France wants to split banks' trading, lending ops
France's government proposed a bill Wednesday that would split banks' risky trading activities from their more traditional lending operations as part of a Europe-wide effort to shore up a fragile industry that contributed to the continent's financial crisis.
The legislation would force banks to house any trading done with their own money and for their own profit in a separate subsidiary by 2015.
President Francois Hollande's Socialist administration hopes the new rules will prevent deposits from being used in speculative activities; banks would still be allowed to leverage deposits for activities considered to the benefit of the economy, like lending to companies.
But the measures - written under pressure of bank lobbyists - seemed to fall short of the "long war" against the financial system that Hollande called for during his victorious electoral campaign earlier this year. By requiring that banks siphon off only those activities considered of no value to the larger economy and those made with a bank's own money, the government left out a wide range of operations that some still consider risky.
Another major goal of the bill is to ensure banks pay for their own mistakes and avoid expensive government rescues. Instead, under the bill, shareholders would be first in line to rescue troubled banks, and a bailout fund would be created and financed by the banks themselves.
In addition, the bill creates a new agency to spot and deal with asset bubbles, like the real estate one that hurt so many banks across Europe. The bill, which goes to Parliament early next year, also imposes a ban on high-frequency trading - the rapid-fire trades placed by computers in fractions of a second that led to the 2010 "flash crash," in which the Dow Jones industrial average dropped nearly 600 points in five minutes.
Finance Minister Pierre Moscovici said the bill could serve as a model for Europe.
Similar rules have already been suggested in reports requested by the European Commission and by the British government. And the U.S. plans to implement the so-called Volcker rule, which places some restrictions on banks' ability to trade for their own profit.
These measures are intended to root out the problems in the banking industry that helped lead to the global financial meltdown and to ensure that a similar crisis never happens again. In boom times, banks made bets on real estate loans and government debt that were considered safe but have since soured. They took heavy losses as they tried to unload these investments and sometimes turned to their governments for rescues.
But rescuing banks is expensive and has added to investor concerns that European countries are simply spending too much. Ireland's rescue of its banking sector pushed it to the edge of bankruptcy and into a bailout loan. Spain is now heading down the same path.