EU Banking Rules Divide at Euro-Area Border in Cameron Deal

  • Draft deal foresees separate rules for euro, non-euro banks
  • Provisional pact needs endorsement of all EU leaders at summit

Cameron Says Britain Close to EU Membership Decision

A European Union deal intended to satisfy Prime Minister David Cameron’s demands for greater U.K. sovereignty may include two-track banking rules for euro-area countries and those outside the currency bloc.

A draft settlement published on Feb. 2 states that “prudential requirements for credit institutions” and other rules needed to bolster financial stability may need to be “conceived in a more uniform manner” for application in the euro area, with its single supervisor and resolution authority, than in the EU’s nine non-euro states, including the U.K., Sweden and Poland.

As part of the U.K.’s drive to wrest changes from the EU and convince voters to support remaining in the 28-nation bloc in a referendum as early as June, Cameron has tried to win protection for the country’s financial center, the City of London, in the face of ever-closer financial ties in the euro area. The Feb. 2 proposal may give non-euro authorities more flexibility in implementing EU banking law.

The draft settlement may signify “a further waning in the post-crisis push for a single-rule book in EU capital markets,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland. “This could be beneficial for the U.K., which is very conscious of the importance of its financial services industry and is keen to ensure that its international competitiveness is not undermined by unnecessary EU legislation.”

Financial Crisis

Since the financial crisis, the EU has been working to standardize bank rules to create a level playing field between nations overseen by the London-based European Banking Authority. That has been complicated by the creation of a banking union in the euro area focused on the European Central Bank, which supervises the currency bloc’s lenders, and the Single Resolution Board, which handles failures.

Over the past few years, the U.K. has fought several battles with euro-area governments over proposed financial legislation as it has sought to protect the City as Europe’s main financial center and keep control over how it’s regulated. The U.K. took the ECB to court over its plan to dictate the location of the clearing of euro-dominated trades and clashed with the EU over legislation on bonus rules for bankers and short selling.

The draft settlement, which still needs the endorsement of EU leaders at a summit later this month, signals a more formal separation between euro and non-euro countries when it comes to applying bank rules, giving Cameron ammunition to claim greater control of British financial legislation. It would apply to secondary law -- technical rules rather than primary legislation.

‘Different Sets’

Given the need for “more uniform” rules for the 19-nation euro area, “different sets of Union rules may have to be adopted in secondary law, thus contributing to financial stability,” according to the draft.

“A good bet would be that they want to move a lot of the detail of bank regulation from the EBA, whose rules affect the entire community and are called the single rule book, to the ECB and SRB, whose rules affect only the euro zone,” said Simon Gleeson, a financial regulation partner at Clifford Chance LLP in London. “This would give the U.K. more freedom and increase the powers of the ECB.”

Reid said that while “much work still has to be done to finalize and agree these proposals, it does seem that at heart they do formally acknowledge that for the foreseeable future the EU will be a union of more than one currency and that euro-zone rules do not overly infringe on non-euro countries’ ability to adopt policies tailored to their own priorities and needs.”

“Of course it remains to be seen exactly how much latitude non-euro countries will in practice have,” he said.

The draft deal guarantees that U.K. taxpayers will never have to contribute to the bailouts of euro-area countries. It also would give finance ministers the opportunity to send matters of concern to EU summits to be discussed by leaders.

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