At least four nations may challenge European Union plans to limit their power to regulate bank capital as governments seek a compromise on implementing global rules on the reserves lenders must hold to prevent a financial crisis, according to four people with knowledge of the matter.
Officials from the EU’s 27 member states are weighing whether to scrap a proposal from EU financial services chief Michel Barnier to make the European Commission responsible for deciding bank capital levels during market turmoil, said the people, who declined to be identified because the talks are private. Nations are also considering widening the range of assets lenders may use to meet liquidity rules, the people said.
Barnier has been criticized by the U.K. and Sweden for seeking to restrain national watchdogs’s freedom to impose tougher capital rules on national banks. Barnier has said that requirements for lenders should be set by the EU, with limited exceptions for national regulators to exceed them to ease credit booms.
The commissioner included the curbs in a draft law he presented last year to implement rules set by the Basel Committee on Banking Supervision. Chantal Hughes, Barnier’s spokeswoman, declined to immediately comment.
“A move towards more flexibility in the application of the rules is to be welcomed,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e- mail. “Across the EU there is a considerable diversity in the size and structure of financial systems.”
The Basel committee brings together regulators from 27 countries including the U.S., U.K. and China to set global rules for banks. The committee last year said it would seek to impose capital surcharges of as much as 2.5 percentage points on the largest lenders as part of its response to the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc.
Denmark, which holds the rotating presidency of the EU, is seeking a deal on the implementation of the Basel rules next month. It would then need to negotiate the final version of the measures with lawmakers in the European Parliament.
Barnier’s version would hand the European Commission power to set “stricter” capital rules for banks in cases where it’s necessary to address “risks which arise from market developments,” according to a copy of the document on the EU’s website. The rules would be temporary, although no expiry date is set out in the draft. The extra requirements could apply across the whole EU or in individual countries.
Nations are considering proposing changes to the law that would keep the power in the hands of their own regulators, the people said. Decisions to hike capital requirements may still be reviewed or coordinated at the EU level, they said.
“Forcing the whole EU into lockstep for the common good could lead to a suboptimal approach nationally,” Patrick Fell, a director at PricewaterhouseCoopers LLP in London, said in an e-mail. An approach based on local decisions “buttressed through coordinated EU review and disclosure” to the market, could be “more sustainable,” he said.
Adding powers to the draft law giving national regulators the ability to impose capital surcharges on banks with systemic importance is also being considered, the people said. On the liquidity rule, nations are considering amending a standard draft by the Basel committee that would require lenders to hold enough easy-to-sell assets to survive a 30-day credit squeeze.
Barnier’s proposal said regulators should assess which assets will count as highly liquid before 2015. Officials are considering calling on supervisors to test a wider range of securities than those set out by Basel, the people said. This list may include some equities, two of the people said.
Liquidity is a measure of the amount of cash and easily sellable assets banks have on hand to meet liabilities. A bank’s capital is a measure of the reserves it has to cover losses.
The debate about the liquidity requirements is “having to shift in recognition of the reality that there is a shortage in supply of suitable instruments for banks to use,” Reid said.
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