France has unveiled a long-awaited bank reform, trumpeting it as a model for Europe even as critics said it fell short of President Francois Hollande's campaign pledge to get tough with the financial sector.
Client-related businesses like market-making, hedging, cash management and lending to hedge funds and private equity are exempted and can stay with the parent company.
The ring-fenced entities are banned from taking customer deposits that would benefit from a government guarantee, from engaging in high-frequency trading and from commodity derivatives trading.
The government has not disclosed the thresholds above which banks fall into the law's scope, nor the capital or liquidity requirements of the ring-fenced entities.
Banks, brokers and investment companies – with the exception of portfolio managers – will be asked to pay into a fund for rescuing ailing banks and for guaranteeing customer deposits.
The fund will grow from an initial €2bn to €10bn in 2020, Finance Minister Pierre Moscovici said.
Regulatory authorities will have the power to force shareholders and some bondholders to pay for the cost of rescuing a failing bank.
Markets watchdog AMF and financial sector regulator ACP will be given extra oversight powers.
The ACP will have the power to oppose the nomination of top executives, to audition boards of directors and to impose a restructuring on banks that fail to meet their obligations.
The AMF will have more powers to demand certain disclosures and documents, to do spot checks on financial institutions and to punish obstruction of its investigations.
Bank fees will be capped for people in precarious financial situations. There will also be added oversight of retail financial brokers and requirements to consult credit scores.
The French proposals are most comparable to the incoming "Volcker Rule" in the United States, which would limit banks' involvement in proprietary trading, hedge funds and private equity businesses without harming client-related activities.