EU lawmakers want bank buffers for sovereign debt

LONDON (Reuters) - Banks should hold capital to cover exposure to risky government bonds, European Union lawmakers said Tuesday, drawing a warning from Germany not to heap fresh regulatory burdens on banks.

The bloc is approving a law to apply the globally-agreed Basel III reform to increase a lender's safety cushions by 2019.

Banks are already struggling to increase their buffers and some countries say forcing lenders to find even more capital to cover sovereign debt exposure would be the last straw.

"We do not support any sudden change to the zero-risk weighting of sovereign bonds," German Finance Minister Wolfgang Schaeuble said in Brussels.

Basel III extends the current practice of not requiring lenders to set aside capital for sovereign debt holdings as a country can print money as a last resort to pay the sum back.

But EU lawmakers across parties see this as untenable in a euro zone where some government bonds are rated at junk or near junk because of the debt crisis and whose member countries cannot print money.

Othmar Karas, an Austrian center-right lawmaker who is steering the measure through the European Parliament, said it made no sense that government debt was "zero" rated for regulatory capital purposes while loans to small businesses (SMEs) have a hefty 75 percent risk weighting.

"There is an imbalance between the risk weighting of sovereign debt and SME loans," Karas told a meeting of parliament's economic affairs committee.

German center-left lawmaker Udo Bullmann said: "We have risks because of sovereign bond management."

Sharon Bowles, the British Liberal chairman of the committee, said the draft law should give supervisors powers to require a bank to increase its capital cushion if its holdings of risky government debt are "disproportionate."

And UK Conservative member Vicky Ford urged lawmakers not to allow EU states, which have joint say on the draft bill and which issue sovereign debt, to dominate the zero risk debate.

"Leaving zero risk to the Council has a conflict of interest," Ford said.

Schaeuble Monday dismissed a report that Germany and France wanted parts of Basel delayed.

(Additional reporting by Ilona Wissenbach in Brussels; Editing by David Cowell)