BRUSSELS (MNI) – EU finance ministers failed to agree a common
position on legislation designed to implement the Basel III bank capital
rules, despite talks that ran into the early hours of Thursday morning.

The ministers postponed the target date for a deal to May 15.

Although progress was made on key areas such as allowing national
authorities to set higher-than-minimum capital levels, disagreement over
the need for a common EU definition of capital prevented the ministers
from finalising a common position for upcoming negotiations on the rules
with the European Parliament.

Under a compromise text drafted by Denmark, the current holder of
the EU council’s rotating presidency, national authorities would be able
to impose an additional capital requirement of 5% on banks’ domestic and
non-EU exposures, and a capital surcharge of up to 3% on their total
exposure.

National discretion would be subject to “a sort of European
mechanism so that everyone knows what you are doing but basically you
can do it,” Danish economy minister Margrethe Vestager explained.

According to the draft amendments, obtained by MNI, EU finance
ministers would be given the final say on whether such decisions should
be permissible, but they would only examine the issue if objections are
raised by either the European Banking Authority, the European Systemic
Risk Board or the European Commission.

EU Internal Markets Commissioner Michel Barnier blamed the UK for
blocking a final deal but said that the Commission also had objections
to the 700 page draft. The mechanism giving ministers the final word
over the acceptability of supplementary capital levels did not comply
with EU law, which gives the European Parliament joint responsibility
over the rules, he said.

Securing some flexibility on capital levels for national
authorities represents a victory for the UK, but Europe’s most important
financial centre appeared isolated when George Osborne, Chancellor of
the Exchequer, revealed in a heated moment of the public debate that he
had been unable to secure a single bilateral meeting with the Danish
presidency during 10 hours of talks to put forward his main concerns.

The Danish presidency also shot down UK demands to review
provisions in the legislation that would effectively allow bank
conglomerates to count the capital held in their insurance units for
their overall capital levels as well. As a result, the issue will not be
revisited in the talks later this month, sources told MNI.

The UK is championing a bigger role for the European Banking
Authority in defining common EU definitions for capital, arguing
alongside the ECB and EBA itself that the absence of common rules
undermines the credibility of the EU’s entire approach to implementing
Basel III across the EU’s 8,300 banks.

“We need a European solution to what the rest of the world views as
a European problem,” Osborne argued, warning that markets would not
cease to be “wary of investing in Europe and European banks” if
ministers failed to faithfully implement the Basel III rules.

Earlier in the day EBA chairman Andrea Enria revealed estimates
that the two most distant definitions of core tier one capital being
proposed by finance ministers could lead to a 300-bp difference in
banks’ capital requirements, an amount he said was “really not something
we can live with”.

A number of EU governments, including Germany, are concerned that
common EU definitions might end up excluding some nationally important
forms of capital that play a large role in some countries’ banking
sectors, an issue that became apparent in the EBA’s stress tests last
year, when German savings bank Helaba withdrew from the tests over that
issue.

Europe’s banking sector fragilities are dangerously intertwined
with the crisis in sovereign debt markets as banks lean on their
governments for support and markets fret over governments’ ability to
support them.

Osborne said the rules on bank capital could have “a bigger impact
on our economies than anything else we’ve talked about over the last two
years”.

Poland’s finance minister Jacek Rostowski said that the EU needed
to be just as tough on preventing future banking crisis has it has been
in seeking to prevent further fiscal crises.

–Brussels Newsroom, +324-952-28374; pkoh@marketnews.com

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