French banks lobby against reform French banks are lobbying hard to limit an upcoming law to separate trading from retail activities - a central campaign promise of François Hollande, Socialist president. Pierre Moscovici, French finance minister, has said the banking reform law will be introduced before the end of the year. This implies that France will not wait for Europe-wide reforms under consideration following the publication last month of the recommendations of the Liikanen panel, commissioned by the European Union. BNP Paribas, Société Générale and Crédit Agricole are wedded to their profitable universal banking model, through which they sell everything from car loans to credit derivatives. But they are resigned to the separation of more risky trading activities given the prominence of the electoral promise in Mr Hollande's election campaign. At stake is the degree of separation. The Liikanen report recommended that banks with trading activities above a certain size, ringfence them into a legally-separate entity from the deposit-taking bank. A ringfenced structure would raise costs as it would have to be capitalised separately, at a time when French banks" profits are already being reduced by higher taxes. The French government has already imposed a financial transactions tax on its banks and aims to extract an additional €550m in 2012 from them in a supplementary budget measure announced in July. The banks have been earmarked for a special 15 per cent rise in corporation tax and, like other big French companies, are also caught by the new 75 per cent top rate tax on those earning more than €1m. The big three French banks have substantial trading assets of 40 per cent or more of total assets, according to analysts at Credit Suisse. This puts them well above the 15-25 per cent threshold suggested by the Liikanen report for ringfencing activities, were this benchmark to be adopted by Paris. France is using the Liikanen proposals as a starting point for its reform. "They are working in the framework broadly developed by Liikanen - but with some improvements," says one banker, in reference to hopes that the industry has succeeded in persuading government advisers and ministers to water down the proposals. The banks" attack is focused on Liikanen's inclusion within the ringfence of market-making, or the buying and selling of securities, which they want left outside. They argue market-making is an essential banking service for big business customers and therefore conforms to the government's stated aim of separating banks" speculative activities from those "useful to the economy, investment and employment." Instead, banks want to limit hived-off activities to those which form only a small part of their operations - such as proprietary and high-frequency trading. "The idea is to get some element of Volcker in Liikanen," says one French banker. Paul Volcker, former US secretary of state, proposed restricting some proprietary trading by banks, but stopped short of ringfencing. The French Banking Federation, the industry group chaired by Jean-Paul Chifflet, chief executive of Crédit Agricole, noted "with interest that the report recognises the French universal banking model's effectiveness in serving clients." But the federation also argues that the report is contradictory in claiming to uphold the universal banking model while recommending legal separation of trading activities. "The Liikanen report, which recommends isolating "high-risk" market activities while ruling out separation as defined by the Glass-Steagall Act, leaves many questions unanswered," it said, referring to the 1933 US law that split retail and investment banking. One senior banker says that if the government decides to put market-making in the ringfence, he believes it would ensure that the separation between the retail and trading entities would not be as strict as that proposed by Liikanen. "We think the government will make sure that the universal bank model is preserved by requiring a form of separation but one in which the retail bank retains an important weight in terms of providing capital," he said. In any case, the industry is more relaxed than at the beginning of the year, when Mr Hollande singled out the world of finance as his "true adversary" in a campaign speech before winning May's election. It no longer expects radical reform given Mr Moscovici's assurances that the law will not undermine universal banking. But the minister has also said: "I do not want a feeble reform," adding that it would "be a law of limits and censure." This could mean banning banks from operating in offshore tax havens and clamping down further on pay and stock options, while requiring banks to fund more consumer protection measures. "The logic for this reform is political - it's not aimed at limiting systemic risk - so you'll have a law but not one that will be detrimental to the industry," said one senior French banker. One person closely in touch with those drawing up the plans says the outcome remains uncertain, with it being far from clear that the finance ministry's more light-touch approach will prevail: "No one knows what Hollande has decided." Additional reporting by Daniel Schäfer