May 3, 2012

E.U. Bank Capital Deal Fails

Ministers will try for agreement at May 15 meeting

Although discussions dragged on till the wee hours of the morning, E.U. finance ministers were unable to put together a deal on toughening bank capital rules. They will now be forced to attempt to find common ground at their next meeting on May 15.

Bloomberg reported Thursday that, despite 16 hours of talks that carried over from Wednesday, in the end differences proved stronger than common ground as some countries insisted on more autonomy for their governments in imposing even stronger restrictions than current proposed rules call for.

Britain in particular was outspoken in demanding the right to boost capital reserves beyond proposed requirements, and Chancellor of the Exchecquer George Osborne said that London would also seek additional discretion on so-called macro-prudential oversight tools, such as when regulators can take steps to intervene in housing markets.

Denmark had proposed a compromise agreement on permitting governments to force their banks to add risk buffers of up to 5% to guard against domestic and non-E.U. exposures. Finance Minister Wolfgang Schaueble of Germany also warned that failure to come to an agreement “will be dangerous.” Nonetheless, ministers are resolved to try to overcome differences by the May 15 gathering.

Michel Barnier, the European Union’s financial services chief, has proposed to set banks’ core capital requirements at 7% of their risk-weighted assets, and added that there would be limited exceptions for national regulators to set higher thresholds. However, although Barnier was optimistic at the conclusion of the meeting, saying in the report, “We have made real progress,” there is apparently some distance to go before concord is achieved.

The current proposal being considered on Basel rule implementation by the E.U. provides for member states to impose a capital surcharge of up to 3% on their banks that are exposed to other member states within the 27-country bloc. If an E.U. country finds it is “specifically targeted” by another country’s higher requirements, the “target” country can appeal to the European Banking Authority for binding mediation.

Current revisions govern when binding mediation is to be used, and also offer a means for countries to provide justification for additional 3%-5% buffers on banks. They also spell out steps that must be taken when countries want to impose buffers higher than 5% and must gain EU approval to do so.

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