Finance ministers agree bank rules as UK wins concession

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Rules designed to beef up bank capital in the wake of the financial crisis were agreed by EU finance ministers in Brussels yesterday (15 May) after the UK won a concession enabling it to preserve control for national supervisory authorities.

The agreement was dogged by a dispute over whether countries like Britain should be allowed to enforce stricter capital rules than those agreed for at the European Union level.

Britain has been fighting to maintain financial authority over the City of London, Europe's finance capital, as other EU members move to centralise supervision of banking and finance in Brussels and the London-based European Banking Authority (EBA).

Britain wanted powers to raise minimum capital requirements beyond the 7% basic threshold required by the Basel Committee, international regulatory advisors for the finacial services industry (see background).

It also wanted to do so without reference to Brussels or the EBA, even when the capital thresholds involved branches of British banks in other member states.

France and other countries claimed such a move could have a distorting effect on competition, veering Europe away from much-needed central control, and wanted to refer such decisions to the European Commission, or mediation through the EBA.

Agreement was key target of Danish EU presidency

Ministers eventually agreed to allow member states to demand of their banks an additional 3% of capital reserves over the basic level – without referring to the Commission or the EBA. In return, the UK dropped earlier objections to certain capital calculation criteria beneficial to German and French banks.

For the Danes, the agreement capped off one of their key presidency targets to achieve consent on the so-called Basel III bank capital rules.

“All countries are behind the compromise agreement and it's an important way to avoid a repeat of the financial crisis,” Margrethe Vestager, the Danish finance minister who chaired the meeting, told reporters afterwards.

She said the agreement struck the right balance between a single set of rules required to enforce the single market, but also gave some member states the flexibility to add on extra measures in order to fulfil national requirements.

Michel Barnier, the EU's Internal Market Commissioner, welcomed the breakthrough but in caged terms, indicating that the Commission would seek to claw back some of the flexibility provisions won by Britain in the agreement. The final wording of the new EU law will now be negotiated between the European Commission, Council and Parliament, with the Assembly expected to vote on the text during a July plenary session in Strasbourg.

“Whilst indicating two clear reservations on the level and conditions for flexibility, we think there is room for improvement in the text,” Barnier said afterwards.

“I was not the only one to voice reservations, several finance ministers, the vice president of the European Central Bank, and the European Banking Authority also had concerns,” he said.

Spat over EU's 2013 budget

Yesterday's ministerial meeting in Brussels also witnessed strong opposition from France, Germany and the UK – along with other net EU budget contributors – to a European Commission proposal to increase the EU's expenditure by 6.8% in 2013.

The Commission's proposal received a boost, however, in the form of a joint statement by 11 finance ministers calling for an increase in regional policy payments within the EU's 2013 annual budget.

The statement was issued during the meeting by ministers from the Baltic states, Bulgaria, Poland, Romania, Hungary, Portugal and Slovakia – all countries that are net recipients of EU funds.

The brewing spat over the 2013 budget foreshadows difficult negotiations, set to heat up this autumn, over the EU's multi-annual financial framework, the funding package for the period from 2014-2020. 

“The rules we are proposing are crucial: once adopted, they will profoundly alter the behaviour and solidity of financial actors. Our overall objective remains to strengthen the resilience of the banking sector in the EU while ensuring that banks continue to finance economic activity and growth. The final compromise must contribute to financial stability, the necessary basis for growth and employment,” said Internal Market Commissioner Michel Barnier.

“The compromise reached today broadly complies with Basel III requirements, and therefore with our commitments to the G20. It recognises the importance of the single market. It does not mean that it is perfect. I believe some improvements are still possible [during the trilogue negotiations]. It is possible to find a final agreement before the summer,” Barnier concluded.

"Today's agreement is an important step towards a safer and stronger banking system in Europe, and one that will help protect the taxpayer from picking up the bill when things go wrong in the way they have had to do over the past few years,” a UK Treasury spokesman said.

"Today's agreement also shows that on issues that are for the whole European Union, Britain is playing a full role in making reforms that support Britain's national interest while also supporting a stronger and stable European economy," the spokesman concluded.

“Current economic circumstances demand difficult policy choices. The EU efforts and scarce public resources should be focused primarily on growth and jobs. In this context cohesion policy has a key role to play for investing out of the crisis,” according to the statement of 11 finance ministers, all from countries that are net recipients of EU funds.

The Basel Committee comprises regulators from 27 countries - including the United States, Britain and China - to set prudential rules for banks.

The group in 2010 agreed to more than triple the core capital than lenders must hold to protect themselves from insolvency as part of a measures to prevent a recurrence of the financial crisis that followed the collapse in 2008 of Lehman Brothers Holdings Inc.

The measures, known as Basel III, must be implemented into nations’ laws before they take effect.

Denmark, holder of the six-month EU presidency, has been seeking to translate the higher capital standards set by the Basel Committee regulators into EU law by the start of next year by reaching a consensus and an accord with the European Parliament by the end of June.

The compromise ministers allows a margin of flexibility so countries that want to can require their banks to increase their capital buffers up to 3 % beyond the minimum of 7% required by the Basel rules, without clearing their decisions through the Commission.

The new Basel rules must be in place by the beginning of next year, and they will affect up to 8,300 European banks.

  • End of June 2012: Danish presidency hopes to have agreement on the capital requirements directive update passed by the European Parliament
  • 1 Jan. 2013: Member states obliged to introduce the new rules under the Basel III agreement

 

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