German plans to force large retail banks to spin off their proprietary trading will probably affect more lenders than anticipated by the so-called Liikanen group, a German government official said.
Based on the share of total assets held for trading, Deutsche Bank AG, Landesbank Baden-Wuerttemberg and Commerzbank AG would be affected by the proposals made by a high-level advisory group led by Bank of Finland governor Erkki Liikanen, according to an Oct. 2 report published by his working group. More German banks will likely be affected, the official told reporters in Berlin today, without providing any names.
A draft bill due to go to Chancellor Angela Merkel’s Cabinet on Feb. 6 would force deposit banks to separate proprietary trading, lending and guarantees to hedge funds as well as high-frequency trading when associated activities exceed 100 billion euros ($135.9 billion), or 20 percent of the balance sheet, the official said on condition of anonymity because the Finance Ministry proposals are still in draft form.
The rule would only apply to banks whose trading and non-trading activities combined amount to at least 90 billion euros, the official said. The German plans have been drawn up in close cooperation with France and are based on proposals made by the Liikanen group, he said.
Banking legislation is hoving back into focus as the European Commission prepares proposals on overhauling bank structure in a bid to curb risk and prevent lenders being too-big-to-fail. Draft rules will be presented in September, a spokesman for European Union financial services chief Michel Barnier said Jan. 30. U.K. Chancellor of the Exchequer George Osborne said separately today that regulators will get the power to break up banks operating in the U.K. under tougher legislation aimed at making lenders safer.
In Germany, banking legislation is at the forefront of policy making as lawmakers prepare to contest federal elections slated for Sept. 22. Merkel’s Social Democratic challenger, Peer Steinbrueck, first proposed that German banks split their investment-banking operations from consumer units to protect depositors and said the government’s draft law is insufficient.
Concerns that Steinbrueck may benefit from hostile sentiment toward the financial industry may have encouraged the Finance Ministry to move quickly to draft the law. The government aims to pass the rule in the Bundestag, Germany’s lower house of parliament, before the summer recess. It would then need approval in the opposition-controlled upper house.
Germany has to provide impetus to financial-market regulation after one-sided deregulation was partially responsible for the financial and sovereign debt crises plaguing the world since at least 2008, the official said.
The German and French rules are to go into effect in January 2014, the official said. Banks would have until July 2015 to complete the separation of proprietary trading activities, he said. Trading activities necessary to prepare for client business, such as market-making, don’t have to be separated automatically because of the law. An impact study is still needed, the official said.
Germany’s BDB banking association warned on Jan. 30 against “hasty” regulation initiatives, saying that there is no proof the division of commercial transactions increases financial-market stability. All German business lobbies agree that maintaining Germany’s universal banking system is in the interest of growth and employment, the BDB said.
The European Central Bank said Jan. 28 that it’s vital to evaluate the impact of the planned new banking rules across the EU. Differences in the structure of the banking sectors could produce “different consequences in terms of divergent funding costs as well possible unintended consequences, namely on the real economy of member states,” the ECB said.