Last week, the center-right and the center-left in the European Parliament reached a preliminary agreement aimed at allowing the EU to force large banks to split their investment banking operations from their traditional activities. Despite strong lobbying from the financial industry, EU regulators took a step forward and the deal could be turned into law.
Around 30 systemically important banks such as Deutsche Bank and BNP Paribas, that fiercely opposed the plans which they hoped would be abandoned, will have to pull out of proprietary trading as well as prove that their investment banking arms do not pose a threat to financial stability. In case supervisors are not convinced, banks will be required to split off their trading arms or face increases in capital requirements. The same measures will apply to banks whose total assets are at least €30bn and trading activities amount to at least €70bn, among other thresholds.
The UK, which has its own ring-fencing laws in the Vickers rule, is likely to secure a substantial carve-out from the legislation. Subsidiaries of US banks which operate on the continent may be affected; the laws might however create regulatory crashes with the proprietary trading rules that they are already subject to.
The two main EP groups were led by Gunnar Hökmark, MEP and Jakob von Weizsaecker MEP, who played an important role in last week’s decision, with the former saying that while mandatory separation is not considered anymore, “competent authorities need to scrutinise if any bank is a threat to financial stability”.
Read more on the topic here, here and here.