France to Require Wall to Isolate Banks’ Riskiest Trading

Finance Minister Pierre Moscovici
Finance Minister Pierre Moscovici said France will ask banks to set up “strict” walls around market activities that are not necessary to financing the economy. Photographer: Balint Porneczi/Bloomberg

France is planning its biggest banking overhaul in three decades, forcing the country’s lenders to place “speculative” trading businesses into separate subsidiaries, Finance Minister Pierre Moscovici said.

“The reform will protect savers, it will better reorient banks toward useful activities, it will preserve the universal bank model that has served us well,” Moscovici said today at a conference in Paris. The banking bill to be presented to parliament next month will also include “strong” resolution measures for troubled banks, he said.

With the plan, the government is following recommendations last month from a European Union-commissioned group, led by Bank of Finland Governor Erkki Liikanen. President Francois Hollande, elected in May, had pledged to revamp the country’s banking industry -- with the biggest foreign holdings in public and private debt in the euro-area’s troubled economies -- to better protect deposits from riskier investment-banking operations.

France will ask banks to set up “strict” walls around market activities that are not necessary to financing the economy, Moscovici said. The “dedicated subsidiary” will be subject to “severe” capital requirements, he said.

Speculation through high-frequency trading and on agricultural-commodities derivatives will be banned, Moscovici said, without providing details. The bill seeks to ban “pure proprietary trading that allows” banks “to speculate with their balance sheets, unless they are very strictly ring fenced,” he said.

‘Demanding’ Measures

Shares of BNP Paribas SA, France’s biggest bank, rose 0.6 percent to 40.30 euros in Paris. Societe Generale, the country’s second-largest bank by market value, rose 0.6 percent to 25.14 euros, while Credit Agricole SA jumped 1.5 percent to 5.62 euros.

“I don’t have the details, which apparently seem demanding,” Societe Generale’s Chief Executive Officer Frederic Oudea, who listened to Moscovici’s speech, told reporters today in Paris. French banks, which are already adapting to rules including Basel III capital requirements, “will have to run this on top of the rest,” he said.

A BNP Paribas spokeswoman declined to comment as did a Credit Agricole spokeswoman.

“This reform isn’t meant to be punitive for banks,” Moscovici said. “The most sophisticated needs of corporate financing and market access can’t be underestimated.”

Legal Separation

Liikanen’s Oct. 2 report recommended a “legal separation of certain particularly risky financial activities from deposit-taking banks within the banking group.”

The EU report found that Paris-based BNP Paribas and Societe Generale, together with Barclays Plc of London, Frankfurt-based Deutsche Bank AG and Royal Bank of Scotland Group Plc of Edinburgh had the highest proportion of trading assets, accounting for more than 30 percent of total assets.

The value of trading assets fluctuates with their market performance.

European efforts to shield deposits from risky activities mirror measures proposed in the U.S. and the U.K. Named after former U.S. Federal Reserve Chairman Paul Volcker, the U.S. plan would ban commercial lenders from proprietary trading.

Other Measures

The U.K.’s Vickers proposals, from a group led by the former Bank of England Chief Economist John Vickers, recommended banks separate their consumer and investment banking units.

“We’ve taken into account all similar legislations that have already been undertaken,” Moscovici said. “Our project will largely rest on an approach advocated by Erkki Liikanen.”

The French government also wants to set up a system ahead of European banking union plans to use lenders’ funds rather than savings or taxpayer money to help wind down troubled institutions, Moscovici said.

The bank reform bill will also seek the creation of a new “macro-prudential” authority to better watch over systemic risks, he said. “Supervision is too focused on following each institution’s individual risk; it doesn’t yet correctly comprehend systemic risk.”

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