Financial Regulatory Forum

U.S. bank trading plan could create loopholes – EU official

By Reuters Staff
February 1, 2010

By Huw Jones

LONDON, Feb 1 (Reuters) – U.S. President Barack Obama’s plans to curb proprietary trading will be hard to define and could create regulatory loopholes for banks to exploit, a top European Union official said on Monday.

Obama’s “structural” reform was very different to the regulatory approach adopted by the EU and globally via the G20 group of countries which focuses on toughening up the Basel bank capital rules, said David Wright, deputy chief of the European Commission’s internal market unit.

“This has not been done in the traditional way,” Wright said of the Obama plan.

“It’s going to be difficult to define this… We look forward to seeing the U.S. definition,” Wright told an industry event.

The Commission is coordinating the EU’s response to the financial market crisis, saying the G20 agenda would be its blueprint.

But Obama stunned global markets last month when he unveiled plans to limit the size of banks and curb proprietary trading, or trading for their own account.

European policymakers were caught on the hop despite G20 pledges to coordinate national regulatory responses to the worst financial crisis since the Great Depression.

Britain, Germany and France have welcomed Obama’s proposals as furthering the regulatory debate but stopped short of pledging to follow suit.

Some policymakers fear if banks are barred from some activities in the United States, they will come to the EU to conduct their riskier operations.

Europe was trying to converge regulation globally as much as possible in line with the G20 agenda, Wright said.

“If we don’t do that, if we don’t come up over the next 12 to 18 months with convergent types of approaches, then emmenthal cheese will be the likely outcome,” Wright said in reference to the Swiss cheese famed for its holes.

The Bank of England and commercial banks have also said it will be hard to define proprietary trading.

The Netherlands wants EU finance ministers to discuss Obama’s plans when they next meet mid-month and the topic may also come up at the informal EU leaders meeting next week.

Wright said it was unclear whether radical structural reform was the way foward and not the more incremental changes being thrashed out to bank capital and liquidity rules.

Getting agreement on tougher Basel rules on bank capital was seen as the way forward by Europeans. “That is what I understood the G20 was converging on,” Wright said.

The EU is a big supporter of the Financial Stability Board tasked by the G20 to implement its regulatory pledges by thrashing out common principles, Wright said.

“Will these principles be put in practice this year, is the key. If they don’t then these are bodies that become words without action,” Wright said.

(Reporting by Huw Jones, Editing by Toby Chopra)

((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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