaners." (Editing by Dan Lalor)