Bank Separation May Face Higher Hurdles in EU Lawmakers' Deal

  • Main EU Parliament groups find compromise on bank structure
  • Proprietary trading ban included in preliminary deal on bill

Breaking up European Union banks would be tougher under a compromise reached by lawmakers from the two biggest groups in the European Parliament setting out rules to split up banks that mix trading activities with deposit-taking. They have also agreed to an EU-wide ban on proprietary trading.

The deal, which still needs plenary approval, gives banks more leeway to prove that they don’t pose a systemic risk than do previous proposals, and allows regulators to impose a capital increase as an alternative to a breakup, according to lead legislator Gunnar Hoekmark from the conservative European People’s Party, who struck the deal with his counterpart from the Social Democrats, Jakob von Weizsaecker. The final wording of the pact is yet to be published.

“The competent authority may decide on a capital add-on in order to have a better capital coverage, or ultimately a separation, but that is a final resource,” Hoekmark said in a telephone interview. “There is no automaticity.”

After the European Commission, the EU’s executive arm, presented a draft bank-structure plan in early 2014, approval of the law has eluded consensus in Parliament until now. The Commission’s proposal would have made separation of investment and consumer banking automatic once the firms were found to exceed certain levels of trading and risk-taking, with some limited room for supervisors to grant an exception.

Prop Trading

While that drastic step has been made harder, banks face a complete ban on proprietary trading under the compromise, bringing the bloc’s 28 countries in line with France and Germany who have already imposed their own national rules.

“A reasonable compromise was found, assuring a proprietary trading ban for Europe’s large banks and introducing a reversal of the burden of proof for the banks with the most extreme balance sheets,” said von Weizsaecker.

The deal among the main lawmakers in the Parliament’s Economic and Monetary Affairs Committee, came as a surprise after lawmakers struggled for months to find middle ground. Hoekmark’s original proposal was shot down in May after an alliance of left-leaning lawmakers and legislators on the “extremes” of the parliament’s political spectrum voted against it. Just last week, members of the Economic and Monetary Affairs Committee didn’t envisage a near-term agreement.

Too Late

The bill has been widely criticized with some saying it comes too late given alternative approaches to tackling too-big-to-fail banks have come to fruition. For instance, the Financial Stability Board is close to wrapping up work on its total loss-absorbing capacity rules. The regulation would require the world’s biggest lenders to have capital and debt available to take losses to ensure they can be recapitalized and restructured in an orderly way without recourse to public funds.

Wim Mijs, chief executive of the European Banking Federation, says the industry is studying the deal with great interest.

“Let me reiterate that the EU’s bank structural reform plan can be seriously damaging if it’s not carefully thought through,” Mijs said. “We sincerely hope that this deal is a step in the right direction, rather than a detrimental one.”

The Council of the European Union, which represents national governments and forms one half of the bloc’s legislature, reached a negotiating position on the bank-separation bill in June. Now that the parliament has decided on a stance, talks can begin on a final version of the draft law.

This brings the the EU one step closer to the U.K., which has pushed ahead with the equivalent bank-separation law, known as the Vickers rule. The Bank of England’s Prudential Regulatory Authority estimates that banks will face a capital gap from ring-fencing regulation estimated at as much as 3.3 billion pounds ($5.05 billion) for affected banks by 2019.

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