EU Bank-Separation Bill Sets $112 Billion Trading Mark 

Banks with annual trading activities of more than 100 billion euros ($112 billion) would face added scrutiny from supervisors armed with a tool box of capital rules and separation powers in a draft European Union law.

Envoys from the EU’s 28 national governments are set for crunch talks on June 17 to reach a deal on how the bloc should tackle too-big-to-fail banks. Under a proposal from Latvia, which holds the EU’s rotating presidency, supervisors would vet lenders that surpass the trading threshold and decide if their investment-banking activities are “excessively risky,” according to documents prepared for the meeting. The threshold would be measured as an average over three years.

A June 5 European Commission document obtained by Bloomberg identifies 14 banks as being over the 100 billion-euro limit: Deutsche Bank AG, BNP Paribas SA, Royal Bank of Scotland Group Plc, HSBC Holdings Plc, Barclays Plc, Societe Generale SA, Credit Agricole Group, Banco Santander SA, Groupe BPCE, UniCredit SpA, Nordea Bank AB, ING Bank NV, Commerzbank AG, Danske Bank A/S.

Latvia’s draft plan, seen by Bloomberg, is “a fair and balanced compromise between the various positions on all the key issues,” according to the June 15 document. “In the presidency’s view, there is no further room for movement without putting at risk the delicate balance on which the current broad support depends.”

Having already adopted a slew of tougher bank regulations in the wake of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., the EU is weighing what further steps are needed to ensure that bank crises can be dealt with without recourse to public funds.

Biggest Banks

The European Commission, the EU’s executive arm, said last year that existing measures were sufficient to tackle risks at the bloc’s biggest banks. It made proposals in January 2014 on how supervisors should assess banks to determine if they should be broken up.

Banks and many national governments, including France and Germany, also said aspects of that commission blueprint went too far. Nations have set about redrafting the plans. The final law would have to be approved by national governments and the European Parliament to reach the statute book.

While the original commission plan focused on possible separation, “the compromise text contains a wider tool box” that supervisors can choose from, according to the documents. These options include the ability to impose capital surcharges on banks and to take “other prudential measures.” This should lead to a “more proportionate treatment” of banks.

Trading Activities

Under Latvia’s proposal, most of the key measures in the law would be reserved for banks that surpass the 100 billion-euro threshold for trading activities. These activities would be defined as trading in derivatives and other securities for which there is a “recent annual pattern of short-term profit-taking.”
Banks would be measured against the threshold on a rolling three-year basis. The plan would also require splitting off proprietary trading at the bloc’s biggest banks.

Such banks would be assessed by supervisors on the basis of numerical data about trading activities as well as qualitative information on points such as how traders are managed and on the bank’s remuneration policies. Exemptions would apply for banks with few retail deposits.
The draft also includes a possibility for exemptions from key parts of the EU rules for countries that have adopted national measures to split their banks.

Biggest Banks

The U.K. has demanded that the law include such a carve out on the grounds that it is in the middle of implementing an alternative blueprint, drafted by John Vickers’ Independent Commission on Banking, for overhauling the structure of its biggest banks.

Latvia is hunting for a deal on the law before it hands over the EU presidency to Luxembourg on July 1. While much progress has been made on the draft law, it is unclear whether a deal can be reached at a meeting of EU finance ministers on June 19, according to two people with knowledge of the talks.

Outstanding points that have been discussed intensively over the past week include the scope of the U.K. exemption, which in theory could also be used by other member states, the people said. The provision sets out conditions that must be met for national bank-separation rules to be applied instead of the EU approach.

Source: Bloomberg – EU Bank-Separation Bill Sets $112 Billion Trading Mark

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