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A look at proposed EU rules aiming to isolate banks' risky trading to avoid bailouts

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BRUSSELS - The European Union's executive is proposing rules to contain the kind of excessive risk-taking by banks that set off the financial crisis. It aims to spare taxpayers from having to bail out large lenders again.

Wednesday's EU proposal is similar to the so-called Volcker Rule in the United States and is a key part of the 28-nation bloc's efforts to overhaul its financial system following the 2008-2009 meltdown. Here's a look at the proposed rules.

Q: Why would the new rules matter?

A: European governments have poured about 1.6 trillion euros ($2.2 trillion) in taxpayers' money into propping up ailing banks since the outset of the financial crisis. That drove up their debt levels and forced them to cut spending on anything from building new roads to welfare benefits. The new rules would specifically aim to make banks deemed "too big to fail" safer. Their collapse would threaten the stability of the financial system and require the governments to step in as rescuers of last resort.

Q: How would the new rules make banks safer?

A: They would ban banks from trading exclusively for their own profit, as opposed to a client's. This proprietary trading has become hugely lucrative for lenders, but the EU contends it serves neither clients nor the wider economy, while it increases the overall risk in the financial system.

The second key measure is handing regulators the power to separate large banks' riskier trading activities from their deposit-taking business. That hopes to keep client deposits and other operations serving the real economy from being affected by a bank's failure.

Q: Why ban banks' own trading activities?

A: Proprietary trading has allowed big banks to use some of the money from their depositors as collateral to engage in more speculative, high-yield investments. When those bets soured during the financial crisis, many banks needed taxpayer-funded bailouts. The EU argues that forbidding such trading makes the financial system safer.

Q: Sounds good — is there a downside to the deal?

A: As the years of negotiations for the Volcker Rule in the U.S. have shown, the devil lies in the detail. One of the big challenges for regulators will be to distinguish banned proprietary trading from legal banking activities that serve their clients. Banks contend the rules will create uncertainty and hamper their role of providing credit to the economy.

Q: Will all banks be subject to the legislation and when does it start?

A: No, it only applies to the larger banks, currently about 30 across Europe that hold assets worth some 23.4 trillion euros ($32 trillion).

The legislation needs to be approved by EU governments and the European Parliament. It is likely to be subject to fierce lobbying and isn't expected to take full effect before 2017.

Q: Is the proposed reform far-reaching enough?

A: Center-left EU lawmakers say the Commission was too timid in its proposals for fear of irritating big member states like Germany and France. Both those counties are loath to see their biggest banks dismantled. Several lawmakers argue all trading activities should be completely separated from the retail operations.

Q: What do the banks say?

A: The European Banking Federation fears "far-reaching consequences on banks' structure, daily business and organization" that could undermine lending and harm the bloc's economic recovery. The proposed measures will introduce "a prolonged uncertainty that will weigh on the international competitiveness and attractiveness of Europe's banking sector," it said.

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Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz

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