Commission proposes ban on proprietary trading

Proposal is ‘final cog’ in crisis response.

The European Commission wants to curb the freedom of the European Union’s largest banks to make the sorts of speculative investments that exacerbated the 2008 global financial crisis.

Yesterday’s proposal, which goes further than similar reforms in the United States, the United Kingdom, France and Germany, is the “final cog” in the EU’s response to the crisis, according to Michel Barnier, the European commissioner for internal market and services.

It would prohibit the EU’s largest banks – around 30 that are “too big to fail, too costly to save and too complex to resolve” according to the Commission – from engaging in so-called proprietary trading as of January 2017.

The move reflects the US’s Volcker Rule, which put a stop to large banks making speculative trades with their own account for their own benefit. Banks have argued that these trades are often made implicitly or indirectly on behalf of clients.

The ECB would also be empowered from July 2018 to order the selected banks to divide riskier activities from deposit-taking, by creating separate subsidiaries. No EU member state has yet introduced a ban on proprietary trading, although some have introduced rules on breaking up banks that are too big to fail.

Collision course

The proposal places the Commission on a collision course with the banking sector, member states and MEPs. One bank told European Voice that the proposal would threaten the business model operated by many of Europe’s “universal” banks, while another warned of reform fatigue, since the Commission has already published more than 30 financial proposals in the wake of the crisis.

“Europe’s banks are committed to ensure financing to the real economy and support the EU’s growth agenda”, said Guido Ravoet, the European Banking Federation’s chief executive. “With the scope and separation requirements that the Commission proposes, this will most definitely be a difficult task.”

Of greater concern to Barnier will be member states’ view of the proposal. Ministers from France and Germany, meeting on Monday in Paris, underlined that they were satisfied their own reforms were sufficient. Yet Barnier described France’s reforms yesterday as only “a step in the right direction”.

The Commission plan would also impose constraints beyond the reforms undertaken by the UK in 2013, known as the Vickers Reforms. While the Vickers “ring-fencing” of bank activities would be considered as equivalent and thus exempted, the UK would also have to impose a ban on proprietary trading.

MEPs have also criticised the Commission’s decision to refrain from making the separation of banks’ activities mandatory, as recommended by a 2012 report commissioned by Barnier from Erkki Liikanen, the Bank of Finland’s governor.