More German Banks Seen as Affected by Banks’ Retail and Prop Activities Split

A new draft law proposed to force Europe’s major retail banks to separate retail and investment banking activities is likely to affect more of Germany’s banks than originally envisaged, with potentially adverse impacts on lending to corporates.

According to a government official, the proposals could impact on up to a dozen of Germany’s largest banks, rather than just two or three.  At the start of October 2012, a high-level advisory group, led by Bank of Finland governor
Erkki Liikanen
, issued a report to the European Commission (EC) on potential reforms to the European banking system, which would include a strict separation between investment banking and retail banking.

The Liikanen proposals also included requiring banks to hold more capital against some of their risky businesses and to have debt that could be converted into equity and used to recapitalise an ailing bank. At the time, based on the share of total assets held for trading, Deutsche Bank, Landesbank Baden-Wuerttemberg and Commerzbank were identified as banks that would be affected by such changes.

A draft bill is now due to go before German chancellor Angela Merkel’s Cabinet on 6 February, which would require the country’s deposit banks to separate proprietary trading, lending and guarantee to hedge funds, as well as high-frequency trading when associated activities exceed €100bn or 20% of the bank’s balance sheet value. According to the government official, the regulations would apply only to banks whose trading and non-trading activities combined amount to €90bn or more, but extend beyond the trio affected by Liikanen.

German banking legislation is particularly in focus ahead of the country’s federal elections, scheduled for 22 September. Merkel is being challenged by the Social Democrats leader, Peer Steinbrueck, who first proposed a separation of German bank’s investment banking and retail operations and has criticised the government’s draft law as inadequate.

The developments in Germany coincide with UK chancellor
George Osborne’s warning
that Britain’s ‘big four’ banks face “complete separation” if they flout new rules to separate their riskier investment operations from their retail business.

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