Thursday

21st Mar 2019

Lawmakers set for battle on EU bank trading ban

  • EU lawmakers are set to battle over whether to ban 'too-big-to-fail' banks from risky trading practices (Photo: sachab)

Lawmakers are set to do battle over a draft law by the European Commission aimed at splitting risky trading practices from basic banking services in Europe’s banking giants.

Last January, former financial services commissioner Michel Barnier presented a bill on bank structure reform featuring a ban on so-called proprietary trading, where banks bet exclusively with their own money rather than customers' money, to be agreed and enforced by 2017.

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Proprietary trading now only accounts for a small amount of banking activity but was used to create the market in sub-prime mortgage loans which led to the financial crisis in 2008-9.

This week, however, Gunnar Hokmark, the Swedish centre-right MEP who will lead the European Parliament’s negotiating team on the bill, unveiled plans to water down its main provisions on risky trading.

Deputies on the parliament’s powerful economic affairs committee will open their formal discussions on the bill in the coming weeks.

One of the assembly’s experts on banking, Hokmark in 2013 piloted EU rules on the resolution and winding up of insolvent banks which put shareholders and bondholders first in line to suffer losses

In a statement accompanying his amendments to the law, Hokmark said that preventing Europe’s banking giants from such trading “would not mean a rapid emergence of new channels for financing, but rather a slow development of new institutions and lending, and thereby a decline in investment”.

His amendments include provisions to allow banks to be involved in market-making such as offering investors somewhere to buy and sell shares.

“Systemic risks that we are exposed to in universal banks must be met by a risk based approach, not by deeming one business structure as a systemic risk when that is not the case and presuming that trading is more systemically risky than lending, which is not the case,” says Hokmark.

“Trading is a way of keeping assets liquid and to transform capital to lending and to distribute the risks of lending".

But the Swedish MEP’s plans were criticised by Finance Watch, an influential NGO which advocates financial sector reform.

On Thursday (8 January), Christophe Nijdam, its secretary general, said that 'too-big-to-fail' banking “distorts incentives so that Europe’s megabanks are more focused on financial trading than on financing commercial investments".

The NGO added that Hokmark’s plan would create a “shell regulation” and would “allow national discretion to undermine the single rulebook and single market”.

The banks themselves are keen for the law to be scrapped altogether by new financial services chief Jonathan Hill.

Banks should separate deposits from risky trading, group says

An expert group advising the EU commission has said banks in Europe need to separate their entities dealing with deposits from those trading with risky investments, in order to prevent a re-run of the 2008 financial crisis.

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