France to present bank ring-fencing law by end-2012

PARIS, Oct 3 (Reuters) - France's Socialist government will present "merciless" legislation before the end of the year to ring-fence banks' risk-taking business from their retail arms, Finance Minister Pierre Moscovici said in an interview published on Wednesday.

Separating speculative and mainstream functions at banks was a central pledge of President Francois Hollande's election campaign and Moscovici said the promise would be kept.

However, he told the daily Le Parisien that any law would preserve a model under which French banks sell everything from unglamorous household loans to complex derivatives.

"We will not call into question our universal bank model. On the other hand we will be merciless with excess. I don't want a feeble reform, I want banks to be at the service of the real economy," he said.

"The idea is to separate those activities which are useful for the economy and for investment from speculative activities."

Moscovici's comments were broadly in line with recommendations unveiled on Tuesday by an EU advisory group, which called for banks' traditional deposit-taking business to be legally separated from higher risk activities. The proposals drew fire from the banking industry even though they fell short of demanding a full break-up of lenders.

Moscovici said the government was also working on legislation to cap over-generous pension packages, stock option deals and golden parachutes for senior executives in the private sector, having already moved to limit pay at state-owned firms.

Hollande has irked many business leaders since taking power in May with anti-business rhetoric and by raising company taxes in the 2013 budget and imposing a 75 percent upper tax rate on income above 1 million euros ($1.29 million).

French banks have been lobbying against any move to split their operations, concerned about the high cost of potential legislation and some have cut back on proprietary trading activities in anticipation.

Yet the government is expected to model its reform on the less costly U.S. Volcker rule, setting limits on trading and investing, rather than more painful British Vickers model that would ring-fence lucrative retail operations.

($1 = 0.7731 euros)

(Reporting By Catherine Bremer; Editing by Toby Chopra)

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