EU banks face fines if they fall short on capital

EU Commissioner Michel Barnier met with Norwegian ministers Sigbjoern Johnsen and Trond Giske in Oslo March 4, 2011.

LONDON (Reuters) - Banks in the European Union could face fines of up to 10 percent of turnover if they fail to comply with tougher capital and liquidity rules, the bloc's financial services chief said on Wednesday.

Michel Barnier, the EU's internal market commissioner, unveiled draft laws in Brussels to implement the new global Basel III accord, which will force 8,200 banks in the EU to hold more and better quality capital over six years from 2013 in a bid to shield taxpayers in a future financial crisis.

Banks will have to raise 460 billion euros of extra capital to fully comply by the start of 2019, which Barnier said would hit economic growth by 0.1 percent for every 1 percent increase in capital and cut the risk of a big banking crisis by 70 percent.

"This will have a fundamental impact on the activities and behaviour of European banks. It's a highway code that applies to all," Barnier told a news conference.

The draft measures largely mirror Basel III, which was approved by leaders of the top 20 economies (G20) last November such as a minimum core equity capital ratio equivalent to 7 percent of a bank's riskier assets.

But it goes further in some cases by introducing tougher sanctions, ways to dilute the influence of credit ratings, and improvements to corporate governance, such as requiring boards to consider more female members and introduce whistle-blowing programmes.

Sanctions should have real teeth, too, Barnier said.

Administrative fines could be up to 10 percent of an institution's annual turnover, or there could be temporary bans on members of the institution's management.

The fines would apply to breaches such as unauthorised banking services or failing to meet governance, liquidity and capital requirements.

The draft asks the European Banking Authority to consider beefing up EU bank bonus curbs, already the toughest in the world. "Perhaps most worrying for relevant firms is the possibility of further prescription around the ratio of variable to fixed pay," said Tom Gosling of PwC consultancy.

WRIGGLE ROOM

Barnier stuck to his plan for making the Basel standards fixed in EU law, meaning that states can only require banks to hold extra capital under a limited set of circumstances.

He wants to create a "single rulebook" so that the same standards are applied in every corner of the EU to avoid distorted competition, a step the cross-border banks that dominate the sector welcomed for its supervisory consistency.

"Done well, this should contribute strongly to deepening integration, reinforcing financial stability and supporting sustainable economic growth," said Michael Lever, managing director at the Association for Financial Markets in Europe (AFME), a banking lobby.

Britain, Spain, Sweden and other EU states want a free hand to require banks locally to hold capital above the levels fixed in the new EU law.

Many of the UK banks, for example, hold capital of around 10 percent. EU states and the European Parliament have the final say on the draft measures, and some changes are likely.

National supervisors can require more capital to cool an overheating property market, curb excessive lending or if an individual bank looks risky to an extent that goes beyond Basel's so-called countercyclical buffers.

"I am convinced you need the same rules for all. There is enough flexibility for supervisors to cater for risk where they have identified it to set extra capital they deem appropriate," Barnier said.

DILUTION?

Barnier said there would be some tweaks to how Basel III is implemented in Europe because it will be applied to 8,200 diverse banks, whereas the United States will only apply Basel III to 20 banks.

U.S. regulators have already warned the EU not to dilute Basel III on the ground, even though the United States failed to fully implement Basel's previous incarnation.

"We are totally faithful to Basel's spirit, letter and level of ambition, but you cannot apply rules to 8,200 banks as you would to 20 banks," Barnier said.

Barnier may face resistance for leaving the door open to some banks in Germany and elsewhere to include "silent participations" -- a form of hybrid debt -- in their core capital calculation if of high enough quality.

Britain's finance ministry said Barnier's proposals will be examined carefully to ensure they still toe the Basel line on issues such as top-quality capital.

"It is clear that the proposals set out in today's draft legislation will need changing if we are to properly implement international standards in the EU, strengthen the European banking system and safeguard the stability of the European economy," a UK finance ministry spokesman said.

The EU measures will require banks to have appropriate short-term liquidity coverage as of 2013, with details finalised by 2015.

Another measure will be presented later to introduce a binding longer-term liquidity buffer due by 2018. The European Banking Authority will test different criteria for what will be eligible for inclusion in short-term liquidity buffers.

Basel III states that some 60 percent of the buffer must be in the form of highly liquid government bonds, which will remain zero risk weighted under the draft measure, which a senior EU lawmaker who will lead the approval process challenged.

"It is now clear that even in Europe there are different risks for different sovereigns; not all are equally liquid," said UK Liberal Democrat member Sharon Bowles.

Banks will have to rely less on external ratings from agencies such as Moody's, Standard & Poor's and Fitch for calculating regulatory capital buffers.

This stops short of a more draconian U.S. law that prohibits banks from relying on external ratings at all, which has proved difficult to implement in practice.

(Reporting by Huw Jones; Editing by Will Waterman)