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08/12/2016

Barnier warns US of tit-for-tat action on banks

Euro & Finance

Barnier warns US of tit-for-tat action on banks

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The European Union's financial services chief warned of tit-for-tat action if the United States pushes ahead with plans to impose extra capital requirements on foreign banks.

In December, US Federal Reserve Board Governor Daniel Tarullo said foreign banks should be required to hold as much capital as their US counterparts, regardless of how their overseas parent companies are funded.

The EU fears this will fragment global capital markets and its financial services commissioner Michel Barnier said big European banks were as well capitalised as American banks.

"I don't want to be forced to do the same as the Americans," Barnier told reporters on the sidelines of a British Bankers' Association conference in London yesterday (17 October).

"My objective is to find agreement with the Americans on foreign banks. My mindset is not one of threats but my objective is to find a free and fair banking relationship. If we don't find such an agreement, we will end up having to do the same thing," Barnier added.

Financial crisis triggered public anger against banks

Many European banks had to be shored up by taxpayers during the 2007-09 financial crisis, triggering public anger that bonuses were still being paid in some cases.

Top lenders across the EU face a third stress test and accompanying asset quality review next year, raising concerns that more capital holes will emerge.

This comes ahead of handing supervision for 130 leading banks in the eurozone to the European Central Bank from November 2014.

"Despite substantial improvement, more needs to be done on the quality of banking assets. We don't expect dramatic results. But of course, these exercises may throw up certain funding gaps," Barnier said.

Banks with shortfalls will need to reduce their assets or tap markets, he said.

"If banks are not able to raise capital in the markets – which could still be the case for a few – we will have a clear framework in place, with bail-in, and national and if necessary European backstops," Barnier said.

Banking assets remain an issue in Europe

But while countries who cannot afford to pay for the repair of weak banks will be able to apply for an international bailout, as Ireland did, direct eurozone aid for the banks affected remains unlikely in the face of German opposition.

There may still be banks that are too big to save and too complex to resolve, Barnier said.

"That is why we are working on a common framework on the structural reform of banks and plan to come forward with a proposal in the coming weeks," he added.

The proposal will be based on a report chaired by Finnish central bank governor Erkki Liikanen which recommended ways to cut risks in banks by separating out trading.

Britain is already planning such changes recommended in its own Vickers Report by requiring high street banks to ring-fence their deposit-taking arms with extra capital. France and Germany are also taking steps to cut risks from trading at banks.

Barnier said his draft law, due in November, would respect the different banking models in Europe.

Timeline

November 2013: European Central Bank takes over supervision of eurozone's leading 130 banks