Bank breakup bill set for key EU talks as nations seek deal

[BRUSSELS] European Union nations are pushing to reach agreement by the end of the month on a bill intended to tackle too-big-to-fail banks.

Envoys from the bloc's 28 national governments will hold crunch negotiations in Brussels on June 17, with the aim of sending the legislation to finance ministers for approval in Luxembourg two days later, two people with knowledge of the matter said, asking not to be identified because the talks aren't public.

For the bill to become law, national governments and the European Parliament each must agree on its negotiating stance. The two bodies must then agree on a single, final version of the legislation.

The draft law, known as the bank structure regulation, sets out ground rules for how central banks and other regulators should measure risk-taking at banks and, if necessary, force them to separate derivatives transactions and other trading activities from consumer services.

Latvia, which holds the EU's rotating presidency, is hunting for a deal before it hands over the baton to Luxembourg on July 1, the people said. Presidency spokesman Janis Berzins declined to comment on the talks.

The European Commission, the EU's executive arm, presented a draft bank-structure plan more than a year ago. It has said that the bill is a key step to prevent public bailouts and to give some coordination to different national measures.

The finance industry has been critical of the proposal.

Jouni Aaltonen, director of prudential regulation at the Association for Financial Markets in Europe, said that while "considerable uncertainty" remains on what the final legislation will look like, "we continue to be concerned by its scope and detailed provisions particularly in relation to market making." "There is a risk that banks will need to substantially reduce their market-making capacity, leading to higher issuance costs to European borrowers and trading costs for fund managers, including pension funds," he said by e-mail. In market making, banks offer both buy and sell prices for the same security.

While national officials have been holding talks on the law for months, there are still key points standing in the way of a joint position, the people said. These include details of exemptions sought by the U.K. and the metrics supervisors should use to assess systemic risks posed by banks.

The European Parliament's attempt to arrive at a negotiating stance faltered last month when a proposal by Gunnar Hoekmark, the assembly's lead lawmaker on the file, was shot down by the Economic and Monetary Affairs Committee.

Representatives of the parliament's political groups will meet on June 11 to decide how to proceed.

Having already adopted a slew of tougher bank regulations in the wake of the financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc, the EU is weighing what further steps are needed to ensure that bank crises can be dealt with without recourse to public funds.

"Existing financial reforms have already made a big difference, but the 'too-big-to-fail' problem is still there," Vanessa Mock, a spokeswoman for the commission, said by e-mail.

The final version of the EU bank structure law will need to deal with the threat posed by systemic banks to financial stability while "not impeding financing of the wider economy," she said. "This is indeed the key challenge of this complex dossier."

The commission's proposal would require the bloc's biggest banks to be screened by the central bank or another agency that supervises them. Separation of investment and consumer banking would take place if the firms were found to exceed certain levels of trading and risk-taking, with some limited room for supervisors to grant an exception if the bank proves that there is no risk to financial stability.

Nations have already redrafted key parts of the commission plan, including replacing a ban on proprietary trading with a rule requiring it to be separated from consumer banking.

Many governments have also sought to give more discretion to supervisors to decide whether other separation measures are needed.

The UK has argued since before the commission plans were presented last year that it should be excluded from the measures on the grounds that it's biggest banks are already in the middle of implementing an alternative blueprint, drafted by John Vickers' Independent Commission on Banking, for overhauling the structure of its biggest banks.

After an attempt by the commission to craft an opt-out for the UK was challenged by legal experts within the EU institutions, officials are working on an alternative approach.

The carve-out won't be UK-specific and could in theory be used by other nations that impose bank structure measures that follow a similar approach to Vickers, one of the people said.

Other points under discussion include the setting of rules shielding banks with a relatively small number of depositors from the draft EU rules, according to a June 6 document seen by Bloomberg. Banks could be excluded if their deposits amount to less that 3 per cent of total assets, or if they have "retail deposits" of less than 35 billion euros.

BLOOMBERG