French Finance Minister Pierre Moscovici introduced a bill designed to force the country’s largest banks to fence off proprietary trading activities in dedicated units.
The product of months of discussions between industry and government officials, the bill would require banks including BNP Paribas SA and Societe Generale SA to split market activities deemed unnecessary to finance the economy into separately capitalized units. The rules would also forbid banks from holding stakes in hedge funds and limit high-frequency trading and commodity speculation. The bill would also set up a 10 billion-euro ($13 billion) resolution fund.
“One cannot speculate with deposits,” Moscovici said at a press conference in Paris today, describing the law as the first of its kind in Europe. The financial crisis “revealed the threat proposed by proprietary trading.”
While France may be first to act, the changes are milder than those proposed by the European Union and U.K., as the government seeks to preserve a universal model that combines consumer lending with corporate and investment banking. President Francois Hollande, who called finance his “greatest adversary” during his campaign, pledged to overhaul banking by separating deposit-taking from speculative operations.
“Most of the capital-market activities, under the disguise of so-called market-making operations, will stay in the deposit bank,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “This law is not going to protect the French taxpayer.”
Bank of France governor and European Central Bank Governing Council member Christian Noyer called the law “optimal,” rejecting criticism that it was “minimalist.” He said the new rules will isolate speculative and risky activities. A full separation of market and retail activities “would be contrary to the national interest,” he said yesterday on France’s BFM Television.
The French push to create separate units for the riskiest trading follows recommendations from an EU-commissioned group led by Bank of Finland Governor Erkki Liikanen. Unlike the Liikanen proposals, the French bill will allow lenders to keep market-making operations within the main banking group.
Liikanen’s Oct. 2 report recommended a “legal separation of certain particularly risky financial activities from deposit-taking banks within the banking group.” It recommended putting proprietary trading and market making in a separate unit.
The EU report found that Paris-based BNP Paribas and Societe Generale, along 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 the total. Their value fluctuates with their market performance.
The French banking federation, the group representing the country’s institutions, said the bill “will not favor a return to economic growth.” The FBF said “the law creates extra constraints and costs at an inopportune time,” according to a statement posted on its website.
Hollande projects 0.8 percent economic growth next year. The median of 38 economist forecasts collected by Bloomberg points to a 0.3 percent expansion.
The industry group also warned against the potential handicap they face. “French banks may end up being the only ones applying such rules on their activities,” saying the U.K. and the U.S. rules implemention were ’’uncertain.’’
“We cannot use the pretext that finance is too big and that the stakes too complex to accept the failures of the system,” Moscovici said. “I want this law to protect consumers, especially the most vulnerable ones.”
France is also setting up a system to help wind down ailing banks without relying on taxpayers, as well as creating a “macro-prudential” authority to better oversee systemic risks, or linkages among financial institutions.
Lawmakers will start debating the proposed law in February and the bill is likely to be voted in the first half of the year. Banks will have to complete proprietary trading ring-fencing by 2015.
French efforts to shield deposits from risky activities come after 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.
While most French bankers opposed a separation between consumer and investment banks, they have said they would accept a Volcker-type rule. French banks, which are already adapting to rules including Basel III stricter capital requirements, “will have to run this on top of the rest,” Societe Generale Chief Executive Officer Frederic Oudea said Nov. 15.
BNP Paribas, France’s largest bank, would have less than 2 percent of its corporate- and investment-banking sales affected by the government split plans, Alain Papiasse, head of BNP’s corporate and investment bank, said last month, declining to further assess the impact of the law.
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.