BNP Paribas and SocGen will be smiling after François Hollande's latest U-turn. Remember how France's socialist President promised a war on banks when he was running for office? Now his Finance Minister says Paris will only crack down on proprietary trading, leaving market-making – and hence the French universal banking model – largely untouched.
This won't just please France's big lenders. It could also undermine the Liikanen report, which was set up by the European Commission and which calls for large market-making operations to be ring-fenced across the EU. If France does not take such extreme measures, it will be hard to find an EU consensus.
For the French banks, proprietary trading is a much less important activity than market-making. Ring-fencing the banks' entire market-making would push up the cost of funding – hurting lenders' profits and forcing them to scale back.
The French banks had three main arguments to persuade Mr. Hollande to soften his line. First, France hasn't suffered a big banking crisis in recent years – unlike, say, Britain, Spain, Belgium, Ireland or even Germany. The universal banking model has been fairly robust and credit has continued to flow to the real economy.
Second, if the cost of market-making is pushed up, this would make it harder for banks to help companies and, indeed, for the government to issue bonds – so harming the economy. Finally, the banks have now written their first resolution plans – so-called "living wills" – showing how they can be wound down in a crisis without the need for taxpayers' money. If these are effective – admittedly a big "if" – there may not be any need for ring-fencing.
Paris' plans are not yet finalized. It is also, admittedly, early days to speculate on the knock-on effect in other countries. But if Liikanen also gets diluted, Britain – which is pursuing a similar ring-fencing idea following its own Vickers report – may find itself the odd man out in Europe again.