Commission seeks bank-capital harmony

Rules aim to prevent more bank bail-outs but Barnier under pressure from member states.

The European Commission is determined to set harmonised rules on the level of capital that banks should hold, both to ensure adequate minimum levels, and to prevent member states competing to set ever higher thresholds.

In addition to resisting pressure from banks to dilute the EU’s commitments to the international agreement, known as Basel III, the Commission is now also anxious to forestall any ‘race-to-the-top’ that could see member states exceeding levels endorsed by the Basel Committee on Banking Supervision.

Michel Barnier, the European commissioner for the internal market, who was forced last week to deny that the Basel rules would be watered down in the EU, is expected to announce firm plans by the end of July.

The rules, which provide for a minimum core capital ratio of 7%, are intended to prevent any repeat of the taxpayer bail-outs of banks that were needed during the crisis. The bail-outs were necessary because banks were insufficiently capitalised to withstand a sudden, sharp, financial downturn.

While the banking sector is lobbying fiercely against stringency, arguing that its ability to lend will be impeded if the rules are too tough, the Commission is also being urged by some member states to give them powers to set capital requirements above 7%.

As reported in last week’s European Voice, the finance ministers of Bulgaria, Estonia, Lithuania, Slovakia, Spain, Sweden and the UK sent a letter to Barnier, saying that his plan was not tough enough and criticising the apparent withdrawal of member states’ right to introduce their own stricter rules separately.

An EU official suggested this week that officials were worried that some member states would implement dangerously high capital ratios that would encourage other countries to do the same.

“We don’t think that a scenario of a race-to-the-top is a good scenario and from this perspective we think that maximum harmonisation for basic ratios is important,” the official said. “The Basel capital ratios have been established and discussed and there is a wide view that these are the appropriate ratios of capital that would ensure the resilience of a bank. If the capital ratios go up in one country, there is a danger that general capital ratios, which are considered to be appropriate, go up [elsewhere].”

Concessions

The Commission is expected to offer a concession allowing national supervisors to impose a distinct capital ratio on an individual and temporary basis in an emergency.

Barnier responded on 27 May to the leaking of a draft of the forthcoming legislation which indicated that banks with insurance subsidiaries would have greater flexibility than those agreed under the Basel III guidelines, re-igniting criticism that the rules would be too soft.

The commissioner said that any criticism at either extreme, that the implementation in the EU was either too tough or not strict enough, was “unjustified and simply factually wrong” and that he would “not be swayed by various pressures”.

He said that any suggestion that the EU would not implement Basel properly would mean that policymakers were “not learning all the lessons from the crisis”. He added: “Europe will implement Basel III…The Commission’s proposals to implement Basel III will respect the balance and level of ambition included in Basel III.”

The Basel III deal, agreed between central bank governors and supervisors and endorsed by world leaders in November 2010, would introduce tougher liquidity and capital rules gradually from 2013 to 2018. It aims to tackle the banking-sector problems that have been blamed for many of the problems that led to the 2008 financial crisis.

The EU’s implementation of the rules will be contained in the fourth review of its Capital Requirements Directive.

The transposition of the Basel III agreement in the EU differs from the way it will be implemented in the US. All banks in Europe will have to comply with the new rules, whereas in the US only the biggest internationally exposed institutions are affected.

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