Potential Reprieve for European Banks Drives Financial Stocks Higher in Europe

News that the EC may dilute some of its efforts to restructure large European banks has lifted bank share prices today.  While the Dow Jones Stoxx 600 is slightly positive on the day, financials are the strongest sector, gaining almost 0.8% in late dealings.

With apparent access to a draft version of new EC proposals, the Financial Times broke the story.  Essentially, that is involved is that EC Commissioner Barnier appears to have second thoughts automatically forcing banks to fence off the risk-taking activity from the lending activity. 

Instead, the proposal grants national supervisors wider discretion in applying the banking reforms.  This is understood to mean that the reforms will be less onerous and less costly than initially envisaged.   The official version is expected late this month or early February.,but the time frame of implementation is not expected to be until at least the start of 2016.

Barnier also proposes a narrow version of what is known in the US as the Volcker Rule that bans proprietary trading.  Barnier’s version will reportedly allow national authorities to determine whether certain trading poses systemic risks that should be separated.   The European Banking Authority would provide the metrics for national banking supervisors.

The “Barnier Rule” on proprietary trading would ban activities that  had the “sole purpose of making a profit for its own account without actual or anticipated client activity.”   It is envisioned to be implemented in 2018 with the separation of some banks from 2020.

A key take away from the “leaked” Barnier proposal is that many small and medium sized banks in Europe may be exempt from any division between lending and trading functions and the from bans on proprietary trading.  The earlier proposals (from the Liikanen report) would have made all banks subject to such reforms.

Barnier’s proposals may be too late for the current EU Parliament to consider.  The EU Parliament election will be held in late May.   There is recognition by some officials of a “democracy deficit” in Europe, which is seen as an elitist project.  New treaty provisions require EU leaders to “take into account” the election results when selecting the European Commission president (now held by Barroso, whose term expires in October).

To this end, there appears to be some interest in having a “top candidate” or “party-list leader (what the German’s call spitzenkandidat) for the major parties.  Although some of their leaders do not support the concept, the four largest party groups appear set to pick their top candidate and have agreed to at least one debate.

This piece is cross-posted from Marc to Market with permission.