The ban on proprietary trading proposed by European Union officials needs revision since it will add to systemic risk by cutting the amount of liquid assets that banks can hold, Denmark’s central bank said.
The ban would make it impossible for some banks to hold the liquidity portfolios required by the EU from 2015, Per Callesen, deputy governor of the Danish bank, said in an interview.
“If they can’t hold these assets themselves and make a small return -- and these liquid assets are obviously not traditional bank lending -- they must place the assets in a different entity,” he said. “Then banks are left without the very liquid assets intended so there’s something that needs to be considered in the regulation.”
The proposal, part of EU measures to prevent too-big-to-fail banks from getting in trouble, will target about 30 systemically important banks such as Nordea Bank AB (NDA), the biggest in the Nordic region. The plan was put forth in January and faces debate among EU member states and the bloc’s parliament, who are free to amend the original draft.
France and Germany earlier this year in a joint note argued that elements of the planned rules would go too far in curtailing involvement in some kinds of trading, jeopardizing the economy.
Denmark, home to the world’s biggest mortgage-backed covered bond market per capita, is already fighting the commission to avert liquidity regulation from upending it’s $550 billion covered bond mortgage market, which banks use to meet more than 70 percent of their liquidity needs.
The Nordic country is leading efforts along with France, Germany, Poland and Finland to have the executive body ignore a recommendation made by the European Banking Authority. The EBA in December recommended capping banks’ covered bond usage at 40 percent and to force lenders to book the bonds at only 85 percent of their market value. It also said all government bonds should get the highest liquidity status, including debt sold by bailed-out nations like Greece.
The legislation containing the ban on proprietary trading would need approval from the European Parliament and the Council of the European Union, the EU institution that represents national governments, to take effect.
Parliament adjourns next month for elections and it will fall to the next assembly, which first convenes in July, to decide whether and how to take forward the plans. Greece, which holds the rotating presidency of the Council, also hasn’t prioritized work on the proposals, focusing instead on draft laws where there is a possibility of reaching pre-election deals with the parliament.
If the proposal isn’t altered it will flush out liquidity from markets relying on big banks acting as market makers, including Denmark’s mortgage bond market, according to the Danish Securities Dealers Association.
“It’ll make brokers start acting like real estate agents who wait for a buyer before closing a deal,” Georg Andersen, head of the association and managing director at Nykredit, Europe’s biggest issuer of covered bonds, said in an interview.
The ban on proprietary trading is part of a regulatory overhaul to protect regular bank lending from the fallout of improper trading behavior in response to the 2008 financial crisis. It matches the U.S. Dodd Frank Act by setting new practices and curbing excessive behavior in the industry by limiting bank executives’ bonuses and allowing for regulators to split up companies deemed ‘too-big-to-fail.’
“Proprietary trading wasn’t the cause of the crisis in Europe,” Callesen said. “Here, problems were caused by traditional lending. Now they want to create a system where banks are less diversified, which we’re not convinced is actually healthy.”
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