Wednesday, July 20, 2011

Anglo-Saxons don't know whether they're coming or going...

If there weren't certain other things going on this week, today's proposals from the Commission for new EU-wide bank capital rules would have certainly caused more of a stir, particularly in the UK.

The FT notes that the new rules would require banks to hold top quality capital equal to 7% of their assets, adjusted for risk. The proposal has already prompted fierce debate, because it would set both minimum and maximum capital requirements. By contrast, the Basel III guidelines, the global rules which the EU rules are designed to implement, expressly allow national regulators to top up the global minimums where they see fit.

The UK believes that mandatory EU-wide limits for capital holdings will curtail member states’ ability to regulate their banks. Not because it sets the limit too high, but because the 7% proposed by the Commission is well below the 10% requirement that the UK’s Independent Commission on Banking is talking about. (The Commission proposal does allow some flexibility but only in exceptional circumstances.)

The FT Money Supply blog notes that the IMF warned only yesterday that the Commission's proposals may not go far enough. "It will be important to set capital requirements at an ambitiously high level, possibly above Basel III," the Fund warned, adding that national regulators should have the discretion to apply additional capital buffers if they wish.

Negotiations on the final text will now begin between national ministers and MEPs but it seems rather ironic that, after years of comments from high-profile EU leaders (read Merkel and Sarkozy) blaming the "Anglo-Saxon" model of regulation for the financial crisis, the UK might be denied the possibility of enforcing stricter regulation on its own banks.

Of course, this probably has nothing to do with the fact that leaders in the eurozone have in the back of their minds that their banks have another rather pressing deleveraging headache on their hands: shoring up their exposure to dodgy eurozone sovereign debt.

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