The European Union’s drive to tackle too-big-to-fail banks has faltered as lawmakers in the bloc’s parliament struggle to find common ground on the crucial question of when authorities can order a lender to split off trading activities from consumer services.

The assembly’s two largest political groups -- the European People’s Party on the center-right and the Socialists and Democrats on the center-left -- have at least agreed on one thing: no deal at all would be better than a watered-down bill that achieves little. The parliament needs to adopt a negotiating position on the legislation so compromise talks can begin with the EU’s 28 member states on a final text.

“We will continue to insist on a regulation that addresses the too-big-to-fail problem instead of just pretending to do so,” Jakob von Weizsaecker, the point man for the Socialists and Democrats, said by telephone. “This will require risky banks with the most extreme business models either significantly to increase their capital or be separated.”

The European Commission, the EU’s executive arm, presented a draft plan in January 2014 that would require the bloc’s biggest banks to be screened by the central bank or another agency that supervises them. Separation of investment and consumer banking would take place if the firms were found to exceed certain levels of trading and risk-taking, with some limited room for supervisors to grant an exception if the bank proves that there is no risk to financial stability.

Banks have said the plan amounts to quasi-automatic separation and would damage their ability to finance the economy.

‘Risky Business’

“The commission proposed what was in reality a mandatory separation of the bigger banks, and I never accepted their point of departure, which was that investment banking is an especially risky business compared to retail banking,” Gunnar Hoekmark of the EPP, charged with shepherding the bill through the parliament, said in an interview. “Retail banking is a risky business. If you are trading in German bonds, that is not more risky than investing in a shopping gallery in the south of Spain.”

Hoekmark said lawmakers have worked through this sticking point, allowing talks to continue. “I think we have an agreement now that all decisions must be based upon discretionary assessments of the competent authority, but we will see what will happen in the coming weeks,” he said.

Negotiations on the bill have dragged in parliament since late May, when Hoekmark’s initial proposal was shot down in committee. He attributes that result to fringe lawmakers joining with the Socialists when it came to a vote.

“We hope that the Socialists will accept what we have proposed to them, and if so we will get the legislation that will make it possible for parliament to negotiate with the council,” Hoekmark said, referring to the Council of the European Union, which represents national governments.

Failing that, it would be “better to have a non-proposal from parliament than a bad one that could create problems for the financial markets,” he said.

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