Deutsche Bank faces a battle with German lawmakers over government plans to force banks to place all business with hedge funds and private equity groups into a separate unit.
The proposals are in a bill due to be approved by Chancellor Angela Merkel and her cabinet today and are part of Berlin’s introduction of a “ringfence” for banks’ riskiest assets, along lines suggested by the EU Liikanen Commission last year. The idea is to make banks safer by requiring such activities to be separated and independently funded, so they could in theory more easily be allowed to fail without affecting a bank’s more traditional business with private and business customers.
Most of the German proposals for ringfencing risky assets focus on banks that are trading securities for their own benefit – so-called proprietary trading. Deutsche, Germany’s largest bank by assets, and other domestic institutions say they have abandoned or cut down on proprietary trading since the financial crisis.
However, a requirement that all loans and guarantees to hedge funds and private equity groups also be separated from a bank’s deposit-taking business would significantly extend the reach of the planned German law, which is now to be debated by lawmakers.
Germany, along with France, is moving ahead with Liikanen-inspired legislation in advance of possible EU-wide implementation. While France’s bill, which is being debated, also demands ringfencing for a bank’s business with hedge funds, this would only be for unsecured lending – a relatively insignificant amount.
By contrast, people familiar with Germany’s bill say it is the intention that banks have to ringfence all of their secured or unsecured business with hedge funds and others that use significant leverage, such as private equity funds.
Deutsche would be the most affected German bank and is likely to lobby to change the draft bill before it becomes law. It is one of the most active global banks in doing business with hedge funds through its so-called “prime brokerage” activities. In presentations to investors in September the bank claimed a number two ranking in prime brokerage among nine investment banks, with a 15 per cent share of the market.
Germany’s legislation also goes beyond France’s in requiring all high-frequency trading carried out by banks to be part of the ringfenced riskier unit. HFT is the use of computer algorithms to carry out ultra-fast trading of securities such as shares. Germany is legislating at the moment to regulate HFT, again ahead of a possible Europe-wide rule book.
Additional reporting by Scheherazade Daneshkhu in Paris