* EU reform seen as compromise to keep France, Germany happy
* Proprietary trading ban would only affect biggest lenders
* Exemptions from bans available to national regulators
* Proposal unlikely to be approved until 2015 at earliest
By Huw Jones
LONDON, Jan 6 Banks in the European Union face
limits on taking market bets with their own money under a draft
EU proposal that represents a central plank of attempts to
prevent a repeat of the financial crisis of 2007 to 2009.
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
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
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
Brussels had already signalled 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 finalised 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
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
Some trading activities, like lending to private equity
funds, deals involving derivatives and complex securitisations,
and typically carried out for customers, may also have to be
carved out into separate entities.
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.
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 from trading.
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.