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EU Parliament ready to pull down fence

Today’s FT  and Bloomberg report a compromise on bank restructuring between two large voting blocs of the European Parliament. The proposal would apply to all G-SIB EU banks and all others that have total assets of at least €30bn. and trading activities of €70bn. or more.

The deal, which still requires plenary approval, would ban proprietary trading and require the banks to prove to regulatory authorities that their investment banking activity does not pose a systemic risk. If such proof is either absent or regulators are not wholly convinced, they retain the option to increase capital requirements or force a split between trading and retail activities. The Parliament has been unable to agree to the Council’s January 2014 proposal which, as well as an outright ban on proprietary trading, also includes extensive investment bank ringfencing measures. Michel Barnier’s mooted structure raised particular opposition in France and Germany, countries with large universal banks which they argued would be disproportionately affected by automatic fence-building. The Parliament deal is between two leading figures in the European People’s Party and the Social Democrats; if, as is likely, the proposal is adopted by the Parliament as its formal negotiating position, it will allow the dialogue with the Council on ringfencing to recommence. Although the details will as always be definitive, the Parliamentary plan is exacting insofar as it reverses the burden of proof, but lenient insofar as it forgoes mandatory separation. Perhaps reflective of a generally softer approach to the banks, the proposal establishes a large gap between Parliament and Council positions, we may expect negotiations to be protracted even by EU standards.

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