After the collapse of Lehman Brothers in 2008, world leaders pledged to tackle banks that were "too big to fail". Yet throughout the years of financial turmoil, many of Europe's biggest banks continued to grow.

The European Commission on Wednesday outlined a long-awaited draft law to change the way those big banks trade, prompting a backlash from France, whose banking lobby said it would give U.S.-based rivals in London the upper hand by restricting the freedom of French banks to trade for clients.

The plan shies away from suggesting any splitting of big banks, as originally called for. Michel Barnier, the European commissioner responsible, has opted instead for a ban on "proprietary" trading using banks' own funds.

Unveiling the plans, Barnier singling out Deutsche Bank (>> Deutsche Bank AG) as typical of "a systemic problem at the European scale". Its 1.6 trillion euros of assets - from loans to derivatives - are equivalent to roughly two-thirds of the entire German economy.

He insisted, however, that his law did not call into question the business model of such a bank. "Even if we do separate out these activities, they can nonetheless be carried out ... within a single banking group," he told journalists.

In the proposal, he suggests isolating other types of trading from the "safe", deposit-taking side of banking by creating subsidiaries within the bank.

But despite shying away from demands to split banks, the law provoked opposition in France, where it was attacked by the country's central bank governor as well as its bank lobby.

"I consider the ideas he has proposed irresponsible and contrary to the interests of the European economy," said governor Christian Noyer.

Germany was more conciliatory. A finance ministry spokeswoman saw the proposals as generally positive, while Britain said they were in line with its own reforms.

BUREAUCRATIC

Elsewhere, many in the European Parliament rounded on the law as inadequate. Austrian lawmaker Hannes Swoboda described it as "too little, too late".

Even if agreement is reached between countries and the European Parliament, which is also in doubt, the rules will begin only by 2017 at the earliest - roughly a decade after the start of the banking crisis in Europe and some two years after similar action in the United States.

Sven Giegold, another influential lawmaker, described the law as bureaucratic and ineffective. "Rather than saying certain types of business should be separated, there are loads of exceptions," he said.

Such critics believe it will do little to address the vast scale of big banks, blamed for risky trading and growth in the multi-trillion dollar derivatives market.

Barnier said the proposal had been crafted to avoid any impact on lending to the "real" economy of businesses and consumers, a well-worn argument of the banking lobby.

This has become a catch-all reason to reduce regulation, despite protests from public-interest groups who counter that most bank activity is now orientated around financial markets rather than loans.

MANDATORY SEPARATION

The draft law draws on advice from a group led by Finnish central bank governor Erkki Liikanen, who suggested mandatory separation of banks' proprietary trading, and other market betting, into a different legal entity having its own capital to cushion risks while remaining within the bank.

On this count, the EU draft law is set to go further, and, like the Volcker Rule in the United States, ban banks from such trading. The U.S. rule, however, applies to all banks, while in the EU it applies to the top 30 or so.

Crucially, the EU law stops short of physically breaking up big banks into retail and wholesale units, a step critics say is needed to remove the too-big-to-fail threat.

France is resisting interference in the structure of its big banks, including BNP Paribas (>> BNP PARIBAS) , which Paris sees as national champions critical in financing the economy. As the law is drafted, Credit Agricole (>> CREDIT AGRICOLE) may be exempted.

Banks have continued to grow in recent years through acquisitions, lending and billions of euros of fresh derivatives deals. In France, BNP Paribas and Credit Agricole's combined assets grew to near 4 trillion euros in 2012.

Although the picture in the United States is similar, where the assets of JP Morgan Chase (>> JPMorgan Chase & Co.) for instance climbed from more than $1.3 trillion (784.6 billion pounds) before the crisis in 2006 to $2.4 trillion last year, the U.S. economy is much larger.

(Additional reporting by Huw Jones in London, Peter Rudegeair in New York, Thorsten Severin in Berlin and Brian Love in Paris; Editing by Erica Billingham and David Holmes)

By John O'Donnell