EU Bank Targets Rebuffed by Swedes Seeking Tougher Rules

Swedish Finance Minister Anders Borg
Anders Borg, Sweden's finance minister. Photographer: Andrew Harrer/Bloomberg

The European Union will fail to reach a deal this week on bank capital rules unless member countries get more freedom to impose tougher requirements, Swedish Finance Minister Anders Borg said.

“I am not willing to compromise on the core principles that we have, so we will take a tough position in these negotiations,” Borg said in an interview with Bloomberg News. “I will not be ready to give up any of the major interests of our country,” he said.

EU nations have clashed over proposals by Michel Barnier, the region’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. The figure was proposed by Barnier in 2011 as part of a draft law to apply rules agreed on by the Basel Committee on Banking Supervision. Sweden wants to set a 10 percent buffer from 2013, and raise it to 12 percent two years later.

Sweden, the U.K. and Spain are among a group of countries warning the plans would unacceptably restrain national powers. Other governments, including France, Italy and Austria, have backed Barnier’s approach.

Governments will seek to narrow their differences on the draft law at a meeting on May 2, with finance ministers scheduled to meet again on May 15.

‘Core Principles’

“It is very important to get a deal, but in this issue we have some core principles that we will defend quite heavily,” Borg said. If ministers fail to reach an accord this week, they would return to the issue at the next meeting, he said.

“There’s still a lot of work to be done” to get an agreement, Chantal Hughes, a spokeswoman for Barnier, told reporters in Brussels today. “Timing is quite short.”

The legislation must be approved both by governments and by lawmakers in the European Parliament before it can come into effect.

Compromise proposals from Denmark that would allow nations to force their banks to hold additional capital of as much as 5 percent may not go far enough, Borg said. While that “would be a good step,” Sweden would still expect that national regulators can go beyond this for so-called globally systemic banks, or G-SIFIs, he said.

“At the end of the day, there might be a need for a kind of a phasing in of tougher requirements, but at least 5 percent additional capital in the long-term is necessary,” Borg said.

Home Countries

Sweden and the U.K. have also objected to existing proposals, arguing they don’t automatically cover banks’ activities outside their home countries.

Borg’s position puts him at loggerheads with France, which has already said the 5 percent rule goes too far. The country, which is in the middle of presidential elections that may see Nicolas Sarkozy ousted by Socialist Francois Hollande, has warned too much freedom for national regulators to raise capital requirements could imperil growth as lenders respond by scaling back their activities.

The final compromise on the draft law is likely to involve a “constrained discretion” for national authorities to go beyond the 7 percent threshold, Sharon Bowles, the chairwoman of the European Parliament’s economic and monetary affairs committee, said today on Bloomberg Television.

National Rules

Barnier’s proposals have won support from banks concerned they may face a patchwork of rules across national markets.

So-called “maximum harmonization” of capital rules in Europe “doesn’t seem likely to happen, which is a concern to us,” Leena Morttinen, head of group European affairs at Nordea Bank AB, said at a conference organized by the European Commission in Brussels last week.

Sweden, the U.K. and France have also clashed over proposals from the Commission to apply lighter capital requirements to banks with insurance arms, versus what was approved by the Basel committee.

Such so-called bancassurers include Societe Generale SA, Credit Agricole SA, and Lloyds Banking Group Plc.

While the Basel committee has sought to largely ban lenders from counting their insurance arms’ reserves towards meeting their capital requirements, the Commission proposals would allow banks to carry out such double-counting.

The Commission plans are backed by France, though Sweden and the U.K. oppose them. The European Central Bank has also said it’s opposed in general to banks relying on their insurance business to meet requirements. Denmark has backed the Commission’s approach, saying a majority of EU nations are behind the plan.

‘Fully Compliant’

Both the draft law proposed by the Commission last year and the Danish compromise plans are “fully compliant” with Basel III, Hughes said.

Sweden will also insist in this week’s talks that the EU set a “stringent definition” on which securities lenders can count toward their core reserves, Borg said.

It’s “very important that we don’t undermine the definition of capital, obviously, because that would then only circumvent the credibility of an agreement,” he said.

Under the current Danish plans, national regulators would retain the power to decide which securities meet the criteria to count toward core reserves. The European Banking Authority, based in London, could alert the European Commission, the 27-nation EU’s executive arm, if it felt a regulator had erred.

Core Capital

Germany rejected a greater role for the EU in defining core capital instruments during preparatory talks for this week’s meeting. Andrea Enria, the EBA’s chairman, has called for powers to create a legally-binding list of securities that count as core capital.

“Strong mechanisms should be put in place to make sure that there is no room for watering down the requirements,” Enria said in a speech in Dublin last week.

At the same time, the U.K. has taken issue with the wording of the draft law that may allow so-called silent participations by German authorities to count toward lenders’ core reserves.

Swedish policy makers want banks to comply with more rigorous capital requirements in part as lending growth exceeds the 2 percent to 3 percent level the central bank has identified as safe. Household borrowing rose an annual 5 percent in March, the statistics office said today. That beat the 4.9 percent median estimate in a Bloomberg survey of analysts. Swedish household debt rose to 170 percent of disposable income last year from about 100 percent in 2000, the central bank estimates.

“For a decade or something like that debt to disposable income ratio has been going up, up, up, up and that means that eventually we’re going to get to a point where somebody is going to have to say enough is enough,” central bank Governor Stefan Ingves said this month.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE