The French banking reform, Is the Glass-Steagall Act coming back?

by Véronique Queffélec on novembre 17, 2012


November 15th, 2012

The French Government wants to see high-frequency trading activities and speculation in agricultural commodities derivatives separated into strictly-regulated subsidiaries.

Unlike the Liikanen plan, it seems as though the French reform will not be targeting market-making activities.

French FM Moscovici commented the Banking Reform due on 19/12

French Finance Minister Pierre Moscovici, speaking at a conference organized by the AMF (French SEC) yesterday, sketched out the main aspects of the French upcoming Banking Reform (the 7th commitment in Francois Hollande’s election campaign), The Government is due to present a draft of the reform on 19th of December. The text will then be presented to the Parliament, which has to vote it with an absolute majority. The ruling party holding the absolute majority in that chamber, this should not be a problem in theory.

At the heart of the reform is the creation of subsidiaries within banks that would house capital markets activities of no use to the economy. The scope of these activities is still unclear, although the minister indicated that banks would be required to separate high-frequency trading activities and speculation in agricultural commodities derivatives into such subsidiaries. It would seem that market-making activities will not be concerned, as they are deemed necessary to the financing of the economy.

This stance contrasts with the one taken in the Liikanen report, which recommends ring-fencing market-making and proprietary trading activities in order to safeguard financing activities. The subsidiary housing the speculative activities would not benefit from an implicit Government guarantee and would be strictly regulated.

In addition to the measures aimed at restricting speculation, the draft bill also provides for a reinforcement of the French financial system as a whole. This will involve setting up a macroprudential authority and making it mandatory for each bank to submit crisis resolution plans to the supervisory body.

The draft will also contain a section on retail banking, with a view to facilitating access to financial services for private individuals, notably the most fragile.

French Banks’ reaction: loss of competitiveness?

French banks reacted (through the French Banking Federation), highlighting that this reform will burden their competitiveness in the sense that different regulatory rules create different competitive advantages “within Europe” and “between Europe and the US”. Some experts give this scenario unlikely to happen given the similar legislation (Vickers, Volcker, Liikanen) in train globally.