Basel Reprieve for EU Banks Weighed If Rivals Skirt Rules

Banks (SX7P) in the European Union may win a partial reprieve from Basel capital and liquidity rules if lenders in other regions such as the U.S. are allowed to escape the full force of the measures.

EU lawmakers are weighing safeguards to prevent lenders in the region from being left at a competitive disadvantage when a global accord by the Basel Committee on Banking Supervision is implemented, according to a document obtained by Bloomberg News.

The overhaul of capital and liquidity rules, known as Basel III, was designed to prevent a rerun of the crisis that cascaded across financial markets after the collapse of Lehman Brothers Holdings Inc. in 2008. EU Financial Services Commissioner Michel Barnier has already promised to be “vigilant” about the way the U.S. applies the Basel measures that were approved in 2010.

The European Banking Authority and the European Commission, the 27-nation region’s executive arm, should be empowered to “take appropriate measures in order to adjust to the level of global competition,” according to the document by Othmar Karas, the lawmaker guiding the adoption of the law through the European Parliament.

The Basel committee said on April 3 that the U.S. and China are among eight nations lagging behind in their implementation of its rules. The U.S. still hasn’t fully put in place an earlier round of changes agreed on by the Basel group in 2004.

‘Regularly Assess’

The London-based EBA should “regularly assess” how well other nations apply the requirements, Karas proposed in the document.

The report “strongly indicates that there is a lack of confidence that all regimes will ultimately commit to internationally agreed rules if these are seen to conflict with domestic priorities or individual national characteristics,” Richard Reid, research director for the International Centre for Financial Regulation in London, said in an e-mail.

The proposals are “yet another sign of how difficult it is going to be in practice to get a uniform global implementation of rules on banks’ capital and liquidity,” Reid said.

U.S. Federal Reserve Governor Daniel Tarullo has called for the Basel III rules to be “implemented rigorously.” The Federal Reserve declined to comment today on Karas’ proposals.

While the EU has raised concerns about U.S. implementation on Basel rules, American banks and regulators have also pointed to potential concerns over the way they are applied in Europe.

Some U.S. bankers, including Jamie Dimon, chief executive officer of JPMorgan Chase & Co., have questioned the way European banks measure the risk of losses on their assets, and so how much capital they need to hold.

Suggested Compromises

The draft EU law implementing Basel III must be approved by national governments and lawmakers in the Parliament before it can take effect.

Karas declined to immediately comment on the content of the report, which sets out suggested compromises on the draft law between parliament’s political groups. Karas, an Austrian Christian Democrat lawmaker, said yesterday that he was hoping to secure an agreement by the end of this week.

Denmark, which holds the rotating presidency of the EU, has organized a May 2 meeting of finance ministers to thrash out their negotiation position on the measures. Parliament’s economic and monetary affairs committee is scheduled to vote on May 8.

Separately, the parliament document contains a call for the EBA and the European Central Bank to recommend which assets lenders should count toward meeting a minimum liquidity rule drawn up by the Basel committee.

Liquidity Rule

The so-called liquidity coverage ratio or LCR, would require lenders to hold sufficient easy-to-sell assets to survive a 30-day credit squeeze.

The EBA, ECB and market regulators should consider whether “gold or other highly liquid commodities including oil,” should be allowed to count toward banks’ liquidity buffers, according to the document. Equities as well as covered bonds and other securities backed by retail mortgages, should also be assessed.

The report on possible EU compromises, dated April 24, also calls on lenders to disclose profits they have made from the European Central Bank’s decision to pump more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system since December.

Banks whose collapse could roil markets to prepare “living wills” indicating how they could be safely wound down if they fail, according to the report.

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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