Bloomberg News

Biggest Banks May Need 17% Core Capital Under EU Plan

April 16, 2012

Regulators in the European Union may be allowed to impose capital surcharges on banks as high as 5 percent in a compromise deal on applying Basel rules in the region. The core-capital levy is half that suggested by the lawmaker guiding the law through the EU’s legislature.

Such a surcharge “could be introduced from 2015, thereby providing member states with more flexibility while ensuring the smooth functioning of the internal market,” according to a document prepared by Denmark, which holds the rotating presidency of the EU, and obtained by Bloomberg News.

Othmar Karas, the Austrian lawmaker guiding the adoption of the global bank-capital and liquidity rules in parliament, last week suggested surcharges for the most systemically important banks of as much as 10 percent of assets weighted for risk.

Both those figures would be in addition to proposals by Michel Barnier, the region’s financial services chief, to fix banks’ core capital requirements at 7 percent of their risk- weighted assets, with limited exceptions for national regulators to set higher thresholds. Nations have clashed over the figure, proposed by Barnier in 2011 as part of a draft law to apply rules agreed upon by the Basel Committee on Banking Supervision.

The U.K. and Sweden have said the plans would unacceptably restrain national powers. Other governments, including France and Austria, have backed Barnier’s approach.

Core Capital

Nations are also split over what types of securities should count as core capital, according to the document, which was sent to ambassadors ahead of this week’s meeting and is dated April 13. Diplomats from the region’s 27 nations will meet on April 19 to weigh the Danish proposals. The meeting is intended to prepare the way for finance ministers to reach a joint position on the law for a gathering on May 2.

EU nations are also divided on when banks should have to start disclosing whether they exceed Basel limits on indebtedness, and to what extent banks should be able to tap their insurance arms for capital.

Denmark previously proposed that nations should be allowed to impose capital surcharges of as much as 3 percent on their banks without seeking prior approval from the EU. Some nations “still have concerns” that this doesn’t give enough flexibility, the document says, prompting the 5 percent proposal.

Systemic Relevance

Karas’s suggested compromise on the version of the draft law that is going through the European Parliament would reserve surcharges of as much as 10 percent for banks “in the highest category of systemic relevance.” Other systemically important banks could face surcharges of as much as 3 percent.

The Danish proposal would allow a supervisor to impose surcharges across its entire banking system, with the exception of units belonging to lenders that are based and regulated abroad.

Preben Aamann, a spokesman for Denmark’s EU presidency, declined to comment.

The Basel committee brings together banking regulators from countries including the U.S., U.K. and China to set global capital rules. Its agreements must be written into national laws before they can be enforced.

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.


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