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(Feb 04, 2014) On January 29, 2014, the European Commission adopted a proposal to prohibit proprietary trading by banks, that is, trading by a bank on its own account in order to make a profit for the bank. If adopted, the legislation would ban banks from investing their own funds rather than those of their customers. (Press Release, European Commission, Structural Reform of the EU Banking Sector (Jan. 29, 2014).)

Specifically, the new proposal seeks to:

  • prohibit proprietary trading in financial instruments and commodities;
  • enforce subsidiarization, that is, it will empower supervisors to require the transfer of certain high-risk trading activities, such as operations involving market making, complex derivatives, and securitization to a separate legal entity within the group; and
  • set down rules on the ties between the separated trading entity and the rest of the banking group, including economic, legal, governance, and operational links. (Id.)

The proposed legislation would apply only to the biggest and most complex banks that engage in large-scale trading activities. The Commission also has adopted companion measures designed to improve the transparency of certain transactions that occur in the shadow banking sector. (Id.) A Commission communication adopted in September 2013 on shadow banking defines this term as a "system of credit intermediation that involves entities and activities that are outside the regular banking system. Shadow banks are not regulated like banks yet engage in bank-like activities." (Press Release, European Commission, Commission's Roadmap for Tackling the Risks Inherent in Shadow Banking (Sept. 4, 2013).)

Michel Barnier, Commissioner for the Internal Market and Services stated in regard to the proposal: "[t]his legislation deals with the small number of very large banks which otherwise might still be too-big-to-fail, too-costly-to save, too-complex-to-resolve. The proposed measures will further strengthen financial stability and ensure taxpayers don't end up paying for the mistakes of banks." (Id.)

Author: Theresa Papademetriou More by this author
Topic: Banks and financial institutions More on this topic
Jurisdiction: European Union More about this jurisdiction

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Last updated: 02/04/2014