Global Policy Forum

EU Banking Talks Make Slow Progress

European Union institutions and finance ministers have been quarreling about the degree to which new global standards for banking capital and liquidity need to be applied uniformly. The European Commission is keen on harmonizing standards to secure a level playing field. Countries such as the UK and Sweden, on the other hand, want to retain some freedom to set the standards they deem fit, especially since under current circumstances, taxpayers will still have to pay the price if a new crisis was to arise. All in all, it appears that political leaders are still not willing to do what it takes to fundamentally improve financial stability.

By Geoffrey T. Smith

May 2, 2012

European Union finance ministers Wednesday made slow progress toward a compromise solution on how to apply new global standards for banking capital and liquidity.

After five hours of talks, the 27 ministers, together with representatives from the European Banking Authority and European Central Bank, were still divided not only over how much capital banks should be forced to hold in future, but also over who should have the right to decide.

A number of national governments want to retain near-complete sovereignty over the rule-setting process, mindful that the lack of a European bank resolution or deposit insurance system means that the cost of rescuing banks still falls squarely on the taxpayers of a bank's home country.

On the other hand, the European Commission is concerned that allowing too much leeway for governments will result in big divergences in rules from one country to another, making it impossible to create a level playing field with clear rules.

Single Market Commissioner Michel Barnier marginally softened his position in opening remarks to the meeting, but appeared unlikely to satisfy national sovereignty hawks, notably the U.K. and Sweden, who want to keep the freedom to impose far higher capital requirements than those foreseen by the so-called Basel III accords. Officials said that the European Central Bank was also still opposed to much of the commission's directive.

The commission's original draft Capital Requirements Directive, which transposes the Basel accords into EU law, had taken as its benchmark the minimum Basel ratio of 8% capital to risk-weighted assets, but allowed member states to set the bar at up to 11% on their own initiative.

By contrast, the U.K. government wants its most important retail banks to have a 10% capital ratio, plus another 7%-10% in additional loss-absorbing capacity. Swedish Finance Minister Anders Borg, arriving at the meeting, had reiterated his government's insistence on setting the bar five percentage points above the Basel minimum for his country's most important banks.

The meeting has been called to hammer out a common negotiating position on the final wording of legislation that will implement the so-called Basel III banking accords into law at the European level. All signatories to Basel III are supposed to have equivalent legislation on their books by the start of next year.

A compromise text drafted by the Danish presidency which formed the basis of Wednesday's discussions still omits any binding commitment to introduce the Basel III Leverage Ratio. It also accepts the commission's proposal for calculating the capital held by banks in other financial subsidiaries such as insurance companies, a proposal that favors French banks in particular. The ECB had criticized both elements of the original draft as incompatible with the original logic of the Basel accords.

Officials said the meeting had been suspended to allow the rotating presidency, held by Denmark, to conduct bilateral negotiations with around half a dozen individual countries.

Although some were still hoping for a final agreement during the day, progress was slowed by a number of factors.

One obstacle is the second round of France's presidential elections on Sunday. With Socialist candidate François Hollande leading the polls ahead of President Nicolas Sarkozy, "there is doubt over the ability of the French government to deliver" on whatever is agreed Wednesday, one official said.

Hopes of a deal, or at least of major progress, were lifted earlier by the presence of U.K. Chancellor George Osborne, who had originally not planned to attend. The U.K. is host to the EU's largest financial center, London, and has one of the largest financial sectors relative to the size of its economy, so is particularly anxious to keep control over limiting the risks to taxpayers from a new financial crisis.

However, an official familiar with the talks said later that there was still too much distance between the various sides, and that "some countries' demands were too far-reaching."

Mr. Barnier expressed concern over the unintended consequences of countries asking for higher capital ratios.

"We are creating a dangerous mechanism which could lead to markets putting one member state after another under constant pressure to meet ever-higher capital demands, to the detriment of growth and employment," he said.

German Finance Minister Wolfgang Schäuble had said on arriving at the meeting that the differences between the sides were "not so great" and expressed hope for a deal, if not Wednesday, then at least by the end of the Danish presidency in June.

"Every country has its own specific characteristics…but of course we have to take care that we have single rules," Mr. Schäuble said, stressing the high degree of interconnectedness within the EU financial system. "It's important for European banking supervisors…that we can administer it reasonably on a cross-border basis."

Formally, the ministers have to agree a common negotiating position for a final three-way set of talks with the European Parliament and Commission on the directive's final wording. The Parliament is due to adopt its common position later this month.

Separately, the ministers also discussed who should be the next president of the European Bank for Reconstruction and Development, but didn't take any decision on the matter. The issue is set to be decided at the EBRD's annual meeting later this month.

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