* Law still needs to go through parliament
* Would limit risk-trading but not break up banks
* Law also foresees jail for reckless bankers
* Spinning off proprietary trading to affect up to a dozen
banks - Schaeuble
* Opposition says plans are not far-reaching enough
By Annika Breidthardt and Matthias Sobolewski
BERLIN, Feb 6 Germany plans to force up to a
dozen banks to separate the riskier side of their business with
a draft law that could send the reckless to jail but stops short
of significantly disrupting key lenders.
The draft, approved by the cabinet on Wednesday, would push
Germany ahead of international efforts to reform the banking
system and prevent a repeat of the 2008 financial crash, even
though the country may need to adjust once the European Union
follows suit with pan-EU rules.
"It's a further step in our efforts to learn the lessons
from the financial crisis of 2008 and 2009. We know the
exaggerated deregulation of financial markets was a mistake,"
Finance Minister Wolfgang Schaeuble told reporters.
"No financial market, no financial actor, no financial
product shall stay unsupervised," he added.
Under the draft law Germany would compel lenders to separate
proprietary trading activities from retail banking, but only
when assets associated with them exceed 100 billion euros ($135
billion) or 20 percent of the balance sheet.
On the basis of data from 2011, Schaeuble said that would
affect 10 to 12 banks but declined to name them.
Lenders would still be allowed to trade on behalf of
clients, conduct treasury activities and engage in
market-making, a practice where financial institutions quote
prices at which they will buy or sell securities.
The German draft includes provisions to imprison bank
executives for up to five years if they are found guilty of
reckless behaviour that puts a bank at risk.
The bank supervisor must also present plans on how banks
might be restructured or wound down without using taxpayers'
The draft law is the latest in a string of measures by
Chancellor Angela Merkel's government to regulate financial
markets, following steps to limit managers' pays, ban
short-selling and have banks pay into a resolution fund.
But with federal elections due in September, opposition
politicians dismissed the plan as "a placebo", saying it is too
soft on the bankers many blame for years of financial turmoil.
"Banks continue to be allowed to do highly risky business,
and they will do so," said Joachim Poss, SPD deputy
parliamentary floor leader.
Greens parliamentary floor leader Juergen Trittin said even
Germany's flagship lender Deutsche Bank could live with the law.
"It's a placebo with the purpose of election campaigning."
The upper house, or Bundesrat, where the main opposition
parties, the Social Democrats (SPD) and the Greens, have a
majority, can delay the law until the election, at which point
it would die. Schaeuble said he hoped the law would be signed by
REGULATE - BUT HOW MUCH?
European countries are trying to strike a balance between
popular calls for banks to be reined in and the risk that too
tight a leash could choke off recovery.
But as EU legislation is likely to be presented only in
September and could take years to come into force, individual
countries have pushed ahead with their own regulation, and
Germany's proposal leaned on similar French plans.
Critics say that is intended to spare German banks some of
the tougher ring-fencing moves outlined by the Liikanen group,
an EU advisory group, which four months ago unveiled reform
proposals to shield taxpayers and savers from bank collapses.
Britain's finance minister, George Osborne, announced on
Monday, for example, that British banks failing to shield their
day-to-day banking from risky investment activities could be
Bankers have sought to cast doubt on whether the law would
bolster financial stability.
"The draft law weakens Germany's financial centre and the
time-tested German system of universal banks," said Andreas
Schmitz, president of the German banking association.
Questioning the point of pushing ahead when European plans
are still pending, he added: "Banking regulation is increasingly
similar to a labyrinth from which nobody knows the exit."