* Separate entities will be created under draft reform
* Activities useful to the economy will not be harmed
* SocGen CEO says reform will be "demanding"
* Notes trading activities will not be thrown out wholesale
By Leigh Thomas and Lionel Laurent
PARIS, Nov 15 France's planned banking reform
will severely curb banks' proprietary trading while avoiding
moves that might restrict the flow of credit to the economy,
Finance Minister Pierre Moscovici said on Thursday.
The government is preparing to unveil a draft law in
mid-December that aims to crack down on banks' risky trading,
which was a campaign pledge of President Francois Hollande.
Banks will have to create a separate entity to house
activities deemed to be risky and would have to outline a
resolution mechanism in case they have to be wound down in a
crisis, said Moscovici.
Regulatory oversight will also be ramped up.
"I want this reform to profoundly change the sector,"
Moscovici told a conference on Thursday. "It will separate
speculative activities from those that are useful for the
The reform is being drafted after European proposals by the
Liikanen Commission called for a ring-fencing of nearly all
types of trading, including market-making where a bank quotes
buy and sell prices at which it will trade specific securities.
Reuters earlier reported that the French reform was expected
to spare market-making, according to two sources briefed on the
Moscovici insisted the reform would not spell the end in
France of large so-called universal banks - with activities
ranging from retail lending to trading in financial markets -
nor harm banks' services to their corporate clients.
Societe Generale Chief Executive Frederic Oudea
said the speech showed the reform would be demanding without
compromising banks' business models.
"It is the confirmation of a demanding reform," Oudea told
reporters on the sidelines of the conference. "I note, however,
that our trading activities will not be thrown out wholesale."
Proprietary trading, where banks take risks in financial
markets with their own money, is under the spotlight because it
can expose banks to big losses.
Around 5 to 10 percent of capital-markets revenue in 2011
was estimated to be proprietary-related at BNP and
SocGen, the two biggest investment banks in France.
Banks have already cut back proprietary trading in
anticipation of tougher rules, which echo measures in other
centres. In Britain for instance the Independent Commission on
Banking under John Vickers recommended UK banks shield or
"ring-fence" their retail operations from riskier investment
The French Banking Federation said in a statement following
Moscovici's speech that banks' ability to lend to the economy
should not be harmed and that foreign banks should not benefit
from the incoming law.
"(It must) not distort competition within the European
market, or between Europe and the United States," it said.
French banks have only just emerged from a year of shedding
assets and cutting staff to slim down their balance sheets to
prepare for tougher capital requirements under Basel III rules.
But BNP Paribas Chairman Baudouin Prot said a
recent U.S. decision to delay application of Basel III risked
creating a trend whereby Europe tightens the regulatory noose
around its banks while other jurisdictions hold back.
"Europe is taking the wrong road," said Prot, who became
chairman last year after almost a decade running France's No. 1
bank. "The U.S. economy, which created the crisis with subprime
debt, has still not regulated its mortgage market."
A full split of trading activities from retail and other
types of banking could cost 6 to 10 percent of profits at
France's top banks, according to analysts at Citigroup.
However, if the scope is restricted to proprietary trading,
the impact would be "marginal", they said.