Germany plans a modest reform of its banking sector that puts a cap on risky activities but would not lead to the breakup of banks or significantly impact big institutions like flagship lender Deutsche Bank, according to a draft law seen by Reuters.
The draft from the finance ministry, which is expected to go to the cabinet for approval early next month, would compel traditional lenders to separate risky trading operations, but only when the exposure associated with these activities exceeds 100 billion euros or 20 percent of the balance sheet.
That means a very limited number of institutions in Germany may be affected. The country's biggest banks, including Deutsche, say they are no longer engaged in the pure proprietary trading the law aims to limit.
"The deposits of savers should no longer be used to finance speculative, high-risk strategies," the draft reads. "The separation of risky activities also allows them to be wound down more easily."
According to the 64-page document, lenders would be allowed to continue to trade on behalf of clients, engage in market-making and conduct treasury activities, although Germany's financial watchdog Bafin would receive powers to separate market-making in special cases.
Direct lending and the provision of guarantees to hedge funds and private equity funds would be forbidden for retail banks, as would high-frequency trading.
The new rules would come into force in January 2014, but banks would have until the middle of next year to identify which of their activities fall into the risky category. They would then be given until July 2015 to separate these activities.
"It all comes down to the definition of proprietary trading. That is the real issue and we can expect more fighting over this," said Konrad Becker, an analyst at Merck Finck.
"Though even if Deutsche Bank has to separate out some activities, it will not hit them hard," he added. "The impact is very, very superficial. This is about politics, a placebo that goes down well in the election campaign."
OPPOSITIION CRITICISM
German Chancellor Angela Merkel faces a battle for re-election this year and the centre-left opposition is hoping to portray her as soft on the bankers many blame for years of financial crisis.
The Social Democrats (SPD), led by former finance minister and chancellor candidate Peer Steinbrueck, unveiled tougher proposals last year that would force banks to split their retail and investment banking units, as well as set up their own sector-wide rescue fund.
"This bill does not go nearly far enough," Gerhard Schick, a finance expert for the Greens told Reuters. "This is a reaction to pressure from the opposition, but it falls short."
The proposals drafted by Wolfgang Schaeuble's ministry must be approved by the Bundestag lower house of parliament to become law.
They are similar to those unveiled by the French President Francois Hollande's government in December, and will come as a relief to big German banks, which lobbied actively to prevent more radical steps.
Based on estimates from experts, the risky trading ceiling set out in the draft law could affect up to three German institutions — Deutsche Bank, Commerzbank und Landesbank LBBW.
Jan Krahnen, director of the Center for Financial Studies at Goethe-University in Frankfurt, criticised the draft law's focus on proprietary trading, saying it was difficult for regulators to distinguish this from other activities.
Krahnen is a member of the European Union advisory group led by Erkki Liikanen that made bank reform recommendations in October.
The "Volcker Rule" in the United States also aims to crack down on risky proprietary trading activities that got banks in trouble during the global financial crisis of 2008-2009, forcing government bailouts on both sides of the Atlantic.
