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UK banks have some protection from latest draft law on European banking regulation, says expert

UK banks will be relieved that banking reform measures introduced following the Vickers report will protect them from some of the proposals that now face their European equivalents, said banking expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com. 30 Oct 2015

EU legislators reached a preliminary deal this week giving regulators more power to break up larger banks. Centre-right MEP Gunnar Hökmark and centre-left Jakob von Weizsäcker reached agreement on a draft law on the thresholds beyond which a bank will have to prove it is not presenting a systemic risk, French news site L'Agefi reported, citing sources in the European Parliament.  

Three thresholds are set: 40% of assets in non-bank loans; 30% of revenue from investment banking; or 15% of a balance sheet consisting of derivatives. These thresholds would make banks including Deutsche Bank, Société Générale and BNP Paribas subject to regulatory decisions, L'Agefi' reported.

The agreement also covers proprietary trading, which would be banned for banks with €30 billion in total assets or trading activities representing more than €70bn, or 10% of the balance sheet, L'Agefi said.

"These proposals, while obviously not welcome, have been foreshadowed for some time as part of the outcomes of the Liikanen review of the EU banking market in 2012 following the financial crisis," said Anderson.

"UK banks may take some comfort from the fact that the banking reform measures introduced here following the Vickers report, should provide them with relief from a number of the proposals now facing European banks," he said.

The Liikanen review found that European banks should be restructured so that high-risk trading activities are provided by a different entity to that providing retail banking activities.

The UK has put its own rules in place based on a report by the Independent Commission on Banking chaired by Sir John Vickers in 2011. From 1 January 2019, UK banks that take in more than £25 million in 'core' deposits from individuals and small businesses will be required to formally separate their deposit-taking activities from their riskier investment banking activities. Affected banks will have to 'ring-fence' these core functions into a legally and operationally distinct entity, which will not be able to hold or own the capital of entities "associated with trading and financial interconnectedness" of the wider banking group.

In June, EU finance ministers confirmed that banks that are already subject to national rules addressing these risks will not be required to further restructure to comply with EU law.

Final rules about the legal structure and governance arrangements required of UK banking groups will be published in the first half of next year, the Prudential Regulation Authority said in May.

Now that a compromise has been reached, the European Parliament could adopt the draft as soon as November, L'Agefi said. The Parliament would then go on to negotiate with national governments represented through the EU's Council of Ministers.