In the past few years, both the European Union and the United States have prioritised devising policies aimed at better regulating the financial sector in light of the economic crisis.

Proposed regulations in this matter have arisen in various forms, the most recent being outlined by the Commission and announced by Michel Barnier, the European Union’s financial services chief. The proposed regulations involve banning "large" banks from proprietary trading. The regulations would also grant regulators the ability to split a bank's structure up if deemed necessary.

The EU Financial Services Commissioner stated that this legislation will deal with the few large European banks that could otherwise be considered "too-big-to-fail, too-costly-to save, too-complex-to-resolve".

Supporters of the regulation argue that preventing banks from, inter alia,  investing their own money to carry out bond, derivatives, stocks, and commodities transactions, in order to make a profit, guarantees a decrease in risk for the banks' clients. These practices are known as proprietary trading.

Proprietary trading is argued to be unsafe because, if a bank invests its own resources on an entity that proves to have been riskier than previously thought and that later defaults, citizens who deposited their money in that bank risk being unable to recover their money. The regulation seeks to protect taxpayers by increasing financial stability and decreasing the probability of bank bailouts.

Proprietary trading is popular among Europe's biggest banks and has proven to be a very lucrative activity, providing banks with large profits. This regulation will prevent these banks from further investing on their own interest instead of their clients'.

The proposed ban would go into effect starting in the year 2017, and it would also provide European regulators with the authority to order a bank to split into "legally distinct" units if deemed necessary.

The Commission's proposed regulation bears many similarities to the United States' Volcker Rule, which was designed to stop banks from becoming "too big to fail". This rule's focus is also the banning of banks from investing in their own interests through proprietary trading. In various press releases by the United States regarding the Rule, American legislators called for an implementation of rules mirroring the Volcker Rule by countries around the world in order to create a more secure framework to prevent a future global financial crisis.

In Europe, the rule was drafted to affect only the 30 largest banks in the region, which, according Commission's figures have combined assets equal to approximately 23.4 trillion euros.

Since the start of the financial crisis, European governments have provided banks with about 1.6 trillion euros and, while there has been a significant decrease in proprietary trading in the last few years, some fear a future increase in these activities could jeopardize the stability of the financial sector.

The proposals outlined by the Commission have triggered different reactions from EU representatives. Some argue that the regulation is coming in too late, given the proximity of the elections and the need for European Parliament and Council to revise the draft and make amendments. Given the wide range of opinions that exist on this matter, it is likely that a thorough discussion will be carried out between parties to consider the implementation of this new regulation.  

For instance, France and Germany have expressed their disapproval of a regulation which they argue will decrease the competitiveness of large banks and create an irregular playing field for small and large banks. Representatives from these countries also point to the potential harm to lending and other banking services as a result of this regulation as well as a decrease in large banks profitability and liquidity. They have also brought up the existence national laws addressing this problem.

There are many criticisms to this regulation coming from parties in all sides of the argument. Some of them highlight the inability of this proposed law to define activities that are considered proprietary trading in an accurate manner, failing to effectively draw a line between these activities and "safer" ones. They argue that this ambiguity weakens the regulation and makes it harder to implement. Others have accused the regulation of being too "diluted" by lobbying efforts because of its failure to suggest the splitting of big banks.

We should expect a fierce debate and intense lobbying by both EU governments and the European Parliament in the near future regarding this matter.