PARIS A soon-to-be-finalized French banking reform law will have a wider-than-expected scope as Francois Hollande's administration seeks to rein in several related sectors, according to a draft seen by Reuters.
Extra powers will be given to France's banking and capital-markets regulators to keep banks, brokerages, insurers and consumer-credit providers in line and to protect taxpayers from the cost of bailing out failed institutions, the document said.
It marks a flagship attempt by the administration of President Hollande to deliver on a campaign pledge to shake up the financial sector by separating speculative banking businesses from those deemed useful to the economy.
The reform holds back from curbing banks' market-making activities, as previously reported by Reuters, putting France at odds with tough proposals by the EU's Liikanen Commission for a broader ring-fencing of trading activities.
"The option chosen by the French government is to not entirely separate activities," said a source close to the situation. "France wants to pave the way in Europe."
The centerpiece of the reform demands banks like BNP Paribas (BNPP.PA) and Societe Generale (SOGN.PA) put their proprietary trading activities and financing for certain types of hedge funds and private equity into separately regulated entities, according to the draft law due to be unveiled in December.
These entities will be banned from high-frequency or commodity-derivatives trading. Client-related activities like market-making, hedging and other investment services will be spared, as will banks' own investment and cash-management operations, keeping them with the parent group.
DEFINITION OF RISKY
However, non-bank entities such as securities trading firms and brokerages will also have to submit to "objectives, limits, rules on organization and on good conduct", that depend on the definition of risky and non-risky trading.
Banks will have until July 2014 to earmark activities deemed risky by the law and will have until July 2015 to transfer them into separate entities.
BNP Paribas only derives about 1 percent of investment-banking revenues from proprietary trading, one of its top executives told reporters recently. Bankers have said it is likely some banks will decide to scrap these businesses entirely rather than continue to run them as a separate entity.
Insurance groups with cooperative structures like Groupama GRPMHA.UL will also face stronger oversight, while another section of the draft reform tightens consumer-credit rules for borrowers in "precarious" financial situations.
The reform will also ask banks, brokerage and trading houses - with the exception of portfolio managers - to outline a resolution mechanism in case they have to be wound down in a crisis.
While the draft law is not due to be officially unveiled until mid-December, leaks have sparked angry reactions from French banks and more sanguine views from some analysts, who say the law will have a marginal impact on bank profits.
Politicians, lobbyists and advocacy groups are also poring over the draft ahead of its publication and an eventual public debate over the law.
"We are pleasantly surprised by the draft proposals on ring-fencing risky activities ... However, in our view the consumer-credit controls don't go far enough," said Maxime Chipoy, finance specialist for French consumer advocacy group UFC-Que Choisir.
(Editing by Christian Plumb and David Holmes)