Risky Business

French Veto Hits E.U. Banking Reform

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Banking reform faces French opposition.
  • Why it matters

    Why it matters

    France’s opposition to rules that would separate commercial and investment banking follow protests by German banks and politicians over a proposed E.U.-wide insurance fund for bank deposits.

  • Facts

    Facts

    • The two largest factions of the European Parliament last year agreed to require the three largest euro-zone banks – Deutsche Bank, BNP Paribas and Société Générale – to verify that their investment banking units did not present unacceptable risks.
    • In the face of French opposition, that agreement has collapsed, forcing center-left and center-right parliamentary groups to restart negotiations.
    • To appease France, efforts are under way to apply the rules to around 10 European banks, rather than only three – of which two are French.
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    Audio

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Pervenche Berès is considered a die-hard leftist in the European Parliament. The French Socialist, a member of the Progressive Alliance of Socialists and Democrats bloc in the parliament, is a tireless advocate for the poor.

But sometimes she ends up working for a completely different interest group: big banks.

And when it comes to the European Union’s proposed banking sector reforms – and specifically, a regulation that would separate commercial and investment banking – Berès is actually on the same page as France’s biggest banks with her aggressive efforts to torpedo the rules.

French banks – especially market leaders BNP Paribas and Société Générale – have been opposing the E.U.’s banking sector reforms for more than a year. These aim to protect ordinary banking customers such as private savers, homebuilders and companies from the risks and speculative losses of investment banking.

But French financial institutions do not want to be forced into separating important banking activities, and they have managed to convince French members of the European Parliament to hold the line. Similarly, German banks and policymakers also have aligned in opposition to a proposed E.U.-wide insurance fund for bank deposits to protect savers across the euro zone – similar to the Federal Deposit Insurance Corporation in the United States.

In backing French banks, the left-leaning Ms. Berès is making things more difficult for her center-left parliamentary group. At the same time, she is playing into the hands of the center-right European People’s Party group, or EPP.

In late October, the two largest factions of the European Parliament had already agreed on a compromise that would have required the three largest euro-zone banks – Deutsche Bank, BNP Paribas and Société Générale – to verify that their investment banking units did not present unacceptable risks and, failing that, they would be forced to hive off certain business activities or increase their capital.

The center-left Progressive Alliance of Socialists and Democrats were actually far more satisfied with the strict formula agreed upon than the center-right EPP. But Ms. Berès then intervened, which the EPP promptly seized upon as an opportunity to back out of the disliked agreement.

As a result, the political wrangling over a separation of commercial and investment banking has started all over again with the central question: Is the onus on banks to verify that their investment activities do not present a danger to savers or financial markets? And is it up to E.U. regulators to force banks to separate banking activities or increase capital if they fail to provide such proof?

“We are not open to placebo rules for separating commercial and investment banking.”

Jakob von Weizsäcker, Member of the E.U. Parliament’s committee on economic and monetary affairs

Jakob von Weizsäcker, a Social Democrat from Germany and member of the European Parliament’s committee on economic and monetary affairs, has not changed his position that banks should be responsible for providing that evidence.

Swedish parliamentarian Gunnar Hökmark, a member of the conservative EPP group, however, is opposed to allowing E.U. regulators to order banks to carve out separate businesses or increase their capital. His recent proposal on separating commercial and investment banking puts the onus on E.U. banking authorities, rather than banks, to measure risks.

Mr. von Weizsäcker disagrees with that.

“We’re not interested in rules that amount to a placebo when it comes to separating commercial and investment banking,” Mr. von Weizsäcker told Handelsblatt. It is critical, he said, to seek real solutions to the problems of banks so large they would require government bailouts to avert collapse.

It appears Mr. von Weizsäcker’s points are getting across, at least within his own center-left parliamentary group.

The group’s chair, Gianni Pittella, on Wednesday backed Mr. von Weizsäcker, according to parliamentary sources. In an effort to appease France, however, efforts are under way to apply the proposed rules for separating banking activities to around 10 European banks, rather than only three as first planned. Two of the 10 banks are French.

The Progressive Alliance of Socialists and Democrats plans to continue pushing its position that banks should be responsible for providing evidence that their investments are safe, even if that position clashes with conservatives. “Even if it means we’ll have to put this up to a contested vote at the committee level, we’re ready to go that far.”

Ruth Berschens is Handelsblatt’s Brussels bureau chief. To contact her: berschens@handelsblatt.com.

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