E.U. Bank Proposal Arrives, but Late to the Party

BRUSSELS â€" The European Union on Wednesday revealed a long-awaited proposal to reduce the systemic risk posed by big banks, a measure that would bring the bloc’s regulations more closely into line with those of the United States. But it is unlikely to become law anytime soon.

Presenting the plan at a news conference here, Michel Barnier, the commissioner responsible for overseeing financial services, described it as “the final stone in the structure of our ambitious financial reform.”

Like the Volcker Rule in the United States, the proposal aims to limit the likelihood that big banks will again endanger the financial system with the kind of risky behavior that brought on the financial crisis.

The proposal would affect “around 30” of the largest European banks and a handful of foreign banks with big European subsidiaries, institutions that Mr. Barnier described as being “too big to fail, too expensive to bail out and too complex to resolve.”

Banks would be barred from proprietary trading, or trading for their own profit. It would require institutions, guided by national regulators, to spin off some risky operations into subsidiaries to ensure that taxpayer-guaranteed deposits are not used to finance those activities â€" a step beyond the “ring-fencing,” or isolating, of depositors’ assets required under Britain’s Vickers Rule. And it would require institutions to disclose more information on their so-called shadow banking activities, where they lend against securities and trade in a derivatives market many times larger than the world economy.

“The proposal does not call into question the concept of a universal bank,” Mr. Barnier said. “We’re looking for a structured universal bank.”

The European Banking Federation, an industry lobbying group, said in a statement that it was “deeply concerned” about the proposal. It said the measure could separate activities “that are client-driven and useful for the real economy,” like market-making, which ensures liquidity for customers.

Despite the obvious zeal with which Mr. Barnier presented his plan, the proposal was weaker than had been expected when a group led by Erkki Liikanen, governor of the Finnish central bank, proposed a structural overhaul of the European banking sector in October 2012. It was also released far too late to be adopted under the current European Parliament, which has its final session in mid-April. Mr. Barnier, whose term as commissioner ends this year, has an eye on succeeding José Manuel Barroso as president of the European Commission, the European Union’s executive body. He defended his decision to bring out the proposal now, even though the incoming Parliament will not be bound to consider it.

“It would have been further watered down if I hadn’t come out with it,” he said.

Arlene McCarthy, vice chairwoman of the Parliament’s Committee on Economic and Monetary Affairs, said she was happy that the proposal enshrined the principle that depositors’ money must be protected, but she noted that opponents of banking reform had guaranteed there would be no “E.U.-harmonized approach.”

“It can’t be done under this Parliament,” she said. The new Parliament will “decide whether to pick this up and run with it.”

Ms. McCarthy said it was unfair to blame the late arrival of the proposal on Mr. Barnier. Rather, she attributed it to an “an unholy alliance,” led by the banking lobby and member states including Britain, France and Germany, which were out to defend their national banking sectors, and rightist members of the European Parliament who sought to resist any further regulation.

The announcement of tighter regulations for so-called too-big-to-fail institutions comes after landmark initiatives to strengthen Europe’s march toward a full banking union. The European Union has given the European Central Bank responsibility for supervising big banks in the 18-country euro zone. It has also taken a significant step toward creating a pan-European authority for winding down failing institutions, though that initiative is faltering against the same time constraints that have doomed Mr. Barnier’s plan.

Nicolas Véron, a fellow with the Bruegel Institute in Brussels, suggested that political considerations had led Mr. Barnier to release the plan now. “Future commissioners can’t ignore it,” he said, “but there will be scope for them to take a completely different approach. They could completely rewrite it.”