EU’s Too-Big-to-Fail Plan Seen as Too Late to Win Approval

Jan 29, 2014 9:13 am ET

(Updates with Barnier comment in 10th paragraph.)

Jan. 29 (Bloomberg) -- Michel Barnier, the European Union’s financial services chief, faces opposition to his plans to curb the activities of about 30 of the bloc’s largest banks to prevent them being too big to fail.

While France and Germany say parts of today’s proposals may hamper lending and threaten an exodus of banking services, European Parliament lawmakers argue the plans have simply come too late for them to review and approve ahead of May elections. Many will have left office or switched jobs by the time the assembly gets a chance to vote on the measures.

“It’s a bit insulting to present this now,” Sharon Bowles, chairwoman of the EU assembly’s economic and monetary affairs committee, said in an e-mail. “Barnier should have presented this much sooner before the election, or not at all. The deadline for the parliament to receive new, non-emergency, proposals before the elections expired in July last year.”

Barnier’s initiative, which would ban the lenders from proprietary trading and hand regulators the power to split them up, are seen as a “cornerstone” of the EU’s fight against too- big-to-fail lenders that has dominated his five-year tenure. Barnier, whose term ends on Oct. 31, has argued for EU-level regulation responding to a flurry of national measures in the 28-nation bloc and the U.S., where regulators last year approved a proprietary trading ban, the Volcker Rule.

Regulatory Overhaul

“Today’s proposals are the final cogs in the wheel to complete the regulatory overhaul of the European banking system,” Barnier said in an e-mailed statement. The plans are “necessary to ensure that divergent national solutions do not create fault lines,” he said.

The bank-structure rules are part of a package of Barnier measures announced today that also include a draft law targeted at so-called shadow banking.

In the EU, the final version of financial regulations must be negotiated and jointly approved by the parliament and by the Council of the European Union, the EU institution that represents national governments, to take effect. They are free to amend Barnier’s original blueprint.

The Frenchman’s successor in the new European Commission will also have the option to withdraw the plans, or submit amended versions.

The commission will “face challenges getting these proposals through the European Parliament and Council in their current form, given how contentious these issues have proved,” Clifford Smout, co-head of the Deloitte Centre for Regulatory Strategy, said in an e-mail.

Lacking Ambition

Today’s plans include a ban on proprietary trading for banks that are labeled by international regulators as systemically important to the global economy, or whose activities surpass certain financial thresholds. The ban would apply starting in 2017, and is more narrowly defined than the U.S. Volcker Rule, Barnier said.

Regulators, such as the European Central Bank, would be required to assess whether these banks should be forced to structurally separate by pushing some of their derivatives and other trading activities into legally distinct, and independently capitalized, units. Exemptions to this process would be allowed in cases where regulators can show they have already taken measures of equal ambition.

‘Recovery Phase’

France and Germany last week submitted a joint note to the commission arguing that elements of the planned rules on structural separation would go too far in curtailing lenders’ involvement in some kinds of trading. This could jeopardize “the financing of the economy in a crucial recovery phase,” they said. Still, both countries have said that they back having an EU initiative.

Barnier’s approach goes “further” than French and German national initiatives, both in terms of introducing a proprietary trading ban and by envisaging a deeper form of structural separation, the EU commission said today.

The EU plans are the commission’s follow-up to a report from a consultative group led by Bank of Finland Governor Erkki Liikanen that Barnier set up in 2011.

It’s positive “all in all” that the commission has presented proposals that take forward the Liikanen group’s work, Marianne Kothe, a spokeswoman for the German finance ministry, said today.

Important points for Germany going forward are that the “universal banking system is to remain intact and that there won’t be any negative consequences for us as far as the financing of the real economy is concerned,” she said.

‘Roughly Equivalent’

U.K. plans to build walls between deposit taking and speculative trading at its biggest banks are “roughly equivalent” to the commission blueprint, Barnier said. This means that the main change British banks would face as a result of the EU initiative is the introduction of the proprietary trading ban, he said.

“I have tried to respect the work that has been done” at national level, Barnier said. “Especially” in the case of the U.K. “which was the first and has gone the furthest.”

One goal of the EU measures is to tackle the so-called “implicit subsidies” enjoyed by large banks, the EU commission said. These subsidies arise because banks judged as too-big-to- fail are allowed to borrow more cheaply by the markets, it said.

Implicit Subsidies

Such implicit subsidies for the “largest European banks” totaled as much as 82 billion euros ($112 billion) in 2012, according to commission data.

The rules would hit banks labeled as globally systemic by the Financial Stability Board, a group of international regulators. They would also capture banks who, for three consecutive years, have total assets exceeding 30 billion euros, and that have total trading activities exceeding either 70 billion euros or 10 percent of their total assets.

Aside from EU banks, today’s rules would also rein in some units of overseas-based lenders that are deemed to meet the thresholds.

A total of 14 EU banks are on the latest FSB list, which is updated annually, include HSBC Holdings Plc, Barclays Plc, BNP Paribas SA, Deutsche Bank AG and Royal Bank of Scotland Group Plc.

The draft EU law on shadow banking, also published today, focuses on boosting transparency of securities financing transactions, such as trades in repurchase agreements -- repos.

These measures include requiring such activities to be reported to data-banks known as trade repositories, and disclosure rules for when collateral provided in such trades is recycled in further transactions, a process known as re- hypothecation.

Shadow banking is a term used by regulators to define activities that fall outside the scope of most banking and market regulation, and which they believe could be a source of systemic risk.

--With assistance from Rainer Buergin in Berlin. Editors: Peter Chapman, Jones Hayden