The European Commission is backing away from plans to force big banks to ring-fence their lending business from higher-risk trading activities, according to a draft proposal seen by the Financial Times.

The Financial Times reported this week that the proposal emanating from Internal Markets Commissioner Michel Barnier does not contain a mandatory separation, and that structural reforms would be less expensive and restrictive than initially called for, with national authorities given much flexibility in how to apply those reforms. For example, supervisors would be allowed to determine whether specific types of trading would present systemic risk and need to be fenced off from other parts of a bank's business.

The ring-fencing proposal was part of a broader initiative on banking reforms triggered by the 2008 financial crisis. Barnier appointed a working group, led by Finnish banker and former member of the European Commission Erkki Liikanen, to come up with recommendations to strengthen financial rules and systems and ward off a similar crisis. The Liikanen group published its report in October 2012. The report called for mandatory separation of lending and trading businesses. It also called for the reforms to apply to all types of banks, including mutual and cooperative banks.

The Times reported that Barnier's proposal would exempt small banks, and give national authorities the ability to exempt large mutuals, cooperatives, and savings banks.

The newspaper also reported that Barnier is proposing a narrower version of the U.S. Volcker rule, which would ban about 30 large banks from proprietary trading. The trading ban, which would prevent those transactions for the “sole purpose of making a profit for own account without actual or anticipated client activity,” would take effect in 2018. Separation of banks affected would begin in 2020, the report said.

While Barnier did not deny outright the veracity of the Financial Times report, a statement from the commission to Euractiv news site cautioned that any documents seen were merely working proposals, not an official endorsement.

“There is no formal proposal from the Commission at this stage. So any text seen is merely a draft, subject to substantial change, and has no political endorsement from the College,” the statement said. What does get proposed will “ensure all banks can be resolvable and not require taxpayer bailout when they face difficulties. At the same time, while we solve ‘too big to fail,' we want to do it in a way that avoids upsetting the economic recovery. That is why the proposal will ensure that financing of the real economy is not impeded.”

Ensuring sustainable economic recovery in the EU while tightening banking regulations will be key talking points for U.S. Treasury Secretary Jacob J. Lew during his visits this week to Germany, France, and Portugal, according to Bloomberg news.

Lew has called on lawmakers in other countries to avoid a “race to the bottom,” which would encourage banks to focus operations in countries with weaker regulations. In the wake of the U.S. reforms like the Volcker Rule, Lew does not want American firms to be at a competitive disadvantage because they face tougher financial rules, the report said.

Barnier is expected to publish a formal proposal to implement the Liikanen group's recommendations late this month or in early February. However, any final decision is unlikely before elections in May or the end of Barnier's term in October.

The proposal is likely to garner criticism both from member states and industry leaders who think the measures would go too far, and lawmakers and experts who feel reforms wouldn't go far enough. Already Member of Parliament Sven Giegold of Germany told the Financial Times that Barnier's proposal seems like a “symbolic political act.” Giegold told the newspaper the proposal risks “having no real effect on the banking sector apart from adding bureaucracy.”

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