Banks Won’t Stop EU Push on Prop-Trading, Firewall Rules

By Jim Brunsden

Photographer: Emmanuel Dunand/AFP/Getty Images

Jonathan Hill, European Union commissioner for financial services and stability.

The European Union’s new financial-services chief, Jonathan Hill, said he’ll press on with plans criticized by the financial industry on curbing some proprietary trading and erecting firewalls between consumer and investment banks.
Hill, who became EU commissioner for financial services and stability on Nov. 1, said the bloc’s existing regulations don’t go far enough to tame the threat posed by the collapse of a systemic lender.
A proposal presented in January by Hill’s predecessor, Michel Barnier, would introduce a “narrowly defined” proprietary trading ban at about 30 of the biggest EU banks, and set thresholds for determining whether some trading activities must be moved into separately capitalized units. The European Banking Federation yesterday expressed its “disappointment” that Barnier’s bill won’t be scrapped.
“The sensible thing to do is to seek to make progress quickly” on
the legislation, Hill said in a Dec. 15 interview in Brussels. “There are still areas of risk in some of the biggest and most complicated banks that it’s sensible to try to find a way of addressing.”
Hill said he would seek a compromise on the rules, which need backing from the bloc’s 28 national governments and EU lawmakers to take effect.

‘Landing Zone’

“I’m sure it will be the case, as it always is, that finding the landing zone is not going to be straightforward,” Hill said. For banks’ riskier activities, the goal is “to find a mechanism for identifying them and then taking a nuanced judgment, or a more nuanced judgment, as to what you do about them.”
The proposal by the European Commission, the EU’s executive arm, has come under attack on multiple fronts since it was presented.
The EBF, which represents lenders across the 28-nation bloc, said the commission’s goals in presenting the bank-structure bill “already have been addressed by new regulations imposed on the sector in recent years.”
Banks have said the measure would increase their costs, inhibit lending to businesses and damage the functioning of financial markets.
The text also received a lukewarm reception from national governments and the European Parliament. The European Central Bank, while supporting the initiative, last month urged the EU to tread cautiously around any moves that might affect so-called market-making activities provided by banks.

‘Supervisory Discretion’

The role of market-making is one of the “issues we need to look at closely” in the draft law, Hill said. Others are the “extent of supervisory discretion” in determining whether separation should take place and the criteria used when assessing the need for such separation, he said.
Hill previously said in a private letter to Frans Timmermans, the commission’s first vice president, that while “it would be premature” to scrap the proposed law, “member states are pulling in different directions in opposition to it, so withdrawal could be an option next year if member state support does not pick up.”
In the interview, Hill vowed to press on in search of a deal on the legislation.
“I’ve concluded that I am not going to withdraw it; I am going to take it ahead,” Hill said. “Had I intended to withdraw it, the honest answer is I would have.”

Trading Activities

The EU plan targets banks labeled as globally systemic by the Financial Stability Board, a group of international regulators. It would also capture banks that for three consecutive years have total assets exceeding 30 billion euros ($37 billion), and that have total trading activities exceeding either 70 billion euros or 10 percent of their total assets.
Exemptions would be possible for banks based in nations judged as already having equally tough rules.
The EU banks in the latest edition of the FSB list, published in November, are: HSBC Holdings Plc, Deutsche Bank AG, Barclays Plc, BNP Paribas SA, Royal Bank of Scotland Plc, Banco Bilbao Vizcaya Argentaria SA, Credit Agricole Groupe, Groupe BPCE, Credit Agricole Groupe, ING Groep NV, Nordea Bank AB, Banco Santander SA, Societe Generale SA, Standard Chartered Plc and UniCredit SpA.
With the EU legislation still in progress, a number of nations have pressed ahead on their own, including the U.K., whose so-called Vickers rule will force Britain’s biggest lenders to split off core consumer banking from trading activities.

Consumer Deposits

The U.K. rule does this by building a firewall that pushes investment banking into a unit that can’t be funded from consumer deposits. It also includes a surcharge on capital requirements for the core bank, while granting exemptions from the separation in certain cases.
The EU plans foresee a narrower range of trading activities being split off, and impose the proprietary trading ban, which isn’t included in the U.K. approach.
Hill said it’s too early to say what a compromise on the EU blueprint might look like.
“The sensible thing is for me to first of all work out exactly where I think we can find a possibility for a compromise and then work out my tactics with others for helping to deliver it,” he said. “I’m going to take it forward and I want to try and do that quickly.”