EU bank rules offer glimpse of centralised new world
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Mon Jul 18, 2011 12:39pm EDT
* New EU bank regulation to signal end of national rules
* Local supervisors to get limited discretion at best
By Huw Jones
LONDON, July 18 (Reuters) - A draft European Union law on tougher bank capital this week will show the extent to which the bloc's newly centralised system of regulation spells the end of national banking rules.
EU Internal Market Commissioner Michel Barnier is due to publish on Wednesday a draft measure to put into European law a global accord on tougher bank capital and liquidity standards known as Basel III, the world's core response to the financial crisis.
Few surprises are expected in substance as Barnier cannot deviate from Basel -- endorsed by world leaders last year -- or he risks a backlash in the United States.
Instead member states like Britain are anxiously eyeing how far it will curb local regulatory sovereignty in a sector that has become politically charged in the crisis.
"The major sticking point will most likely be around maximum harmonisation and whether the proposed system will give national regulators sufficient flexibility and discretion to set capital requirements to reflect risks taken by individual banks, and financial stability concerns as and when they arise," said Giles Williams of consultancy KPMG.
Barnier is expected to present the reform as the first capital requirements regulation (CRR I) rather than the fourth capital requirements directive (CRD IV), a regulatory source familiar with the measure said.
The switch is more than just semantics.
A directive gives states two years to stitcvh rules into national law while a regulation is immediately and directly binding on states, giving no room for national discretion.
EU sources told Reuters last week Barnier will stick to making the tougher Basel capital standards a common ceiling across Europe and not a minimum floor in a move the banks would welcome.
"The use of maximum harmonisation regulation means that national authorities will not have the scope to set higher capital ratios across the board," KPMG's Williams said.
Barnier is expected to offer some room for limited national discretion but subject to an EU vetting procedure.
The moves to limit national wriggle room will be reinforced by the new European Banking Authority which will flesh out binding technical standards to implement Barnier's law.
The EU executive European Commission may also come forward with separate proposals soon on tightening up another channel for supervisory discretion known as Pillar II, the regulatory source said.
The combination of these steps will create what will be known as the EU's single rulebook in banking which national supervisors must follow to the letter.
The EBA will make sure of this through its membership of all the "colleges" of national supervisors that oversee cross-border banks which dominate the sector in the EU.
Barnier's CRR I will need approval from the European Parliament and EU states to become law, a step that typically involves tweaks.
CRR I may make only a general statement on Basel's new liquidity standards, leaving it to a separate EU regulation later on once global regulators have agreed final details.
The European Commission is set to increasingly use regulation rather than directives and has already begun to do so in the securities sector with its crack down on derivatives. (Reporting by Huw Jones)