German Banks Blast Merkel Proprietary Trading Split Plan

Germany’s banks criticized plans by Chancellor Angela Merkel’s government to force them to separate some investment-banking operations from units that work for corporate and retail clients.

The coalition’s proposal will raise costs and erode the ability of banks to provide clients with a complete array of services, Deutsche Kreditwirtschaft, a lobby for Germany’s five biggest banking groups, said in a statement drafted for a parliamentary hearing on the bill taking place in Berlin today. The “go-it-alone” approach leap frogs that of some European partners and won’t reduce risk at banks, according to the 27-page study of the bill posted on the lower-house website.

The government legislation seeks to preserve Germany’s so-called universal banking model of investment- and retail-banking arms under one roof by watering down plans suggested by a group commissioned by the European Union and led by Bank of Finland Governor Erkki Liikanen. The central banker suggested a split to protect depositors and taxpayers in case securities units ran up losses.

Five months to the day before federal elections, Merkel’s government is treading a fine line between a banking industry for whom the proposals go too far and the Social Democratic-led opposition, which says they don’t go far enough.

Merkel’s Cabinet approved a draft bill in February that would force deposit-taking banks to split into separately capitalized units the trading they do for their own profit along with lending and guarantees to hedge funds.

‘Most Obvious’

Deutsche Bank AG, Germany’s biggest lender, is the “most obvious” candidate for setting up a separate subsidiary for the affected activities, Fitch Ratings Ltd. said in February. 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, Fitch said.

Deutsche Kreditwirtschaft said its members doubt that the work banks conduct to provide liquidity for clients in a given market, known as market-making, can be differentiated from the proprietary trading that the law seeks to move to separately capitalized entities. Germany has no need to “rush” legislation by passing the law this year, it said.

The German law would force deposit-taking banks to hive off businesses including high-frequency trading when the associated activities exceed 100 billion euros ($130 billion), or 20 percent of the balance sheet.

Merkel’s Christian Democrats, facing federal elections on Sept. 22, are sparring with the SPD over regulating financial markets after the coalition curbed manager pay, banned some short-selling and made banks pay into a resolution fund.

Germany’s “Liikanen Light” plan “is best seen as yet another salvo in the government’s strategy to steal every idea of the opposition on financial regulation, making them devoid of election themes,” Bernhard Speyer, who leads the banking, financial markets and regulation team at Deutsche Bank’s DB research unit, said in a study published in February.

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