By Huw Jones
LONDON (Reuters) - Draft European Union rules forcing banks to isolate their risky trading activities should be eased to take national measures into account and avoid harming markets, an EU document written by a senior lawmaker has proposed.
The 28-country bloc is in the process of approving a law that would force banks to legally separate trading activities above a certain size so their collapse in any future market meltdown wouldn't hurt customer accounts.
The draft law is seen by some lawmakers as essential to rein in banks whose market bets helped trigger the 2007-2009 financial crisis in which taxpayers bailed out lenders.
In the document seen by Reuters on Tuesday, Gunnar Hokmark, a Swedish center-right member of the European Parliament which has joint say with EU states on the draft law, proposes amendments ditching terminology such as "separation" and adding protections for trading activities which raise capital for the economy.
The original draft set a January 2014 cut-off, after which national measures that rein in trading risks could not be taken into account when it comes to exemptions.
Britain was seen as benefiting from this deadline as it has already approved its own law on the issue, with lenders such as Lloyds and Barclays set to submit their plans to comply.
Yet France and Germany gained no such evident clearance and remain keen for their universal banks such as Deutsche Bank and BNP Paribas, which house trading and deposits under one roof, not to be overly disrupted.
Banks hope the new EU financial services chief Jonathan Hill will scrap the divisive draft law altogether given the unease among some member states.
Hokmark, in charge of steering the measure through parliament, also seeks to ease European Central Bank concerns that, if unchanged, the EU law could harm market-making or banks offering investors somewhere to buy and sell shares.
He proposes a new provision saying some parts of banks' trading activities are essential to funding the economy.
"This should be reflected in the deliberations around the bank structural reform ... It is important to state that there is nothing telling us that trading is more risky than lending, rather the opposite."
His proposed changes may infuriate lawmakers on the left but may find favor with some on the right and among some member states who fear a duplication of rules.
Hokmark also says that overall riskiness of trading activities should be considered, not just size alone, when supervisors decide if the new EU rules apply to a bank.
He also rejects the draft law's ban on a bank investing in hedge funds or private equity, adding a welter of other rules aimed at making banks safer should also be taken into consideration.
(Editing by David Holmes)