EU lawmaker backs supervisory discretion on bank trading risks

By Huw Jones

LONDON, April 16 (Reuters) - Supervisors should have discretion when it comes to deciding if a bank must isolate trading activities under planned European Union rules, a senior EU lawmaker said on Thursday.

EU member states and the European Parliament are scrutinising a law on reining in risks from trading derivatives, stocks and bonds at banks to apply lessons from the 2007-09 financial crisis.

Gunnar Hoekmark, the Swedish centre-right lawmaker steering the measure through parliament, said there is now "clear support" among lawmakers to give supervisors leeway to decide if a bank should separate out trading.

The original draft proposed fixed thresholds, above which trading should be ring fenced in a separate legal entity.

"The question is whether this majority (among lawmakers) is thin or broad, but I hope it will be a broad one," Hoekmark told Reuters.

"It's critical that we facilitate for investors, for the capital markets union, and not create new fragmentation in market liquidity," Hoekmark added.

This marks a shift in parliament towards what some member states want in terms of supervisors having the final say on any structural changes at banks.

There is a concern at the European Central Bank and among other policymakers that requiring separation of trading simply because it reaches a monetary threshold could damage market-making.

"The supervisor needs to have some margin of manoeuvre, nothing should be fully automatic whatever criteria is used, as it's better for when it comes to financing our economies," Daniele Nouy, the ECB's top banking supervisor, told the parliament this month.

Some countries like France and Germany don't want to overburden their universal banks like Societe Generale (Paris: FR0000130809 - news) or Deutsche Bank (Xetra: 514000 - news) , who have retail and investment banking all under one roof.

The original draft law also proposes banning proprietary trading or when banks trade with their own money, rather than on behalf of clients.

EU president Latvia, which is trying to find common ground among member states first before negotiating a final text with parliament, has proposed ditching the ban, fearing the difficulty of separating prop trading from market making.

But Hoekmark said if it means having broader backing in parliament for its negotiating position with member states, he would stick with the proposed ban, meaning a compromise of some sort is likely.

Parliament's economic affairs committee is due to vote on the draft law in late May.

(Reporting by Huw Jones; Editing by Keith Weir)