July 19, 2011 5:59 pm

Fight expected over EU bank capital rules

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Brussels is expected to push ahead on Wednesday with new mandatory European rules for bank capital, despite strong objections from the UK and other countries that want their regulators to have flexibility to impose even higher standards.

The centralised approach will come in draft European Union rules designed to implement the latest, internationally-agreed “Basel III” guidelines on banking capital.

The world’s biggest economies have all committed to the tougher guidelines, but Wednesday’s publication by EU internal market commissioner Michel Barnier will make the EU the first area to begin enshrining them in law. The new rules will eventually apply the standards to more than 8,000 banks or investment firms.

The proposal has already prompted fierce debate, both within the European Commission and more broadly, because it would set both mininum and maximum capital requirements. By contrast, the Basel III guidelines expressly allow national regulators to top up the global minimums where they see fit.

The 27 EU commissioners will discuss the matter and take a final decision on Wednesday morning, but in recent internal meetings only a minority – around six or seven – have pushed for more flexibility. Spain, Sweden and several eastern and central European states are thought to support the UK position.

EU officials argue that national supervisors will still have considerable flexibility to impose higher capital levels on a temporary basis – for example, if economic conditions demand – or at individual firm level. They say the “maximum harmonisation” approach is needed to establish a “single rulebook” for banks in Europe.

But the UK believes that this will still seriously curtail member states’ ability to protect their domestic taxpayers from future bank rescues and undermine the new Financial Policy Committee, which is charged with spotting and deflating economic bubbles.

The rules as drafted would require all EU banks to hold top quality capital equivalent to 7 per cent of their assets, adjusted for risk. That is well below the 10 per cent requirement that the UK’s Independent Commimssion on Banking may impose on domestic retail banking operations.

British officials plan to continue their fight in the European Council. They argue that the International Monetary Fund and the European Systemic Risk Board – made up of central bank governors from all 27 member states support their position. The IMF said recently that it “strongly supported” the UK authorities’ push for European legislation that would allow them to establish standards that exceeded the Basel III minima.

Jean-Claude Trichet, speaking after an ESRB meeting, also said board members believed “the Basel requirements are a minimum and they have to be considered a minimum”.

The amount of flexibility given to national supervisors is only one of the thorny issues which will be debated as the proposed EU legislation – which needs approval from both member states and MEPs – progresses.

Critics say early drafts watered down the Basel guidelines for financial conglomerates, which would effectively cut capital requirements for the major “bancassurances” groups by billions of euros. There are also concerns that the EU will weaken the “leverage ratio” part of the Basel III agreement which caps the ratio of a bank’s total assets to its capital. That rule is envisioned by global regulators as a backstop to prevent banks from cheating on their risk adjustment process.

The banking sector will also be looking to water down the Basel liquidity rules, which require them to hold enough cash and easy-to-sell assets to survive a 30 day market crisis. The UK already has liquidity rules, but many other EU jurisdictions do not.

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