As many as 12 banks based in Germany will be affected by government legislation to force some large retail banks to spin off proprietary trading, Finance Minister Wolfgang Schaeuble said.
Chancellor Angela Merkel’s Cabinet approved a draft bill today that would force deposit banks to separate proprietary trading, lending and guarantees to hedge funds as well as high- frequency trading when associated activities exceed 100 billion euros ($136 billion), or 20 percent of the balance sheet. The BaFin financial regulator would get discretionary powers that affect lenders not covered by the limits.
“Based on the figures for 2011, around 10-12 banks in Germany will be affected” by the legislation, Schaeuble told reporters in Berlin today. “We’re empowering BaFin to go beyond the general rule in individual cases when necessary.” Deutsche Bank AG, Landesbank Baden-Wuerttemberg and Commerzbank AG were named by the so-called Liikanen group as being affected.
The bill is the latest measure taken by Merkel to regulate financial markets after curbing manager pay, banning some short- selling and making banks pay into a resolution fund. Banking legislation is at the forefront of policy making as lawmakers prepare to contest federal elections slated for Sept. 22.
Under the bill, top managers at banks face prison sentences of up to five years or a penalty of as much as 11 million euros if they intentionally violate rules and the banks that employ them get into trouble as a result.
Punishing financial-market participants with jail terms is not “draconian, but proper,” Deputy Finance Minister Steffen Kampeter said yesterday in an interview. Legal solutions shouldn’t be restricted to limiting bonuses, he said.
There is no evidence that a split of trading business from other parts of banks improves stability on financial markets, according to the BdB Association of German Banks.
“The package on financial market regulation passed by Cabinet today follows the wrong path,” Andreas Schmitz, BdB president, said in an e-mailed statement. “The draft law weakens Germany as a financial center and the proven universal banking model in several ways. It is primarily the product of electioneering.”
The government aims to pass the draft in the lower house of parliament and gain upper-house approval before the summer.
Kampeter said that he’s confident the opposition-controlled upper house, or Bundesrat, will back the measures because there’s “consensus not only among German legislators but among the German population that we should not wait for the rest of the world to regulate and address these problems, but to step forward.”
The European Commission will wait until September before presenting draft rules for an overhaul of bank structures in a bid to curb risk and prevent lenders being too-big-to-fail, a spokesman for European Union financial services chief Michel Barnier said Jan. 30.
Merkel’s Social Democratic challenger, Peer Steinbrueck, first proposed that German banks split their investment-banking operations from consumer units to protect depositors and has said the government’s draft law is insufficient.
Germany is also pushing for the commission to bring forward a bank restructuring directive to 2015 from a planned 2018 start date. The directive would set Europe-wide rules for so-called bail-ins at failing banks, compelling senior bondholders to accept losses.
“We have a majority of countries who love bailouts, but bailouts should be the exception,” Kampeter said. “It’s not the bailout by the taxpayers which should be the regular case, it should be a proper bail-in structure so that everybody who invests in a business or takes a share knows it’s not the tax- payer who takes the risk, but he himself.”
The package of German laws would go into effect in 2014 and banks would have until July 2015 to complete the separation of proprietary trading activities. Trading activities necessary to prepare for client business, such as market-making, don’t have to be separated automatically because of the law.
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