EU FINANCE ministers have agreed on tougher capital rules for banks, resolving years of sparring between Britain and the rest of the EU over how best to craft measures to prevent another crisis.
Acknowledging the depth of the recent euro zone difficulties that have driven Spain to take over lender Bankia and prompted a sweeping credit downgrade of Italy’s banks, British chancellor George Osborne dropped earlier objections and threw his weight behind the draft law.
He had previously accused his EU peers of trying to dilute globally agreed capital rules to the point where they would make him “look like an idiot”.
The deal paves the way for regulations, effective from next year, aiming to make the 27-member bloc’s 8,300 banks safer. It makes it more expensive for banks to lend, by demanding they hold more capital to cover potential losses on loans.
“We are reaching a point where we have got to make a decision to see the euro zone stand behind their currency,” Mr Osborne told reporters. “A very important part of that is strengthening the entire European banking system.”
“The rest of the world is paying very close attention to how strong European banks are,” he later told finance ministers.
How much capital should be set aside to cover banking risks is a central question raised by five years of financial sector difficulties in which dozens of banks fell in Europe.
The compromise also helped to avert a worsening of relations between Britain and the rest of the bloc, after prime minister David Cameron blocked plans by other EU members in December to change an existing treaty to enforce budget controls.
Britain, which had demanded concessions on the capital rules to protect London’s autonomy in controlling its financial sector, won leeway to set stricter standards than the EU norm, but will need permission from Brussels above certain levels.
German finance minister Wolfgang Schaeuble called the agreement a “significant” step in reforming finance.
Higher capital buffers strengthen banks to withstand shocks, such as the slump in property prices or recession now hitting Spain. Banks with higher-than-average capital, such as Switzerland’s UBS, have increased attraction for depositors.
Holding more capital could also help banks resist contagion if financial markets were to shun a particular country in the bloc and it needed emergency funding.
Far more than the details in banks’ balance sheets, the dispute over the rules was a struggle for influence and power in a bloc shaken by the worst financial crisis in generations. Britain has been fighting to maintain its authority over the City of London as other EU members move to centralise supervision and regulation of banking and finance.
It also wanted the right to ensure its banks are safe, having bankrolled the £46 billion rescue of Royal Bank of Scotland, the biggest bailout of the financial crisis.
Mr Osborne has argued that Britain, not the European Commission, should decide, as it would have to bear the financial consequences of a bank bailout. – (Reuters)
