New EU rules seek to make too-big-to-fail banks less risky

BRUSSELS: The European Union’s executive arm is set to present a long-awaited financial market reform meant to defuse risk-taking by the largest banks and protect taxpayers from the potential costs of rescuing them. Wednesday’s EU Commission proposal — echoing the United States’ so-called Volcker Rule — is a key part of the 28-nation bloc’s efforts to overhaul its financial system to avoid a repeat of the global crisis that forced governments to bail out banks in 2008 and 2009. The draft regulation is expected to bar the largest banks — those “too big to fail,” whose collapse would threaten the stability of the financial system — from trading exclusively for their own profit, as opposed to a client’s. So-called proprietary trading has become a hugely lucrative activity for banks, but regulators contend it neither serves clients nor the wider economy. [caption id=“attachment_647314” align=“alignleft” width=“380”] The European Union’s executive arm is set to present a long-awaited financial market reform meant to defuse risk-taking by the largest banks and protect taxpayers from the potential costs of rescuing them. Reuters[/caption] The reform is also poised to give regulators powers to separate the banks’ riskier trading activities from their deposit-taking business. It would cover the continent’s 30 largest banks which hold assets worth approximately 23.4 trillion euros ($32 trillion), according to EU Commission figures. The legislation still needs approval by EU governments and the European Parliament. It is likely to be subject to fierce lobbying over its fine print, and isn’t expected to take effect for several years. Nations like France and Germany have sought to protect their biggest banks like Societe Generale or Deutsche Bank. They pressured the Commission to refrain from demanding that they be split in two, separating their speculative trading business from the more stable retail business, as initially envisioned by the Commission. German Finance Minister Wolfgang Schaeuble and French Finance Minister Pierre Moscovici insisted in a joint statement Monday the reforms must aim at “preserving the ability of European banks to finance the economy with room for supervisory judgment to choose whether or not to ring-fence some trading activities.”’ The Commission’s proposal is based on the so-called Liikanen report which was issued in 2012 by a panel chaired by Finnish central bank chief Erkki Liikanen. The US Volcker Rule is named for Paul Volcker, a former Federal Reserve chairman who was an adviser to President Barack Obama during the financial crisis that followed the collapse of Lehman Brothers. AP