The European Union is still trying to move along its reform package for big banks — which includes rules curbing speculation and pushing for more transparency in risky trades — five years after the global financial meltdown. Michel Barnier, the Union’s financial services commissioner, presented the long-awaited draft law in Brussels this week. The blueprint is headed by a plan to ban proprietary trading, i.e. when banks trade exclusively with their own capital and seeking self-profit rather than on behalf of a customer. The mere fact that new rules have been proposed might be progress, but don’t expect the legislation to be passed any time soon. (Read the draft proposal here).
Around 30 big banks in the E.U. — “too-big-to-fail, too-costly-to save, too-complex-to-resolve,” as Barnier put it — are celebrating. After all, they will not be obliged to split their lending operations from risky trading activities, as recommended by a high-level expert group led by Erkki Liikanen, Governor of the Bank of Finland, in a report presented to the Commission in 2012. The Commissioner said that supervisors would get more power to require those banks to separate certain potentially risky trading activities from their deposit-taking business if the pursuit of such activities compromises financial stability. This would apply to banks exceeding, for three consecutive years, two thresholds: total assets of €30 billion or if the bank’s total trading assets and liabilities exceed €70 billion or 10% of total assets. As such, banks potentially affected account for around 65% of the total banking assets in the E.U.
A comparison with equivalent legislation in the United States, the Dodd-Frank Act of 2010 and especially its so-called “Volcker Rule”, is in order. Barnier said his proposal goes beyond that one, which stipulates that banks are allowed to place up to 3% of their overall capital into private equity funds, while the E.U. would ban it outright.
The proposal on structural reforms of the Union’s banking sector is much lighter than initially expected by industry players, but was critiqued by advocates and detractors alike. The European Banking Federation said that it was “untimely” and that “the universal banking model to be preserved.” Those — like many legislators in the European Parliament — advocating for greater control of the financial system, such as a mandatory separation of a bank’s investment activities, were also infuriated. On his behalf, Barnier considers it “the final cogs in the wheel to complete the regulatory overhaul of the European banking system.”
Better late than never, the optimists will say. That may be true but not when it comes with looming elections in the European Union. Knowing how legislation in the E.U. works it’s fair to say that it is impossible that the European Parliament passes this legislation before April when it holds its final session. As rumors grow stronger that he will present his candidacy to become the next president of the European Commission, it’s tempting to believe that Barnier was more focused on campaign strategy than on safeguarding the financial system and defending the Union’s taxpayers (during the course of the financial crisis, a total of €1.6 trillion in public funds went to bailing out out the financial institutions). The E.U. hopes the ban on proprietary trading could come into force in 2017 followed by the separation rules in 2018 — a long way to go indeed.