The European Commission faces calls from banks to scale back parts of a draft law that could lead to some lenders being forced to split off trading activities, a European Central Bank survey shows.
Banks are warning that forcing them to separate some client-focused trading services from their core business would “decrease liquidity in many asset classes and exacerbate the impact of financial shocks,” according to a summary of comments submitted to the ECB and obtained by Bloomberg News.
Lenders are also calling for changes to the text to make it clearer that no bank will be automatically forced to split under the legislation, unveiled earlier this year by Michel Barnier, the EU’s financial-services chief. “Only the supervisor’s assessment should provide the final decision,” according to the June 12 summary document.
The proposal would ban about 30 of the bloc’s most systemically important lenders from proprietary trading and set out a blueprint to split them up according to EU-level standards, following a review by supervisors. The split would push certain kinds of derivatives and other trading activities into separately capitalized units.
Banks say mandatory separation of market-making will lead to “higher costs that would either have to be passed on to end users, and/or a number of market-makers would possibly withdraw from this activity as they would not set up costly separate trading entities,” according to the ECB document.
“The summary presents views collected across a sample of around 20 banks, five investors and one market association,” according to the ECB document. “The respondents cover both universal banking groups as well as the head offices of saving banks/cooperative banks.”
An ECB spokesman said the views in the survey shouldn’t be attributed to the central bank or any specific participant. The ECB is preparing a legal opinion on the draft EU bank-structure regulation that will be published in due course, he said.
Barnier has said the blueprint is a “cornerstone” of the EU’s fight against too-big-to-fail lenders that has dominated his five-year tenure. The plans need approval from governments and the European Parliament to take effect.
National officials met in Brussels yesterday to discuss the plan as Italy, which took over the EU’s rotating presidency on July 1, weighs how to take forward work on the legislation.
Germany, France, Spain, Poland, and Denmark are among at least 10 countries to challenge Barnier’s approach, with many warning that the plans don’t leave supervisors enough room for maneuver to decide whether or not to go ahead with separation, and that the range of activities to be split off is too wide.
The plan has also hit a legal snag, after in-house lawyers for the EU said that some exemptions built into the proposals either needed to be scaled back, or the legislation in general made more flexible.
Germany’s position on the law is “that we can’t regulate everything in detail, abstractly and universally, but that we give the supervisor much more the instruments and the discretion to enable it to take the right decisions in every particular case,” Finance Minister Wolfgang Schaeuble has said.