Bank regulators in the European Union may win powers to impose capital surcharges of as much as 3 percent on lenders’ activities at home and abroad as part of a compromise plan for applying Basel rules.
Denmark, which holds the EU’s rotating presidency, made the proposal to resolve a clash over how much freedom national authorities should have to impose capital rules on their banks that exceed a minimum standard, a Danish presidency official told reporters in Brussels. Finance ministers will seek to thrash out a deal on the rules at a May 2 meeting.
Nations are divided over proposals by Michel Barnier, the EU’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. Barnier proposed the limit in 2011 as part of a draft law to apply rules agreed on by the Basel Committee on Banking Supervision.
Denmark called the May 2 meeting to reach an accord on the bill. The EU faces a Jan. 1, 2013, deadline set by the Basel committee for adopting the measures. The ministers will also discuss candidates to run the European Bank for Reconstruction and Development.
The U.K., Spain and Sweden are among countries warning that Barnier’s bank-capital plans would restrain national regulators. Others, including France, Italy and Austria, back the commissioner’s approach.
The clash is “the main outstanding issue” that must be resolved to reach an agreement on the law, Denmark said in an e-mailed copy of the compromise plan, dated April 27.
The document replaces previous proposals from Denmark that would have allowed regulators to impose surcharges of as much as 5 percent, but only on a bank’s activities in its home country. Both the U.K. and France had criticized the plan as unacceptable.
Under the new proposals, the surcharges would cover both domestic and cross-border activities.
The draft law must be agreed on by governments and the European Parliament before it can enter into force.
“It is very important to get a deal, but in this issue we have some core principles that we will defend quite heavily,” Anders Borg, Sweden’s finance minister, said in an interview on April 27. If ministers fail to reach an accord this week, they will return to the issue at their next scheduled meeting on May 15, he said.
There is “no technical reason” why ministers shouldn’t be able to reach a deal on the law on May 2, the Danish official said, adding that the 3 percent surcharge plan is a “rather substantial” compromise. The official couldn’t be named because negotiations are continuing.
Under the compromise plan, regulators would have to seek prior approval from the European Commission if they wanted to impose surcharges of more than 3 percent.
Governments are split over what kind of EU-level checks should take place before nations can introduce larger surcharges, including whether the commission should have the power to veto them.
The Basel committee brings together regulators from 27 countries including the U.S., U.K., and China to set prudential rules for banks. Its agreements must be implemented into nations’ laws before they can come into effect.
The European Central Bank has said that countries should have the power to toughen capital rules for their banks beyond normal EU standards if their financial stability is threatened.
The European Systemic Risk Board, a group of central bankers and other regulators charged with monitoring threats to markets in the EU, has made similar calls.
“Authorities will require flexibility in the set of available policy tools to both prevent and mitigate specific risks,” the ESRB said in a statement this month.
Denmark is also seeking agreement on other outstanding issues in the draft law, said the official.
Governments have clashed over proposals from the commission to apply capital requirements to banks with insurance arms lighter than those approved by the Basel committee. Such companies include Societe Generale SA, Credit Agricole SA, and Lloyds Banking Group Plc.
While the Basel committee has sought to prevent lenders from counting their insurance arms’ reserves toward meeting their capital requirements, the commission proposals would allow banks such double-counting.
The commission plans are backed by France, while Sweden and the U.K. oppose them. The ECB has also said it’s opposed in general to banks relying on their insurance business to meet requirements. Denmark has backed the commission’s approach, saying a majority of EU nations are behind the plan.
Another split concerns how strictly the EU should define and police which securities lenders can count toward their core reserves and when banks should have to start publishing whether they meet an indebtedness limit drawn up by the Basel committee.
© Copyright 2022 Bloomberg News. All rights reserved.