The Danish EU presidency plans today (2 May) to seek agreement on compromise measures designed to beef up capital requirements on 8,300 banks across Europe, as finance ministers meet for a special meeting in Brussels.
Under the compromise update to the capital requirements directive, banks will be required to fix 7% of their assets as core capital.
Britain, Sweden and a minority of other states want flexibility to demand a higher buffer level in their home banks, claiming that this is a necessary step to safeguard taxpayers against future banking crashes.
France, Germany and the rest of the EU – backed by the European Commission – want a stricter limit, arguing that flexibility would pave the way to arbitrage in the financial services sector, and distort the single market.
Under a compromise tabled by the Danes, member state regulators would be allowed to increase the buffer of core capital by an additional 3% in certain defined circumstances, with a provision that further increases will require Commission clearance.
The Danes are confident that a deal can be struck, but it requires delicate negotiation on numerous other key issues affecting bank capital.
Banks with insurance arms – business as usual
One argument centres on whether banks should apply the capital requirements only to their domestic activities, or on the totality of their dealings in member states. Danish presidency sources said the compromise foresees all international activities being covered.
Other contentious issues in the draft package relate to the capital requirements applying to banks with insurance arms. Currently such banks – including France's Société Générale and Crédit Agricole, and the UK's Lloyds – may count their insurance holdings towards their capital.
French requests to continue this practice will win out if the compromise meets agreement, although the UK and Sweden have been vocally opposed.
The compromise would also allow Germany to continue in its use of so-called 'silent partnerships' to calculate the capital of its powerful Landesbanken – or regional banks.
These partnerships between the Landesbanken and local authorities obfuscate the capital calculations, according to critics in Sweden and the UK.
Under the proposed deal, each country would give way to a certain extent, enabling the vital package of measures – required G20 obligations as laid out by the Basel committee on banking supervision – to be implemented by a deadline of the end of the year.
Negotiation on a tightrope
The negotiations will, however, be fraught. There are numerous ancillary negotiations relating to individual member states that need to be folded into the agreement.
Negotiations may also grow more complex if French President Nicolas Sarkozy is unseated by Socialist François Hollande in the election this Sunday (6 May). Hollande is thought to be less amenable to placate the big French banks.
George Osborne, Britain's finance minister, will not attend the meeting in Brussels. His deputy Mark Hoban will represent the UK, underlining widespread doubt that today's meeting will achieve final resolution.
Instead, ministers are more likely to attempt to iron out remaining difficulties with the compromise in the hope that a final breakthrough can be achieved when they next meet formally in Brussels, on 15 May.
The legislation – an updated directive and a regulation – must then be approved by governments and by lawmakers in the European Parliament before it can take effect.