EU Bank-Separation Push Falters

European Union (EU) plans to ban proprietary trading and break up the bloc's biggest banks are faltering as lawmakers clash over fundamental principles of the bill.

The European Commission, the EU's executive arm, presented its bank-structure overhaul a year ago to address the threat posed by too-big-to-fail banks. The bill has proven divisive in the European Parliament and among national governments, leading some legislators to say its days may be numbered.

"The chances of any serious progress on the proposal for structural reform of the banks are diminishing rapidly," Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland, said by email. "In part it's because quite a few governments see no real need to substantially reshape their banking systems."

The push for an EU-wide law lags behind the U.K., whose so-called Vickers rule will force Britain's biggest lenders to split off core consumer banking from trading activities. Other countries such as France, Germany, and Belgium have also developed their own measures.

The bill would cover banks that have assets exceeding 30 billion euros (US$34 billion) in three consecutive years and trading activities of more than 70 billion euros or 10 percent of assets. It specifically captures the European banks labeled as globally systemic by the Financial Stability Board, including HSBC Holdings Plc and Deutsche Bank AG.

The commission's blueprint sought to ban the lenders from certain activities, such as proprietary trading and investing in hedge funds, while also forcing supervisors to assess whether the banks should have to separate off some trading activities into separately capitalized units.

This separation would take place if the investment banking surpassed certain thresholds and if the lender couldn't demonstrate that the move was unnecessary.

The bill requires approval from the EU parliament and the Council of the European Union, the institution that represents national governments. Both bodies are currently trying to settle on their negotiating positions on the draft law.

The lead lawmaker on the file in parliament, Sweden's Gunnar Hoekmark, has put forward an amended version of the law that faced pushback during a debate last week. In the council, nations have called for further explanation of proposals put forward by Latvia, which holds the bloc's revolving presidency.

Hoekmark, a member of the assembly's largest center-right group, proposed giving supervisors more freedom to decide if separation is necessary, and to focus the legislation more narrowly around making sure a bank can be wound down if it fails. This approach ran into opposition from lawmakers seeking more far-reaching measures.

'Systemic Damage'

Focusing the legislation solely on whether a bank is resolvable is "problematic," Jakob von Weizsaecker, who represents the parliament's Socialist group in the discussions, said in the public debate. Even if a bank can, on paper, be safely wound down if it fails, this might still "cause a lot of collateral systemic damage," he said.

"If we end up with a hung parliament, 50-50, and a hung council, don't forget what happens then, and the commission has already said it—they will withdraw the proposal," said Philippe Lamberts, co-leader of the assembly's Green group.

Jonathan Hill, the member of the EU commission responsible for financial-services policy, said last year in a private letter that "withdrawal could be an option" if support from national governments doesn't pick up.

Hill later said publicly that he supports EU legislation in this area and urged quick progress in adopting it.

The Latvian EU presidency has put forward a plan to national governments that would replace the ban on proprietary trading with a mandatory separation requirement, according to documents dated Jan. 19 and obtained by Bloomberg News.

The revised plan would require further separation measures at banks that are so systemically important that their risks place them in a "red zone," while handing supervisors more discretion over others.

"Member states' views on the separation process differ," according to the document. "But all agree that the proposal cannot be accepted unless the separation process, as elaborated in the commission's proposal, is changed."

EU nations are broadly divided into two camps, according to the document, with one side backing wide discretion for supervisors and others seeking a more constraining approach.

A spokesman for Latvia's EU presidency declined to comment. A spokeswoman for the EU commission declined to immediately comment.

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