Europe has unveiled a blueprint to isolate high-risk trading at big banks in a bid to challenge their dominance, provoking a hostile response in France amid fears it could benefit U.S. rivals not covered by the rules.
After the collapse of Lehman Brothers in 2008, world leaders pledged to tackle banks that were "too big to fail". Yet throughout the years of financial turmoil, many of Europe's biggest banks continued to grow.
The European Commission on Wednesday outlined a long-awaited draft law to change the way those big banks trade, prompting a backlash from France, whose banking lobby said it would give U.S.-based rivals in London the upper hand by restricting the freedom of French banks to trade for clients.
The plan shies away from suggesting any splitting up of big banks, as originally called for. Michel Barnier, the European commissioner responsible, has opted instead for a ban on "proprietary" trading using banks' own funds.
Unveiling the plans, Barnier singled out Deutsche Bank as typical of "a systemic problem at the European scale". Its 1.6 trillion euros ($2.2 trillion) of assets - from loans to derivatives - are equivalent to roughly two-thirds of the entire German economy.
He insisted, however, that his law did not call into question the business model of such a bank. "Even if we do separate out these activities, they can nonetheless be carried out ... within a single banking group," he told journalists.
But despite shying away from demands to split banks, the law provoked opposition in France, where it was attacked by the country's central bank governor as well as its bank lobby.
"I consider the ideas he has proposed irresponsible and contrary to the interests of the European economy," said governor Christian Noyer.
Even if agreement is reached between countries and the European Parliament, which is also in doubt, the rules will begin only by 2017 at the earliest - roughly a decade after the start of the banking crisis in Europe and some two years after similar action in the United States.
The draft law draws on advice from a group led by Finnish central bank governor Erkki Liikanen, who suggested mandatory separation of a bank's proprietary trading, and other market betting, into a different legal entity having its own capital to cushion risks while remaining within the bank.
the EU law stops short of physically breaking up big banks into retail and wholesale units, a step critics say is needed to remove the too-big-to-fail threat.
Nevertheless, France is resisting interference in the structure of its big banks, including BNP Paribas , which Paris sees as national champions critical in financing the economy. As the law is drafted, Credit Agricole may be exempted.
Banks have continued to grow in recent years through acquisitions, lending and billions of euros of fresh derivatives deals. In France, BNP Paribas and Credit Agricole's combined assets grew to near 4 trillion euros in 2012.
