Bank regulators in European Union nations may retain powers to set capital levels on lenders they deem too big to fail, in a possible compromise to implement Basel rules in the region.
Under the plans, regulators would be free to force some or all lenders in their jurisdiction to hold a “systemic risk buffer” of as high as 3 percentage points, according to a document obtained by Bloomberg News. The measures drawn up by Denmark, which holds the EU’s rotating presidency, may also relax a planned liquidity rule forcing banks to hold enough easy-to-sell assets to survive a 30-day credit squeeze.
The compromise plan follows a clash over proposals by Michel Barnier, the bloc’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 during credit booms. The U.K. and Sweden have said that Barnier’s plans would be an unacceptable limit on national powers.
Barnier’s plan to give the European Commission powers to bolster bank-capital requirements during market crises would be curbed, according to the Danish document, dated Feb. 28.
Still, the commission, the 27-nation EU’s executive arm, would have veto power over decisions to raise the buffer higher than three percentage points of core capital.
The Danish proposals would give extra “flexibility” to national regulators to go beyond the 7 percent threshold and may “constitute a viable approach for reaching a compromise,” according to the document.
The national measures would go beyond a decision by the Basel Committee on Banking Supervision last year to impose capital surcharges on banks whose failure would roil the global economy.
The Basel committee brings together regulators from 27 nations including the U.S., U.K. and China to coordinate bank capital rules.
Under the Danish plan, national regulators would be able to set tougher capital rules on lenders not identified by the Basel committee as requiring a surcharge.
“Some economies will be prone to different stresses, for example booms in property prices,” Richard Reid, research director for the International Centre for Financial Regulation, said in an e-mail. “Allowing national regulators to be able to account for these local, and in some cases regional differences is essential.”
EU nations and lawmakers in the European Parliament must agree on Barnier’s draft law before it can enter into force. Chantal Hughes, Barnier’s spokeswoman, declined to immediately comment.
The Danish plan would also allow national regulators to impose tougher rules on banks whose methods for measuring the riskiness of their assets are deemed to be flawed, and to set limits on lenders’ indebtedness, according to the document.
“There’s not much justification,” for Barnier’s proposal to cap capital requirements, said Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based research institute.
“You have to make a distinction between harmonization of the definition of capital and maximum harmonization of the capital level,” Lannoo said in a telephone interview. “Like any market, there should be competition.”
Measuring Asset Risk
Another part of the draft rules would limit the scope for banks to reduce their capital requirements by being too lax in the way they calculate the riskiness of their assets.
Until the end of 2014 lenders would be forced to hold capital equivalent to at least 80 percent of the requirements they would have faced under the first set of Basel rules dating from the 1990s. These older rules don’t allow banks to measure the riskiness of their assets.
In a possible relaxation of a minimum liquidity rule, banks may be allowed under the Danish plan to use a wider range of assets than envisaged by the Basel committee.
The European Banking Authority should assess by mid-2013 whether some residential-mortgage backed securities, equities listed on a recognized exchange and gold should count toward meeting the so-called liquidity coverage ratio.
The mortgage backed securities should be eligible as collateral with the lender’s central bank, and should be of “high” credit quality, the document says.
The London-based EBA drafts technical rules and coordinates the work of national regulators in the EU.
The version of the liquidity rule published by the Basel committee has been criticized by some EU governments and banks as overly restrictive as it recognizes few assets other than sovereign debt as highly liquid.
The Association for Financial Markets in Europe, which represents international lenders including Deutsche Bank AG, BNP Paribas SA and UBS AG, has said that the measure may make it harder for lenders to spread their risks. Denmark has warned that the rule would threaten its mortgage market.
The EU may also delay the implementation of the ratio. The Basel committee has said the standard should be binding on lenders from Jan. 1, 2015. The Danish proposals say that the measure should apply from the end of 2015 “at the latest.”