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2nd Dec 2021

Barnier launches EU bid to ban risky bank trades

  • Barnier - Banks should be banned from riskiest trading

The EU's biggest banks could be banned from speculative trading, under legislation proposed on Wednesday (29 January) by the European Commission.

EU financial services commissioner Michel Barnier told reporters that so-called proprietary trading, where banks bet exclusively with their own money rather than customers, would be outlawed.

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The practice is often highly profitable for institutions but lawmakers say it serves neither clients or the health of the European economy.

Although proprietary trading now only accounts for a small amount of banking activity, it was used to create the market in sub-prime mortgage loans which led to the financial crisis in 2008-9 and, consequently, publicly funded bank bailouts totalling around 13 percent of the EU's GDP.

The rule, which is similar to the so-called 'Volcker rule' which now applies in the US, would apply to around 30 of the bloc's 8,000 banks which together cover around 65 percent of the total banking assets in the EU.

It would also cover banks which have total assets exceeding €30 billion, and that have total trading activities exceeding either €70 billion or 10 percent of their total assets. Twenty-three EU-based banks are in the world's top 50 largest institutions according to Global Finance magazine.

The rules were "the last component in a raft of new regulation," said Barnier, referring to a flow of legislation which has seen more than thirty EU bills aimed at financial markets adopted since 2009.

"We still have concern about some of Europe's largest banks," said Barnier, adding that the proposals were aimed at institutions he described as "too big to fail, too costly to save and too complex to resolve."

However, the draft law steers away from requiring the separation of the standard deposit-based services and the riskier investment arms of banks as recommended in an advisory report for the commission published in 2012.

Instead, national supervisors would be given the power to transfer high-risk trading activities such as derivatives and mortgage securitisation by banks into separate subsidiary firms.

"Our proposal does not rule out the model of the universal bank," noted Barnier.

The commission hopes the ban on proprietary trading could come into force in 2017 followed by the separation rules in 2018.

However, the plans face opposition on a range of fronts, including from governments, and the banking sector, as well as a race against time.

Both France and Germany have warned that the proposals are weaker than reforms they have made at national level. "I consider the ideas he has proposed irresponsible and contrary to the interests of the European economy" said Christian Noyer, governor of the French central bank.

For its part, the UK, which is opposed to a ban on proprietary trading, offered a more conciliatory response.

Barnier's plans had "much in common with the banking reforms the UK has pioneered and have been designed to allow the UK to go ahead with full implementation of its reforms," a UK government spokesperson commented.

Meanwhile, the timing of the proposal, just two months before the EU institutions close ahead of May's European elections, has also caused grumbling among MEPs.

No deal is likely before 2015 and the commission proposal itself could yet be unpicked by Barnier's successor who will take office in the new EU executive in the autumn.

“It would be better to keep it for the new parliament,” said Sharon Bowles, who chairs the Parliament's economic affairs committee.

For his part, Green finance spokesperson Philippe Lamberts said that the EU executive's plan was "some way short" of expectations.

"Despite recognising the problems with banks combining essential day-to-day banking activities and risky investment activities, the proposals will fail to ensure a true separation of these activities," he said, adding that the rules were "seriously undermined by a very restrictive definition of proprietary trading."

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