Bank Breakup Bill Faces Test After U.K. Carve-Out Talks

European Union nations will seek a deal on Wednesday on a law to tackle too-big-to-fail banks, after hammering out the detail of plans to exempt big U.K. lenders from the legislation.

The draft law sets out rules for how supervisors should vet the EU’s most systemic banks and, if necessary, hit them with tougher capital requirements or force them to split off their trading activities, according to documents obtained by Bloomberg. Envoys from EU nations will seek agreement at a June 17 meeting in Brussels, with much preparatory discussion in recent days devoted to defining Britain’s planned carve-out, according to two people familiar with the talks.

Latvia, which holds the EU’s rotating presidency, has told other nations that “there is no further room for movement” on the draft law, according to a June 15 document. Changing any element would put “at risk the delicate balance on which the current broad support depends.”

The draft law is the EU’s latest bid to tackle risks posed by its biggest banks and to shield taxpayers from having to bail them out if they fail. The European Commission, the EU’s executive arm, made proposals in January 2014 on how supervisors should assess banks to determine if they should have to split off investment banking from consumer services.

National officials have been holding talks since last year on how to redraft aspects of the plans.

Vickers Plan

The Brussels-based commission has advocated a carve-out that would shield the U.K. from having to amend its own rules -- known as the Vickers plan -- which predate work on the EU law; that idea has had broad support from nations. Still, intensive talks have taken place this month on the details of the exemption, according to the people, who asked not to be named because the talks are private.

In the texts to be discussed at Wednesday’s meeting, banks already being split up under the U.K.’s blueprint would be exempt from key parts of the EU legislation. Still, the EU rules would capture U.K.-based units of banks that are headquartered in other EU nations and fall outside Vickers, according to the documents.

The would mean, for example, that units of BNP Paribas SA and Deutsche Bank AG operating in the U.K. would be vetted by supervisors under the EU law, according to one of the people.

The U.K.’s bank-structure rules, drafted by John Vickers’ Independent Commission on Banking, seek to ensure that core financial services such as retail deposits and payments will be protected if riskier divisions incur losses and have to be shut down. Banks with core deposits exceeding 25 billion pounds ($39 billion), including HSBC Holdings Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc, will be forced to comply starting in 2019.

A deal at the June 17 meeting would establish nations’ opening negotiating position in talks on the law with the European Parliament.

An agreement at the gathering isn’t certain, the people said. The draft law may also be discussed at a meeting of finance ministers on June 19 in Luxembourg, they said.

The U.K.’s EU representation didn’t have immediate comment.

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