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BRUSSELS - The European Union's executive arm presented a long-awaited financial market reform Wednesday to defuse risk-taking by the largest banks and protect taxpayers from the potential costs of rescuing them.
The proposal — which echoes the United States' Volcker Rule — is a key part of the 28-nation bloc's efforts to overhaul its financial system to avoid a repeat of the crisis that forced governments to bail out banks in 2008 and 2009.
The regulation proposes barring the region's largest banks — those considered "too big to fail," whose collapse would threaten the stability of the financial system — from trading exclusively for their own profit, as opposed to a client's. So-called proprietary trading has become a hugely lucrative activity for banks, but regulators contend it neither serves clients nor the wider economy.
"This legislation deals with the small number of very large banks which otherwise might still be too-big-to-fail, too-costly-to save, too-complex-to-resolve," said Michel Barnier, the EU Commissioner in charge of financial market reform.
"The proposed measures will further strengthen financial stability and ensure taxpayers don't end up paying for the mistakes of banks," he added.
The regulation would cover the continent's 30 largest banks, which hold assets worth approximately 23.4 trillion euros ($32 trillion), according to EU Commission figures.
The legislation still needs to be approved by EU governments and the European Parliament and is likely to be subject to fierce lobbying over its fine print. It is not expected to take full effect before 2017 — or almost a decade after the 2008 collapse of Lehman Brothers that set off the financial crisis.
The reform also aims to give regulators the power to separate banks' riskier trading activities from their deposit-taking business. The Commission said it had no estimate on how many banks would have to create such subsidiaries, which will require their own capital buffers.
European governments have injected about 1.6 trillion euros ($2.2 trillion) into their banks since the beginning of the financial crisis, or the equivalent of about 13 per cent of the bloc's economic output, Barnier said.
The proprietary trading, which will be banned with only a few exceptions, represented up to 15 per cent of banks' balance sheets before the financial crisis but is now down to an estimated 4 per cent of balance sheets, or about 940 billion euros, according to the Commission.
"There is a risk it will increase again once growth picks up," Barnier said.
However, one of the big challenges for regulators will be to distinguish proprietary trading, which will be banned, from other banking activities.
Nations like France and Germany have sought to protect their biggest banks like Societe Generale and Deutsche Bank. They pressured the Commission to only separate out risky trading activities, not force banks into being split in two separate entities, one being speculative trading operations and the other their retail business.
Banks in Britain, which is home to Europe's biggest financial hub, London, won't have to split off their riskier trading operations into subsidiaries since they already face equally tough national legislation called the Vickers rules, the Commission said.
The U.S. Volcker Rule is named for Paul Volcker, a former Federal Reserve chairman who advised President Barack Obama during the financial crisis.
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