Frankfurt: The European Commission plans to ban proprietary trading at large banks and may force lenders to ringfence all trading activities deemed a threat to financial stability, Sueddeutsche Zeitung said in its Saturday edition.
Moves to curb so-called proprietary trading seek to end a high-risk trading strategy used by investment banks to place large directional bets on their own balance sheets, rather than on behalf of clients.
Citing a draft proposal of European bank safety rules, Sueddeutsche said European banks would not be required to conform to the new rules until March 2020.
Around 29 banks would be impacted by the ringfencing rules, Sueddeutsche said, adding that smaller financial institutions may still be allowed to continue with such trading strategies.
Regulators will decide which banks need to separate their high-risk trading divisions from other deposit taking operations, Sueddeutsche further said.
The European Commission is finalising its own proposals following recommendations from an advisory group led by Finnish central banker Erkki Liikanen. That report, published in October 2012, recommended mandatory separation of a bank’s proprietary trading operations from client deposits, along with higher capital requirements on trading assets.
The Liikanen group came up with the idea of a legal separation between commercial and investment banking operations in an attempt to shield taxpayers from having to fund further bailouts and to protect savers from any more banking collapses.
Efforts to impose such a separation of risky trading activities have sparked uproar among some lenders worried that the cost of new rules will stifle lending to the real economy.
European countries are reforming their banking systems to prevent a repeat of the 2008 financial crash, trying to strike a balance between popular calls for banks to be reined in and warnings that too tight a leash will choke off economic growth.
