November 29, 2012 6:22 pm

French haggle over bank reform

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The horse-trading over France’s upcoming bank reform law has intensified after a draft text was put out to a consultation committee this week before a final version is presented to cabinet ministers in just under three weeks’ time.

The government’s flagship measure – to separate banks’ speculative trading activities from those financing the economy – occupies just four pages of the 30 page draft text obtained by the Financial Times, prompting criticism from some observers that the reform does not go far enough.

The text is subject to change before it is presented to the cabinet on December 19 and key details will be decided by ministerial decree.

Article 1 of the draft proposal contains President François Hollande’s campaign promise to separate “investment services to clients” from a subsidiary dedicated to operations deemed unrelated to the financing of the economy.

The subsidiary is banned from proprietary trading and high-frequency trading. Some forms of hedge financing are also outlawed and the rules apply not just to banks but also to consumer credit providers, brokers and insurers.

Unlike the recent European Union-commissioned Liikanen report, banks will not be required to separate market-making activities within a holding company structure, which would have pushed up costs.

This represents a victory for French banks which have lobbied hard in defence of their universal model, arguing that most market-making is aimed at serving clients. They have also raised the spectre of being put at a competitive disadvantage to US banks.

Although proprietary trading and high-frequency trading are not allowed according to the draft text, even when isolated in the subsidiary, Christophe Nijdam, analyst at Alpha-value consultancy, said the definitions were broad enough to allow high-frequency trading and proprietary trading to continue under the guise of market making. “This reform is similar to the situation with the US Volcker rule, which was meant to be equivalent to a suit of armour but ended up being more of a string vest with too broad definitions,” he said.

The remaining 26 pages of the draft text deal with putting in place resolution systems if a bank fails, beefed-up supervision and consumer protection measures.

Andrew Lim, analyst at Espirito Santo bank, estimated that “only up to 2 per cent of total assets are deemed truly speculative”. One senior banker said: “It won’t make much of a difference to us if we have to stop the operations likely to be outlawed.”

However, as Cyril Meilland, analyst at Cheuvreux said in a note: “The proposed perimeter – excluding market-making – will affect marginally, if any, of their businesses. But in the end, it will all depend on the way the parliament will deal with the draft law, and all banks are concerned that the parliament members might steer the legislation towards harsher rules.”

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