It is closer in spirit to the US "Volcker Rule" - a complex attempt at cracking down on banks' prop trading - than the more radical UK reform recommended by the Vickers Commission aimed at getting banks to shield retail activities to avoid a repeat of the 2008 financial crisis.
By keeping French banks' combined model of commercial and investment banking intact, the government has tilted the law's balance in favour of keeping credit flowing to the stagnant French economy as opposed to stringent financial regulation. "I did not want to weaken the French banking system. I want it to be strong," said French Finance Minister Pierre Moscovici. He told a news conference the plan could even point the way for similar laws elsewhere in Europe, adding that Germany was also considering a similar reform.
Bank of France head Christian Noyer, speaking late on Tuesday, defended the plan, calling it "optimal" for France's economy, which has been stagnating in recent quarters and may end the year in decline, recent figures suggest. The French Bank Federation said the reform would "create additional costs" that would make it more difficult to lend, saying banks were already under pressure to meet tougher post-crisis Basel III capital and liquidity requirements. There was little market reaction, with BNP Paribas shares up 1.5 percent, Credit Agricole gaining 2.1 percent and Societe Generale 0.1 percent higher, compared with a 1.4 percent sectoral gain at 1600 GMT.
Under the terms of the draft law, banks will have to ring-fence proprietary trading activities in separate, self-funded entities by 2015, while sparing activities such as market-making, hedging and private-equity financing. Regulatory oversight of these activities will be ramped up. The ring-fenced entities will be banned from high-frequency trading and commodity derivatives trading. In principle, this is not far removed from recommendations made in October by a European Union advisory group led by Erkki Liikanen which called for the ring-fencing of a swathe of trading activities.
The reform also encompasses other measures including a fund to rescue ailing banks and guarantee their deposits which Moscovici said would rise to 10 billion euros ($13.21 billion) in 2020 from an initial 2 billion, as well as tougher enforcement powers and consumer protection.