Britain and France are again at loggerheads over the stringency of rules to make banks safer, as London fights attempts to soften requirements for lenders to hold buffers of easy-to-sell assets.
In a move that further complicates tense talks to pass laws implementing the so-called Basel III international capital rules, the European Commission is pressing for liquidity standards to be made more flexible.
The amendments, presented at talks between the European parliament and EU member states, are supported by Paris and the European Central Bank, which fear imposing the overly-prescriptive rules would hurt lending.
But the suggested changes have angered London, which sees the weaker proposal as unwarranted, unwise and out of step with the views of parliament, the agreed position of EU member states, and the commission’s original plan.
In an echo of the fierce debates on capital requirements earlier this year, one British diplomat described the liquidity issue as a “test of whether Europe has learnt lessons from the crisis and is serious about implementing Basel”.
The “liquidity coverage ratio” is a groundbreaking attempt to prevent runs such as that which brought down Lehman Brothers in 2008. Due to come into effect in 2015, it requires banks to hold assets that are easy to sell as protection against a 30-day funding crisis.
But Mario Draghi, the ECB president, recently echoed widespread industry concern in concluding the exact terms may be “overly conservative and may thus excessively impair” interbank lending.
Taking account of these criticisms, a paper circulated by the commission suggests “a less prescriptive approach” to liquidity reporting requirements in the run-up to 2015. Specifically it deletes the list of assets that can be counted towards the buffer and removes other metrics.
A spokesperson for Michel Barnier, the EU commissioner responsible for financial services, said it was right to “pay attention to a possible negative impact on lending to the real economy” . “Important discussions are going on at the level of the Basel committee which will finalise its details on this in 2013,” he added.
In a letter to MEPs, British diplomats hit back at the case for softening the liquidity rules, exaggerated the likely changes from Basel and underplayed how the reforms will help the real economy by limiting big bank crises.
The commission is still committed to bringing in the LCR in 2015. But Britain is worried that without the detailed reporting requirements before 2015 the measure is likely to be delayed and banks will fail to prepare for the new regime.
Philippe Lamberts, the Belgian Green MEP involved in the talks, described the commission plan as “backtracking”. “It is an open door to almost anything including [doing] nothing,” he said.
The Basel committee met earlier this month to discuss changes to the liquidity rule but adjourned without making any final decision.
The ECB and France are pushing for a much broader definition of eligible assets – basically anything a central bank accepts as collateral – while most other regulators want a specific list.
At present, only sovereigns, top quality corporate bonds and cash would count, but there are sizeable blocs of Basel members who want to include equities – at a discount – and a wider variety of corporate bonds.
Historically, the UK and US have sought the narrowest definitions while the Continental Europeans have argued for flexibility. But people familiar with the discussions say that the Germans are starting to take a tougher line on some issues as well. The next Basel meeting is at the end of the year.
In a veiled reference to ECB actions to support the banking sector, the UK letter describes the liquidity rules as “an essential part of the exit strategy from the reliance on central bank facilities”.
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