France to force BNP Paribas, SocGen to wall off prop trading

French Finance Minister Pierre Moscovici introduced a bill designed to force the country’s largest banks to fence off proprietary trading activities in dedicated units.

The product of months of discussions between industry and government officials, the bill would require banks including BNP Paribas SA and Societe Generale SA to split market activities deemed unnecessary to finance the economy into separately capitalized units. The rules would also forbid banks from holding stakes in hedge funds and limit high-frequency trading and commodity speculation. The bill would also set up a 10 billion-euro ($13 billion) resolution fund.

“One cannot speculate with deposits,” Moscovici said at a press conference in Paris today, describing the law as the first of its kind in Europe. The financial crisis “revealed the threat proposed by proprietary trading.”

While France may be first to act, the changes are milder than those proposed by the European Union and U.K., as the government seeks to preserve a universal model that combines consumer lending with corporate and investment banking. President Francois Hollande, who called finance his “greatest adversary” during his campaign, pledged to overhaul banking by separating deposit-taking from speculative operations.

“Most of the capital-market activities, under the disguise of so-called market-making operations, will stay in the deposit bank,” said Christophe Nijdam, a Paris-based analyst at AlphaValue. “This law is not going to protect the French taxpayer.”

‘Optimal’ Bill

Bank of France governor and European Central Bank Governing Council member Christian Noyer called the law “optimal,” rejecting criticism that it was “minimalist.” He said the new rules will isolate speculative and risky activities. A full separation of market and retail activities “would be contrary to the national interest,” he said yesterday on France’s BFM Television.

The French push to create separate units for the riskiest trading follows recommendations from an EU-commissioned group led by Bank of Finland Governor Erkki Liikanen. Unlike the Liikanen proposals, the French bill will allow lenders to keep market-making operations within the main banking group.

Liikanen’s Oct. 2 report recommended a “legal separation of certain particularly risky financial activities from deposit- taking banks within the banking group.” It recommended putting proprietary trading and market making in a separate unit.

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