Bank-Debt Limit Sought by EU Lawmakers Following Dexia Break-Up
February 08, 2012, 12:35 PM ESTBy Jim Brunsden
Feb. 8 (Bloomberg) -- Banks may be forced to limit their borrowing in a bid by European Union lawmakers to strengthen the region’s implementation of Basel capital rules.
Members of the EU’s Parliament will push for the rule that may force banks to hold reserves against possible losses on the region’s sovereign debt, according to two lawmakers on the assembly’s financial affairs committee.
The EU’s effort to implement the Basel rules has been “too conservative,” said Philippe Lamberts, who is leading work on the dossier for the parliament’s Green group. Last’s year’s failure of Dexia SA showed the need for a borrowing limit to maintain investor confidence in banks, he said in an interview. “We have Dexia failing before our eyes -- this is not a distant future.”
The EU is striving to meet a January 2013 deadline to adopt tougher bank rules agreed on by the Basel Committee on Banking Supervision in 2010. Michel Barnier, the EU’s financial services chief, was criticized last year by governments including the U.K. for proposing a law that they claimed would water down what was approved in Basel, including by dropping the debt limit, known as a leverage ratio.
The EU’s law to implement the Basel accord should include a “clear commitment” to a binding leverage ratio and a requirement for lenders, by 2015 at the latest, to start disclosing how well they measure up to the standard, said Vicky Ford, a U.K. lawmaker following the draft law for the parliament’s Conservative group.
Further Study
Barnier has said that the leverage ratio is “untested” and needs further study. The ratio, as agreed to by Basel, would limit a lender’s borrowing to no more than 33 times its Tier 1 capital, a measure of its financial reserves. It would do this by requiring banks to hold financial reserves equivalent to three percent of their loans, derivatives trades and other assets.
The Basel committee has called for the measure to take effect in 2018.
The final version of Barnier’s proposals must be approved by national governments and lawmakers in the European Parliament before they can be implemented. The parliament is scheduled to vote on the draft law by July.
Green lawmakers may also seek to expand the draft law to include rules on bank structure and on pay practices, Lamberts said.
--Editors: Peter Chapman, Christopher Scinta
To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net
