Banks That Mislead Watchdogs in EU May Be Fined 10% of Sales
The European Union may give national regulators the power to impose tougher penalties for banks that fail to disclose dangers to their survival, according to proposals designed to safeguard the region’s financial markets.
Banks may be fined at least 10 percent of their annual sales for the worst cases of misleading regulators about levels of capital reserves, liquidity, indebtedness and risk taking, under the draft EU proposals obtained by Bloomberg News. Bankers may also be fined at least 10 percent of their yearly pay or 5 million euros ($7.1 million) for the most serious breaches.
“Effective, proportionate and dissuasive sanctioning regimes are key” to ensuring “compliance with EU banking rules, protect users of banking services and ensure safety, stability and integrity of banking markets,” said the draft legislation prepared by the European Commission.
The Group of 20 countries is seeking to toughen financial rules to curb excessive risk-taking and prevent a repeat of the crisis triggered by collapse of Lehman Brothers Holdings Inc. in 2008. Regulators in the Basel Committee on Banking Supervision agreed last year to more than double the high quality capital that lenders must hold to cushion against possible losses, as well as to enforce rules on bank liquidity and indebtedness.
The EU overhaul would be used to police lenders’ reporting on whether they comply with the new Basel standards. Banks would also be punished for missing targets for liquidity that the EU intends to impose as part of its implementation of Basel rules.
“Great European Takeover’
Penalties would be applied to banks that fail to meet a so-called liquidity coverage ratio, which requires them to hold assets sufficient to survive a 30-day credit crunch, and to lenders that contravene rules banning banks from focusing too much of their activities on a single partner.
The plans are “the beginning of the great European takeover of the process of how infractions are dealt with,” Bob Penn, financial regulation partner at law firm Allen & Overy LLP in London, said in a phone interview. “It’s the thin end of the wedge.”
Chantal Hughes, a spokeswoman for Michel Barnier, the EU’s financial-services chief, declined to immediately comment. EU governments and the European Parliament need to approve the final versions of draft laws before they can take effect.
While governments would have the power to set higher or lower penalties depending on the severity of infractions, they wouldn’t be able to set the ceiling for fines at a lower level.
The rules may enable countries including Germany and Spain to increase fines beyond current levels, according to data published by the commission in December. The U.K. already has fining powers beyond the minimum levels proposed by the EU.
“Serious questions will remain, firstly over whether single member-state regulators will wish to be subject to the overbearing hand of Europe.” Penn said. “There will be a lot of political nervousness about that.”
A bank’s financial strength, the size of its gains from any breach of the rules, and its cooperation with regulators should be considered by regulators to determine the level of fines, James White, a spokesman for the Association for Financial Markets in Europe. AFME represents international lenders including Deutsche Bank AG (DBK), BNP Paribas SA (BNP) and UBS AG. (UBSN)
‘Element of Discretion’
The EU rules should respect national legal frameworks, said Irving Henry, a director of the British Bankers’ Association, said in a telephone interview. “The application of penalties should have an element of discretion, as in U.K. law.”
The U.K.’s Financial Services Authority and the Bank of Spain declined to comment. Germany’s financial regulator, Bafin, doesn’t comment on legislative proposals, said spokesman Ben Fischer.
The fining measures are intended to accompany the EU’s plans on the implementation of Basel III in the 27-nation region that Barnier has promised to publish by the end of July.
Under the proposals, supervisors would also be required to put in place whistle-blowing programs to improve detection of violations.
Authorities should ensure “appropriate protection for employees of institutions who denounce potential or actual violations committed within the institution against retaliation and discrimination,” the document says.
The rules would cover banks giving services that haven’t been authorised by their regulators and failure to notify supervisors of planned acquisitions.
The European Banking Authority, which brings together regulators from across the EU, would be tasked with drawing up guidelines on fines that should be applied in specific cases, the document says.
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