UK faces isolation or climb-down on bank rules

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British Chancellor George Osborne is set for a showdown or climb-down with his EU counterparts today (15 May) as finance ministers meeting in Brussels seek to push through capital requirements proposals against opposition from the UK and Bulgaria.

At the heart of the dispute is whether countries like Britain should be allowed to enforce stricter capital rules than those agreed for at the European Union level. The issue triggered a public fallout between Osborne and his EU counterparts at a meeting of finance ministers earlier this month.

The dispute also highlights the broader struggle for influence over financial policy in a bloc shaken by the worst financial crisis in a generation. 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).

Negotiations on the issue stalled in the early morning of 3 May, when the UK and Bulgaria rejected compromise proposals put forward by the Danish presidency, after marathon talks by finance ministers in Brussels failed to find a compromise.

Britain wants powers to raise minimum capital requirements beyond a 12% threshold (see background) – and to do so without reference to Brussels or the EBA. Meanwhile, France and other countries claim such a move would have a distorting effect on competition, and veer Europe away from much-needed central control.

UK has run out of road

The Danish presidency said it preferred “to seek the broadest possible agreement”, but would not hesitate to use EU treaty rules to push the proposal through since a qualified majority of member states was in favour.

Negotiations have been kept open by the Danish presidency, and the UK is still prepared to negotiate, claiming agreement is almost within reach. But other member states suggest the country has run out of road, leaving Osborne little option but to back down or remain out-gunned.

“It is clear that following the extreme pugnacity of George Osborne at the last meeting that there is little left to discuss, and we will move quickly to adopt the compromise from last time,” said one EU diplomat.

Britain wants to reject the proposal, claiming that the compromise blocks it from implementing recommendations for the overhaul of its banking system made by John Vickers, a former Bank of England economist. It may decide, however, to avoid another high-profile show-down with the hope that it can claw back some ground later.

The use of a qualified majority vote would be unusual and indicate frustration among member states at the UK's intransigence. Britain could seek to amend the proposal further in the legislative process, however, since a trialogue negotiation between the European Commission, Parliament and Council will follow before the proposal is agreed.

The UK for its part maintains that the compromise fails to adequately transpose rules agreed on by the Basel Committee on Banking Supervision, which the EU must implement before the end of this year.

UK, France and Germany to agree on 2013 EU budget cuts

Elsewhere, the UK is likely to agree with other countries that a European Commission proposal to increase the EU's expenditure by 6.8% during 2013 should be rejected. The UK, France and Germany, along with other net contributors, are all set to reject the Commission proposals.

Meanwhile, the European Parliament voted on the capital requirements proposal yesterday (14 May), agreeing that flexibility on bank capital should be allowed, but only with the clearance of the Commission, a condition the UK opposes.

In the same package of measures, the Parliament's economic and monetary committee voted to limit bankers' bonuses to 100% of their basic pay.

This follows calls from Internal Market Commissioner Michel Barnier for "tougher action" on bank bonuses, in the wake of an EBA report published last month.

The report – which Barnier said made for “startling reading” – found that bonuses paid to bank executives in one unnamed EU country were more than three times basic pay, and in one case a bonus of more than nine times basic pay was reported.

During an informal meeting of the finance ministers on 3 May, British Chancellor George Osborne accused his EU counterparts of trying to water down Europe's bank capital rules and said this would make him "look like an idiot".

"I am not prepared to go out there and say something that is going to make me look like an idiot five minutes later," Osborne said, referring to potential loopholes allowing some banks to sidestep new capital standards agreed by global regulators.

Michel Barnier, the EU commissioner in charge of financial regulation, accused Osborne at the meeting of seeking an opt-out with a proposal that would let Britain impose higher capital ratios on its banks than elsewhere in Europe - something France and others fear could disadvantage continental institutions.

“London is a very important centre but ... there are other centres alongside London which also merit consideration,” said Barnier, a former French government minister.

The European Parliament voted through the capital requirements proposal yesterday (14 May). "On the key concern of maximum versus minimum harmonisation there is sufficient flexibility within an EU framework. This will allow countries with a very large debt to GDP ratio to take the necessary action to protect themselves," said the chair of the Parliament's economic and monetary affairs committee, Sharon Bowles (UK; Alliance of Liberals and Democrats for Europe).

“As we have done in the past, the Parliament has taken a firm line on variable remuneration. It is clear that these ultra-high levels of remuneration cannot continue, as indeed recent shareholder votes are beginning to show,” said Bowles, in relation to bankers' bonuses.

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 have discussed is to allow a margin of flexibility so countries that want to can require their banks to increase their capital buffers up to a certain limit, perhaps as much as 12% of risky assets for up to two years, with any further increase subject to Commission and European Banking Authority approval. This compares with Basel's minimum of 7%.

Ministers face pressure to introduce the rules the new Basel rules 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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