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Banks Face Tripling of Capital Levels as EU Moves on Basel III Regulations

Banks face demands from the European Union to more than triple the minimum levels of core capital they must hold to stave off insolvency under proposals that some lenders complain will hamper the region’s economic recovery.

Michel Barnier, the EU’s financial-services chief, will propose tomorrow a law to implement global rules approved by the Basel Committee on Banking Supervision aimed at bolstering banks resilience to shocks. Lenders will need to raise about 423 billion euros ($595.5 billion) by 2019 to comply with the EU’s version of the Basel III rules, according to a draft of the EU proposals obtained by Bloomberg News.

“A lot of existing capital will need to be replaced, it will not count any longer,” said Markus Heidinger, a partner dealing with financial regulation at law firm Wolf Theiss in Vienna. “At best, 10 percent of the work is done. It is just the beginning.”

Stress tests on the EU banking industry published on July 15 revealed that eight lenders have a combined 2.5 billion-euro shortfall in the capital they need to cope with a future financial shock. The exams encompassed part of the new Basel rules on what instruments can count toward banks’ reserves, prompting complaints from some lenders that they were being asked to meet future standards ahead of time.

Germany’s Landesbank Hessen-Thueringen, known as Helaba, pulled out of the tests two days before the publication of results, disputing the capital rules for the exams that were set by the European Banking Authority.

Silent Participation

“If you take the example of Helaba, they have a form of silent partnership which right now under German rules counts as regulatory capital, but is not accepted in the stress tests and will not be accepted under the future EU rules,” Heidinger said.

So-called silent participation is a form of non-voting capital. “After the phasing-out period, it simply will not qualify as Tier 1,” a measure of lenders’ financial strength, said Heidinger.

Barnier’s proposals will include empowering regulators to release a bank’s stress-test results even without the lender’s consent. Under existing rules, they can only release data that banks have agreed can be published.

Lenders have complained that part of the draft text, prepared by Barnier’s staff in the European Commission, goes beyond the capital rules agreed to internationally by the Basel committee, including by raising the reserves that banks must hold against some real-estate investments.

‘Higher Risk Weighting’

“The higher risk weighting for exposures secured by residential real estate jeopardizes retail bank’s ability to provide loans to the real economy,” said Chris De Noose, managing director of the European Savings Bank Group, a Brussels-based banking association. “The financial crisis did not provide sufficient evidence that would justify a revision of the risk weighting of these exposures.”

The Basel accord, published in December 2010, increases the amount of core capital lenders must hold to 7 percent of their assets from 2 percent, with the value of these assets weighted according to their riskiness. The Basel III agreement also tightens the definition of what banks can count as capital. Basel agreements must be implemented by national governments before they can take effect.

Barnier has clashed with some governments in the 27-nation EU over how to interpret and implement the Basel accord. Finance ministers including Spain’s Elena Salgado, Sweden’s Anders Borg and U.K. Chancellor of the Exchequer George Osborne have criticized plans to make it harder for national regulators to set tougher capital rules than those agreed by Basel.

‘Considerable Costs’

It is “imperative” that nations can decide on whether to further reinforce requirements for lenders, as it is their national budgets “that might bear the considerable costs” of a banking crisis, the ministers said in a letter to Barnier in May.

“Some jurisdictions appear determined to carry out gold- plating” of the EU rules, said Emil Petrov, a managing director at Nomura International Plc in London. “The question is how this is going to work in an environment where there is a common European rulebook.”

The U.K. government has also argued against plans by the commission to leave out a binding limit on lenders’ indebtedness that was included in the Basel accord.

The indebtedness rule is “vital” to the regulatory overhaul, U.K. Treasury Minister Mark Hoban said last month.

The EU version of the Basel rules will cover more than 8,000 banks in the region, Barnier told reporters on July 12.

The Basel committee brings together regulators from 27 countries including the U.S., U.K. and China.

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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