German banks may exit proprietary trading and hedge-fund businesses rather than set up separate units under a government plan to strengthen the finance industry, according to Fitch Ratings Ltd.
The banks could opt to stop “restricted activities rather than incur the costs of separation, as the affected businesses make relatively small contributions to earnings,” Fitch analysts including Michael Dawson-Kropf said in an e-mailed statement today. “Only a few banks would end up putting trading activities into separate subsidiaries.”
Chancellor Angela Merkel’s cabinet approved a draft bill last week that would force deposit-taking banks to split the trading they do for their own profit, along with lending and guarantees to hedge funds, into separately capitalized units. About 10-12 banks will be affected by the plan designed to avoid a repeat of the taxpayer-funded bank rescues that followed the 2007 meltdown of the U.S. housing market, Finance Minister Wolfgang Schaeuble told reporters in Berlin on Feb. 6.
Placing such activities in separate subsidiaries “would be neutral to slightly positive for bank credit profiles” Fitch said.
Deutsche Bank AG, Germany’s biggest bank, is the “most obvious” candidate for setting up a separate subsidiary for the affected activities, Fitch said. Commerzbank AG, Landesbank Baden-Wuerttemberg and the local unit of UniCredit SpA may also be among the firms required to establish the units or close down the businesses, according to the ratings company.
Deposit banks would be required to separate the businesses, which also include high frequency trading, when they exceed 100 billion euros ($136 billion), or 20 percent of the balance sheet, according to the legislation. The BaFin financial regulator would get discretionary powers that affect lenders not covered by the limits.
The government aims to pass the draft law in the lower house of parliament and gain upper-house approval in the first half of the year.