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The German cabinet approved Wednesday draft legislation on banking separation in order to protect customers' deposits from riskier areas of banks' operations, government sources told AFP.
The government wants the law to come into effect in January 2014 and banks' activities to be separated by July 2015.
It will only apply to institutions with balances sheets over 100 billion euros ($135 billion) or with risky positions worth 20 percent of the balance sheet value. And they will be required to transfer their risky businesses into legally and financially separate units.
As such, the rules will likely affect Germany's two biggest banks, Deutsche Bank and Commerzbank, as well as regional banking giant Landesbank Baden-Wuerttemberg (LBBW).
The law also requires banks to draw up so-called "wills" or emergency plans for restructuring or winding down if they get into financial difficulty.
And leading managers and executives will face up to five years in jail if they are found guilty of neglecting their duties in monitoring their group's risks, under the draft of the new law.
Banking separation is an idea promoted by the head of the Finnish central bank and European Central Bank governing council member Erkki Liikanen as a measure for reducing risk in the banking sector.
But one of Deutsche Bank's co-chief executives, Anshu Jain, has repeatedly slammed the idea as harmful both to the German economy and German companies.
He argues that if Deutsche Bank can no longer use deposits to refinance its activities in investment banking, refinancing costs would automatically rise and that would narrow the financing possibilities of major companies.
At the same time, banks with high deposits would find it difficult to find attractive investments for customers, Jain said.