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Financial Planning > Behavioral Finance

Proposed E.U. Bank Laws Tougher Than Basel Rules

By Marlene Y. Satter

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The European Union may be planning to get even tougher on bankers than the Basel Committee on Banking Supervision. A parliamentary draft of a proposed law provides for higher capital reserves and lower bonuses.

Bloomberg reported Friday that the draft, prepared by Othmar Karas, an Austrian lawmaker guiding the adoption of global bank-capital and liquidity rules, could provide for regulators to impose capital surcharges of as much as 10% of a bank’s assets, weighted for risk. That could result in core capital reserve requirements of up to 17%.

Denmark, currently holding the rotating presidency of the E.U., has advanced a proposal that permits countries to impose surcharges of up to 3% across their banking systems. The proposed surcharges would be added on top of regular requirements for banks to hold core reserves of 7%; they would be applied to banks, according to the document, “in the highest category of systemic relevance.”

Karas was quoted saying that large lenders “pose a threat to the stability of the financial system as a whole.” More of a capital buffer should act as a deterrent and keep them from taking “too much risk. In the end, taxpayers’ money must not be at stake when bailing out banks.” On Thursday, Karas also proposed an additional measure that would ban banker bonuses that exceed fixed pay. This came in the wake of calls from other lawmakers to find a way to cap excessive compensation.

Karel Lannoo, chief executive of the Center for European Policy Studies, a Brussels-based research institute, said in the report that a 10% surcharge would result in a cost to banks that “would be enormous.” Parliamentarians are considering a plan that would permit 10% surcharges “if this is justified by exceptional circumstances such as the size of the banking group in relation to the economy of the home country or the degree of concentration in the domestic financial market.”

“I think it will be immediately resisted” by national governments. Lanoo said. “I don’t think they will get this through.”

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