The EU has proposed curbing the freedom of the largest banks to engage in the sorts of speculative trading that contributed to the 2008 global financial crisis.
The proposed reforms would ban around 30 of the EU’s largest banks from carrying out so-called proprietary trading, where banks use their own funds for investments to boost profits for their own gain.
Although the practice can be highly profitable for banks, the EU says it entails many risks but no benefits for either banks’ clients or the wider economy.
Making the banking system safer
Strengthening the financial stability of the EU’s largest banks, those regarded as too large to be allowed to fail, will ensure taxpayers do not end up paying for the mistakes of banks. This happened during the financial crisis when publicly-funded bank bailouts swallowed around 13% of the EU’s gross domestic product.
The EU also wants to introduce measures to ringfence banks' low-margin, but largely safe, retail operations from their potentially riskier investment divisions. This would ensure the safety of depositers’ savings and prevent the need for any further bank bailouts.
Under the plan, national supervisors would be given the power to transfer the high-risk trading activities of selected banks - such as market making, mortgage securitisation and investments in complex derivatives - to separate subsidiary companies.
Clamping down on excessive risk taking
The proposal also calls for greater scrutiny of any attempts to switch newly-regulated activities to the “shadow banking” system - which is a less regulated sector of the financial services industry.
The Commission hopes the reforms will be the “final cog” in a complete regulatory overhaul of the European banking system which was prompted by the financial crisis. Earlier measures include the creation of larger capital cushions for banks, bonus caps for bankers and plans for a eurozone banking union.
The plans have to be approved by the European Parliament and individual countries and would likely start in 2017.