The UK would still be able to ringfence its retail banks and impose extra capital requirements on them under the proposed European Union regulations that seek to harmonise capital rules across the 27-member bloc, Michel Barnier, EU’s internal market commissioner, told the Financial Times.
Mr Barnier said he had split his new capital requirements proposal, unveiled on Wednesday, into two to give jurisdictions such as the UK and Spain more flexibility to impose additional demands on particular parts of their banking sectors to improve financial stability.
Mr Barnier’s proposal, which must be approved by the European Council and Parliament, makes the EU the first jurisdiction to begin implementing the global Basel III agreement to make banks safer by forcing them to hold more and better capital against unexpected losses. The UK, Spain and six other countries had objected to an earlier draft that put all the rules into a draft regulation, saying it would prevent them from going above the Basel III minimum that requires all banks to hold top quality capital equal to 7 per cent of their assets adjusted for risk.
Some investors had interpreted the wording of Mr Barnier’s Capital Requirements Directive 4 as effectively barring the UK’s Independent Commission on Banking, chaired by Sir John Vickers, from pursuing its proposals to force banks in Britain to ringfence their retail operations.
But Mr Barnier said: “It seems [the Vickers Commission] may be proposing 10 per cent for retail banks. That would be possible in my proposal. We think we have the flexibility we need,” he said. “We do think the [Vickers] proposals can be integrated into our framework.”
The CRD4 rules defining capital, and setting a firm floor of 4.5 per cent, are in a draft regulation, which is mandatory across the EU, while the rest of the capital requirement, creating an effective minimum of 7 per cent, is in a draft directive. Directives must be translated into national law by each member country, allowing for some flexibility.
Mr Barnier said that his proposal “foresees a much expanded use of the countercyclical buffers” that would allow countries like the UK to pile extra capital requirements on top of the 7 per cent for “financial stability” reasons. “In the directive are all the issues relating to supervision where national flexibility is needed. There is flexibility for supervisors on the buffers.”
His discussion of flexibility specifically cited Sir John Vickers’ proposal to force UK banks to separate out their retail functions and hold top quality capital equal to 10 per cent of those assets, weighted for risk.
In a boost to UK Chancellor George Osborne’s decision to create the ICB a year ago, Mr Barnier said: “It would be useful if every country in Europe did this exercise.”
He added he was confident his proposals would eventually win the full support of the UK. “It becomes more credible if we have the UK on board, given the importance of its financial sector.”