EU Said to Plan Concession on Tax Credits as Bank Capital

The European Union plans to give banks longer to prepare for rules restricting the use of tax credits as part of their capital, four people with direct knowledge of its negotiations said.

The Basel 3 regulations will stop European banks from using so-called deferred tax assets, or losses they can write off against tax, for more than 10 percent of their capital base. The EU plans to double the period that lenders have to implement the change to 10 years, said the people, who asked not to be identified because the talks are private.

Tax credits already account for about 10 percent, or 105 billion euros ($136 billion), of the core Tier 1 capital of banks assessed under the continent’s July 2011 stress tests, though some lenders’ levels are far higher, according to the European Banking Authority. European governments lobbied to extend the tax-credits change because it may encourage foreign banks to buy their most troubled lenders, the people said.

“A relaxation of the rules on deferred tax assets as part of capital ratios would make it easier for banks which incurred losses during the credit crisis,” said Gregory Turnbull Schwartz, an Edinburgh-based fund manager at Kames Capital Plc, which manages 52 billion pounds ($79 billion) of assets including European bank bonds. “However, it would not make the banks any more sound and may in fact be detrimental, as banks would appear better capitalized, but the quality of that capital would be poorer.”

Phasing Out

The extension refers only to existing deferred tax assets and will be phased out gradually over the 10-year period, the people with knowledge of the EU negotiations said. European policy makers are discussing how to implement the Basel banking standards published by regulators in 2010 as part of global efforts to prevent a repeat of the financial crisis.

“The treatment of deferred tax assets” by the EU “is fully in line with Basel 3 guidelines,” Stefaan De Rynck, a Brussels-based spokesman for the European Commission, wrote in an e-mail. “For existing deferred tax assets, however, the EU legislators agreed to foresee a longer phasing-in of the deduction period,” he said, without confirming how long that period will be.

Deirdre Farrell, a spokeswoman for Ireland’s rotating presidency of the EU, declined to comment.

Ratings companies typically strip out tax credits when assessing banks because of their limited ability to absorb losses compared with other forms of capital such as stock and certain junior debt. Standard & Poor’s discounted 3.7 billion euros of Allied Irish Banks Plc’s tax credits when rating the Dublin-based bank in August.

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