EU wrangles over bank rules in crisis aftermath
BRUSSELS—Disagreement between European states on new banking rules is highlighting a key weakness in the continent's effort to fight its crisis -- whereas the financial sector is spread across national borders, it's still individual countries that have to pick up the bill when things turn sour.
At the heart of the dispute is not only the question of how to ensure that shaky banks can't sink the finances of entire countries, but also the balance of power -- and responsibility -- between national governments and pan-European authorities.
The finance ministers of the 27 European Union countries will on Wednesday discuss new capital requirements for the more than 8,300 banks on the continent. Once agreed, the new rules will force European lenders to come up with hundreds of billions of euros in additional capital by selling shares or assets or reining in dividends and bonus payments.
The core of the new rules, also known as Basel III, was negotiated by the world's biggest economies in a "never-again" moment brought on by the collapse of investment bank Lehman Brothers in 2008. But before the new rules can come into force, they first need to be put into national law, or in the case of Europe, EU law.
Basel III gradually increases the minimum amount of highest-quality capital held by banks from just 2 percent to 7 percent of risky assets by 2019. An additional 2.5 percent has to be built up in good times to prevent asset bubbles and provide a buffer for economic downturns. The bigger capital cushions are meant to absorb unexpected losses, after the crisis of 2008 proved that previous requirements were too lax.
What is at issue in Europe now is whether individual countries can require their own banks to hold even more capital and whether such a move would have to be approved by the European Commission, the EU's executive arm in Brussels.
On one side of the argument are the U.K. and several smaller Eastern European states, who argue that since national taxpayers have to foot the bill when something goes wrong, it should be up to national regulators to decide what it takes to make their lenders safe.
The other side of the debate is led by France and the European Commission, who warn that higher capital requirements in one country may also affect neighboring economies. Force British banks to raise an extra 5 percent in capital, they argue, and those lenders will quickly cut down their foreign activities, crimping lending in small states that don't have a big domestic banking system.
The debate cuts to the heart of the continent's financial crisis, forcing governments to consider how to regulate a European market in which business and capital move freely, but where a lot of decision-making and spending-power remains in national hands.
As officials in Brussels sometimes like to put it: While banks may be international in life, they are national in death.
Between 2008 and 2010, European governments spent (EURO)4.6 trillion ($6.1 trillion) on bailing out struggling banks. The U.K., which had to save three major banks, saw its debt load almost double, while much smaller Ireland had to seek an international bailout to help stem the losses of its domestic lenders. And many economists fear that the economic recession in Spain may soon reveal massive bank losses there.
The crisis also uncovered the close ties between financial institutions across the continent. French, Belgian and Luxembourg authorities had to scramble to save multinational lender Dexia, while Germany spent billions saving the Irish subsidiary of a German bank.
To bridge the divide between the two camps, Denmark, whose country currently holds the EU presidency, has proposed a compromise that would allow national regulators to require an extra capital buffer of 3 percent. Anything beyond that would have to be approved by the Commission in Brussels, which would examine not only the level of risk in the home state but also the potential impact in neighboring countries.
On Monday, officials were still uncertain that a deal could be reached at Wednesday's get-together due to British skepticism over the compromise proposal. Any delay will make it difficult to have full implementation of the new rules by Jan. 1, 2013 -- the deadline set out in the Basel III agreement. However, of the 28 states that negotiated the agreement, only Saudi Arabia has completed its national rules.