EU Banks May Face Graduated Capital Surcharges in Compromise Bid

Banks in the European Union may face a sliding scale of additional capital requirements based on the havoc that would be unleashed by their collapse, according to draft plans obtained by Bloomberg News.

The European Commission, the 27-nation EU’s executive arm, is proposing to impose capital surcharges on lenders based on whether their failure would do damage at national, European, or global level, according to the document, which is intended to spur compromise talks on a draft EU bank law. Lenders would face curbs on paying bonuses and dividends until the requirements are met.

Banks whose collapse would damage the economy in only one country would face surcharges of as much as 3 percent of their risk-weighted assets, according to the document, which will be discussed today at a Brussels meeting of government officials and lawmakers. The document, which doesn’t specify the surcharges that European and globally systemic lenders should face, says the European Banking Authority should draft technical rules that would underpin the system.

Lawmakers and national governments in the 27-nation EU are at loggerheads over how to apply an overhaul of bank rules agreed on by global regulators in 2010. The measures, known as Basel III, more than triple the core capital that lenders have to hold to protect themselves from insolvency.

Biggest Banks

The Basel group has called for nations to adopt the rules by January 2013, and to fully apply them from 2019. Lawmakers have said that the bloc may miss the 2013 deadline because of ongoing talks on the legislation.

Twenty percent of Europe’s biggest banks (SX7P) would have failed to meet the Basel III requirements had they been in force in June 2011, according to data published in April by the European Banking Authority. Lenders had a collective capital shortfall of 242 billion euros ($313 billion).

The commission compromise proposals flesh out agreements reached by the Basel committee to make systemic banks hold more capital than is required under Basel III.

While the Basel group agreed that globally systemic banks should face surcharges of as much as 2.5 percent of their risk- weighted assets, national regulators were left in charge of setting requirements for banks that only pose a threat in one country.

Lenders Complexity

The surcharges should be calculated based on criteria including lenders’ size, complexity and interconnectedness, according to the commission plan. The measures would exist alongside some power for nations to force all banks under their supervision to hold more capital than required by Basel III.

Michel Barnier, the EU’s financial services chief, has said that agreement on the bank capital law is an essential precursor for plans to build a so-called banking union with common supervision and financial backstops for lenders.

The banking union, which was discussed by EU finance ministers at a meeting last week in Nicosia, Cyprus, would include the euro area and any other EU nations that choose to voluntarily participate.

A spokesman for Barnier couldn’t be immediately reached for comment.

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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