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EU Risks Violating Bank-Capital Pact, Basel Member Says

The European Union risks violating international bank-capital standards and its implementing law should face a rigorous review by global regulators, a Swedish member of the Basel Committee on Banking Supervision warned.

The EU’s plans to apply a worldwide pact struck by the Basel group fall short in multiple areas, from requirements applied to government debt to treatment of loans to small businesses, Uldis Cerps, executive director for banking at the Swedish Financial Supervisory Authority, said in an interview on Nov. 19. The Basel group is set to probe the EU’s compliance with the rules in a peer review to be completed next year.

“It’s quite clear that there are some things that are not Basel compliant, according to my view,” Cerps said. “It’s important that the review team does a thorough job.”

The EU emerged bruised from a preliminary Basel committee probe last year that cast doubt on its claims to be fully in line with a global pact to beef up banks’ defenses against financial crises. The review, based on a draft version of the EU plans, triggered a rebuttal from Michel Barnier, the bloc’s financial services chief.

The Basel group’s follow-up assessment in 2014 will examine the final version of the EU’s implementing rules, which were agreed on by the bloc earlier this year. The review will be led by Canadian regulators, Cerps said, while last year’s assessment was led by Australian authorities.

Non-Compliance

“There are a number of issues where the previous report that has been published identified non-compliance,” Cerps said. “Sweden had been very vocal about the need to address those gaps.”

The U.S. will face a similar probe next year that should be equally rigorous, according to Cerps, who said that he doesn’t want to prejudge the work of the team that assesses the EU.

Of the reviews completed so far, the committee has found China, Japan, Singapore and Switzerland’s measures to be in general compliance with the Basel standards.

“The EU’s implementation is fully in line with the spirit and level of ambition of Basel III,” Chantal Hughes, a spokeswoman for Barnier, said by e-mail.

“We said at the time that we weren’t in agreement with the findings of the preliminary peer review, and stand ready to provide the Basel committee with all necessary information and explanations on how we plan to apply Basel III,” she said.

Core Capital

The EU is set to phase in its version of the Basel accord, known as Basel III, starting in January, and the rules will fully apply as of 2019.

“Obviously it’s not going to be the same review team, it may be a different methodology, but the problems of material non-compliance are still there,” Nicolas Veron, fellow at the Brussels-based Bruegel research group, said in a telephone interview. “One can expect the Basel committee to be consistent.”

“My expectation is that the U.S. will be found compliant and that the EU will be found non-compliant,” with Basel III, he said.

The European Commission has insisted that its rules implementing Basel III respect the international accord. Some tweaks were needed because the bloc decided to apply the rules to all 8,300 EU-based banks rather than invoke its right to apply the rules only to internationally active lenders, according to the commission.

‘Copy-Paste’

“The EU couldn’t simply copy-paste Basel III into its regulations,” Hughes said. “It had to be integrated with our existing rules through a democratic process. Also, the EU is applying the rules to all of its banks, not just the biggest ones.”

Basel III more than triples the minimum amount of core capital that internationally active banks must have to at least 7 percent of their risk-weighted assets. The pact also seeks to tackle other weaknesses exposed by the 2008 financial crisis.

“The rules of the game are that the Basel regulations set identical minimum standards for internationally active banks,” Cerps said. Not fully implementing the rules for these lenders for the sake of also applying them to smaller banks “is in my view not compliant with the spirit of Basel,” he said.

The committee is developing other requirements for banks, building on Basel III, Cerps said.

Securitized Debt

Work on overhauling capital requirements for securitized debt “needs to be completed,” he said. “A new consultation is expected quite soon.” The Basel group called last year for a more risk-sensitive approach to setting capital requirements for securitizations.

The committee is also evaluating whether to set extra capital requirements for banks based on the risk that they may lose money on their investments because of interest rate movements, Cerps said.

The Basel group brings together regulators from 27 nations including the U.S., U.K. and China to co-ordinate their rule-making.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

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