01 May 2012

FT: EU set for clash on banking rules

Translating the "Basel III" international rules on bank capital into law has emerged as the most highly-charged financial regulation issue in Brussels – throwing up sharp disputes and creating unusual political bedfellows.

At stake is who decides what risks the EU’s 8,300 banks can take, and what tools regulators will have to deflate dangerous credit bubbles of the sort that plunged the world economy into crisis in 2008. The talks will also test the EU’s fidelity to the Basel accord, a complex package that will, over the next six years, seek to head off more taxpayer bailouts by forcing banks to build up buffers of equity, cash and liquid assets.

Some big disagreements have yet to be overcome. At one extreme stands a French-led bloc pushing for softer requirements on bank capital and leverage plus a Brussels veto over national authorities that want to pile on extra capital requirements. It has won Paris the full-throated support of most British and continental banks. At the other is Britain, home to Europe’s main financial centre, which is calling for strict enforcement of the Basel minimum requirements and the right for national regulators to impose even tougher rules without prior EU approval. Its backers include the European Central Bank and, on most issues, the Basel committee itself.

Most contentious is the “maximum harmonisation” approach, giving national authorities flexibility within a minimum and maximum level of bank capital. To protect the single market, Brussels wants the final say on imposing extra demands, so it will be able to contain the spillover if one nation tightens its rules and prompts its banks to yank funding from other parts of the EU. The latest compromise proposal, brokered by the Danish, would give national regulators the option to tack on an extra 3 per cent capital buffer.

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