Reuters: Regulatory News: UPDATE 2-France pledges crackdown on banks' proprietary trading

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UPDATE 2-France pledges crackdown on banks' proprietary trading Nov 15th 2012, 14:53 Thu Nov 15, 2012 9:53am EST * Separate entities will be created under draft reform * Activities useful to the economy will not be harmed * SocGen CEO says reform will be "demanding" * Notes trading activities will not be thrown out wholesale By Leigh Thomas and Lionel Laurent PARIS, Nov 15 (Reuters) - France's planned banking reform will severely curb banks' proprietary trading while avoiding moves that might restrict the flow of credit to the economy, Finance Minister Pierre Moscovici said on Thursday. The government is preparing to unveil a draft law in mid-December that aims to crack down on banks' risky trading, which was a campaign pledge of President Francois Hollande. Banks will have to create a separate entity to house activities deemed to be risky and would have to outline a resolution mechanism in case they have to be wound down in a crisis, said Moscovici. Regulatory oversight will also be ramped up. "I want this reform to profoundly change the sector," Moscovici told a conference on Thursday. "It will separate speculative activities from those that are useful for the economy." The reform is being drafted after European proposals by the Liikanen Commission called for a ring-fencing of nearly all types of trading, including market-making where a bank quotes buy and sell prices at which it will trade specific securities. Reuters earlier reported that the French reform is expected to spare market-making, according to two sources briefed on the government's position. DEMANDING REFORM Moscovici insisted the reform would not spell the end in France of large so-called universal banks - with activities ranging from retail lending to trading in financial markets - nor harm banks' services to their clients. Societe Generale Chief Executive Frederic Oudea said the speech showed the reform would be demanding without compromising banks' business models. "It is the confirmation of a demanding reform," Oudea told reporters on the sidelines of the conference. "I note, however, that our trading activities will not be thrown out wholesale." Proprietary trading, where banks take risks in financial markets with their own money, is under the spotlight because it can expose banks to big losses. Around 5 to 10 percent of capital-markets revenue in 2011 was estimated to be proprietary-related at BNP and SocGen, the two biggest investment banks in France. Banks have already cut back proprietary trading in anticipation of tougher rules, which echo measures in other centres. In Britain for instance the Independent Commission on Banking under John Vickers recommended UK banks shield or "ring-fence" their retail operations from riskier investment banking activities. A full split of trading activities from retail and other types of banking could cost 6 to 10 percent of profits at France's top banks, according to analysts at Citigroup. However, if the scope is restricted to proprietary trading, the impact would be "marginal", they said. Link this Share this Digg this Email Reprints

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