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By Bloomberg

The European Union’s biggest banks may be spared a ban on proprietary trading, with a majority of the bloc’s member states preferring for such activities to be split off into separately capitalized units.

A narrowly defined ban aimed at banks’ dedicated proprietary trading desks proposed this year by the European Commission, the EU’s executive arm, has failed to win support, according to a report prepared by Italy, which holds the EU’s rotating presidency. The measure is part of a broader proposal on managing risks at the bloc’s systemically important banks.

“Only very few countries are explicitly in favor” of the ban, according to the Dec. 22 document published on the EU’s website today. A “large number” of nations have shown support for exploring an alternative approach that would separate banks’ trading on their own account from core banking services.

The draft EU law would cover banks labeled as globally systemic by the Financial Stability Board, a group of international regulators. The EU banks in the latest edition of the FSB list, published in November, are: HSBC Holdings Plc, Deutsche Bank AG, Barclays Plc, BNP Paribas SA, Royal Bank of Scotland Group Plc, Banco Bilbao Vizcaya Argentaria SA, Credit Agricole SA, Groupe BPCE, ING Groep NV, Nordea Bank AB, Banco Santander SA, Societe Generale SA, Standard Chartered Plc and UniCredit SpA.

The regulation would also capture banks that have assets exceeding 30 billion euros ($37 billion) in three consecutive years and total trading activities of more than 70 billion euros or 10 percent of total assets.

Lukewarm Reception

The commission’s blueprint sought to ban the lenders from certain activities, such as proprietary trading and investments in hedge funds, while also forcing them to build firewalls between investment and consumer banking.

The proposal has come under attack on multiple fronts since it was presented in January, with warnings from banks that it would increase their costs, inhibit lending to businesses and damage the functioning of financial markets.

The text also received a lukewarm reception from national governments and the European Parliament, which must agree on the final version of the rules.

Under the commission proposal, the ban would cover “desks’, units’, divisions’ or individual traders’ activities specifically dedicated to taking positions for making a profit for own account, without any connection to client activity or hedging the entity’s risk.” This ban is narrower than the U.S. Volcker Rule, which also bans proprietary trading, according to the commission.

Revenue Sources

EU national governments are concerned that the costs of the ban “could be higher than the benefits,” according to the document. “For instance, prohibition of proprietary trading could be detrimental to the diversification of revenue sources, in particular geographically, which may be more relevant in downturns.”

The Italian report states that “the majority of countries are in favor of a broader definition of proprietary trading and of its separation.”

Nations have also challenged provisions in the commission text on how structural separation of banks into core units and trading units should be carried out.

A number of countries have “strongly” pushed for supervisors to be given more flexibility to decide whether separation of trading activities is needed, according to the report.

“Many delegations have pointed out that any framework for separation should not be detrimental to the role played by market-making activities in providing liquidity to the markets and to the universal banking model,” the report states.

‘Sensible Thing’

Jonathan Hill, the member of the European Commission responsible for financial-services policy, has vowed to press ahead with seeking a deal on the rules.

“The sensible thing to do is to seek to make progress quickly” on the legislation, Hill said in a Dec. 15 interview in Brussels. “There are still areas of risk in some of the biggest and most complicated banks that it’s sensible to try to find a way of addressing.”

Under EU procedures, national governments seek to develop joint negotiating positions on draft EU laws, which they then use in compromise talks with the European Parliament, which also prepares a negotiating stance.

Parliament is set to vote on its position in early 2015, while nations will continue talks on their approach under Latvia’s presidency in the first half of next year.