EU Lawmakers Dismiss Barnier’s Bank-Structure Overhaul Proposals

Senior European Parliament lawmakers told European Union financial-services chief Michel Barnier to rethink his planned bank-structure rules, saying the measures lack ambition and would allow many banks to escape restrictions.

Provisional proposals that would hand extra powers to supervisors and see the largest EU banks face curbs on proprietary trading need to be fundamentally reworked, according to Sharon Bowles, chairwoman of the parliament’s Economic and Monetary Affairs Committee, and Sven Giegold, a German lawmaker in the assembly’s Green group.

“It’s somewhat insulting to bring this text out now,” Bowles said by e-mail, referring to the limited time before the assembly adjourns for May elections. “This proposal is bureaucratic and doesn’t guarantee equal standards for all competitors,” Giegold said by telephone. “Better no rules than these.”

The parliament’s opposition adds to the obstacles standing in the way of Barnier, who has already publicly renounced any hope of getting bank-structure proposals into law before the end of his term in October, meaning it would fall to his successor to pursue their adoption. The prospect of EU action in this area has been strongly opposed by banks including Deutsche Bank AG and Credit Agricole SA.

The plans, which have yet to be approved by the European Commission, the EU’s executive arm, would require approval by national governments and the European Parliament before they could take effect. Barnier has said that publication by the commission should take place early this year.

Defined Ban

About 30 lenders would face a “narrowly” defined ban on so-call proprietary trading, according to a draft of the measures. “Desks, units, divisions or individual traders specifically dedicated to taking positions for making a profit for own account, without any connection to customer activity or hedging the entity’s risk would be prohibited,” according to the document.

The tentative plans, which follow a pledge by Barnier to propose bank-structure rules before the end of his mandate later this year, would empower supervisors, such as the European Central Bank, to force the largest banks to shift some activities including “investment and sponsorship of complex securitization, sales and trading of derivatives” to a separately capitalized unit.

Individual Judgments

The rules that banks would face would be “based on individual judgments” by supervisors, “and therefore it’s not a fair and equal regulation of the market,” Giegold said.

There “is no formal proposal from the commission at this stage,” Chantal Hughes, a spokeswoman for Barnier, said by e-mail. “So any text seen is merely a draft, subject to substantial change, and has no political endorsement.”

Barnier’s proposals, which also include tougher transparency rules for trading in repurchase agreements, or repos, and other securities financing transactions, would apply to banks whose activities exceed certain financial thresholds.

A bank would also be covered if it is labeled as globally systemically important by international regulators. That international list includes banks such as Barclays Plc, BNP Paribas SA and Deutsche Bank.

On the basis of 2006 to 2011 data, 29 banks in total would be covered, according to the commission.

Additional Separation

“The proprietary trading ban and the potential additional separation will apply to EU credit institutions and their EU parents, their subsidiaries and branches, including in third countries,” the document states. “It will also apply to branches and subsidiaries in the EU of banks established in third countries.”

Exemptions could apply for banks based in nations that already impose equally rigorous rules. Some special treatment is also foreseen for savings banks, cooperative banks and institutions that “are organized in a decentralized manner.” EU sovereign debt would also be exempt from measures to push trading activities into a separate unit.

The draft Barnier plan “doesn’t come close to matching the level of ambition sought by the parliament,” Bowles said. The text comes six months after the deadline for the parliament to consider new proposals -- a cut-off point necessitated by the upcoming elections, Bowles said.

There is also the prospect that Barnier will stand down from the commission to pursue a seat in the parliament, so further calling into question the appropriateness of bringing out a text now, she said.

High-Level Group

The limited number of banks covered, and the focus on handing decision-making powers to regulators, diverges from recommendations made by a high-level group set up by Barnier and led by Bank of Finland Governor Erkki Liikanen, Giegold said.

Barnier should revert to an approach closer to that proposed by the expert group, Giegold said. Under the Liikanen approach, all banks with “significant” trading activity would be forced to set up separately capitalized units to carry out this business, according to the group’s report.

U.S. regulators last year approved a final version of a ban on proprietary trading by commercial banks, known as the Volcker rule.

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