Biggest Banks May Need 17% Core Capital Under EU Plan

Europe’s biggest banks may need to hold core-capital reserves of as much as 17 percent under plans being weighed by European Union lawmakers.

The region’s parliament is considering allowing regulators to impose capital surcharges of as much as 10 percent of a bank’s assets, weighted for risk, according to a set of suggested compromises on a draft law prepared by Othmar Karas, an Austrian lawmaker guiding the adoption of global bank-capital and liquidity rules.

The surcharges would be on top of standard requirements that lenders hold core reserves of 7 percent and would be applied to banks “in the highest category of systemic relevance,” according to the document, obtained by Bloomberg News.

Governments and lawmakers in the 27-nation EU are considering rules for lenders that would go far beyond international agreements approved by the Basel Committee on Banking Supervision. Denmark, which holds the rotating presidency of the EU, has proposed empowering nations to set surcharges of up to 3 percent across their banking systems. Karas yesterday suggested adding language to the legislation that would ban banker bonuses that exceed fixed pay, following calls from other lawmakers to rein in excessive compensation.


Large lenders “pose a threat to the stability of the financial system as a whole,” Karas said in an e-mail. An additional capital buffer should rein in lenders from taking “too much risk,” he said. “In the end, taxpayers’ money must not be at stake when bailing out banks.”

The draft law must be approved by the parliament and national governments and there are likely to be changes before the final legislation is enacted.

“I don’t think this will survive in its current form,” Bob Penn, financial regulation partner at Allen & Overy LLP, said in a telephone interview. It is likely to be overtaken by other EU proposals to prevent bank rescues by imposing losses on unsecured creditors at failing lenders, he said.

Under the suggestions drafted by Karas, 10 percent surcharges will be imposed “if this is justified by exceptional circumstances such as the size of the banking group in relation to the economy of the home country or the degree of concentration in the domestic financial market,” the document said.

Enormous Cost

Europe’s largest lenders would have needed an additional 242 billion euros ($318 billion) in their core reserves to meet the 7 percent requirement, had it been in force as of June 2011, the European Banking Authority said last week.

The cost to banks from an additional 10 percent surcharge “would be enormous,” said Karel Lannoo, chief executive officer of the Centre for European Policy Studies, a Brussels-based research institute.

“I think it will be immediately resisted” by national governments, he said in a phone interview.

Global regulators on the Financial Stability Board, which oversees the Basel Committee, agreed last year on a list of 29 lenders whose collapse would have a severe effect on the economy, and which should face capital surcharges. EU-based lenders on the list included BNP Paribas SA, Deutsche Bank AG, and Royal Bank of Scotland Plc. The surcharges suggested by the FSB range from 1 percentage point to 2.5 percentage points.

According to the parliament document, lenders that have less systemic importance may face surcharges of as much as 3 percentage points of core reserves.

Deferred Bonuses

On banker pay, the document suggests that payment of at least 60 percent of a bonus award should be deferred for a minimum of three years. Also, regulators would be required to collect the names and job titles of bank employees paid more than 1 million euros a year. The EBA would publish a report on regulators’ findings.

Under current EU rules, banks are only quizzed on the number of staff making over 1 million euros, with the EBA also gathering data on compensation broken down by business area.

The requirement for banks to hold 7 percent core capital was agreed on by the Basel committee in 2010 as part of an overhaul of financial regulation in the wake of the crisis that followed the collapse of Lehman Brothers Holdings Inc. The measures are scheduled to be phased in by 2019. They need to be adopted by national legislatures before they can come into effect.

According to the parliament document, the EBA would identify “systemic institutions at global, European and domestic level which are active within the European Union.” National regulators would then be responsible for ensuring that lenders hold appropriate surcharges.

(Updates with comment from lawyer, draft bonus rules, starting in sixth paragraph.)
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