* EU says Basel study lacks rigorous evidence
* Basel says Japan compliant overall with Basel III
* Basel says U.S. rules differ over securitisation
* EU timetable for Basel rules likely to slide
By Huw Jones
LONDON, Oct 1 European Union banks may get an
unfair advantage over global rivals because of the bloc's
failure to apply international capital rules properly, a global
regulatory body said on Monday.
The Basel Committee on Banking Supervision said in an
unusually blunt report that EU rules for implementing the
committee's Basel III bank capital accord being phased in from
January are "materially non-compliant" in two crucial respects.
Banks could end up holding too little capital against
exposures to risky assets like low-rated government debt, or
their buffers may not be of high enough quality to absorb losses
in a crisis, the committee said.
In a sign of how the Basel report touched a raw nerve, the
bloc's financial services chief Michel Barnier immediately
issued a statement questioning its findings, saying they were
not "supported by rigorous evidence".
The global accord forces lenders across the world to triple
to 7 percent their minimum capital buffer to help avoid more
taxpayer bailouts like those of the 2007-09 financial crisis.
The committee's inspection team said it was concerned that
the two differences in Europe would allow big banks there to
hold less capital than they should.
"This potentially has material impact both in terms of
financial stability and an international playing field," the
Basel report said.
The first key discrepancy covers the definition of core
capital or which instruments can be included in a bank's core
buffer. Basel III says it must be common shares while Germany
has pushed hard to include what some regulators see as less
proven financial instruments.
Core buffers are seen by markets as a key indicator of a
bank's strength that underpin investor confidence and many banks
already report their ratio ratios under Basel III even though it
does not take full effect until 2019.
Ten out of 13 cross-border banks reported overstatements in
their core buffers by up to 50 basis points, while three
reported overstatements of 100 basis points, the report said.
U.S. banks have long accused their European rivals of
"optimising" risk weights to push down how much capital they
need, thereby getting an unfair advantage.
The Basel Committee will be hoping that its findings will
act as a warning shot to the EU to bring its rules, which are
still being finalised, in line with the global accord.
The findings are likely to fuel market concern about the
true state of banks in the EU after several "stress tests"
forcing lenders to beef up their capital buffers failed to coax
investors back into the battered sector.
GOVERNMENT DEBT EXPOSURE
The second area of non-compliance is in how banks use
internal models to tot up risks on their books, such as
exposures to government debt, thereby determining the size of
Basel said there were too many "permanent partial
exemptions", meaning that banks could attach a too low or zero
risk weighting to sovereign debt holdings and therefore avoid
setting aside more capital.
"The provision was meant to apply only in exceptional
circumstances, not broadly," the Basel report said. Some euro
zone sovereign debt has been slashed to junk credit rating.
The Basel team found that some EU states allowed only narrow
exemptions so that the notional amount of exempted exposure to
sovereign debt averaged 5.49 percent of a bank's total exposure.
The most affected bank, however, had a fifth of its exposure
to sovereigns treated too leniently.
EU states and the European Parliament meet on Wednesday to
try to make progress in approving the bloc's Basel rules.
Parliament wants the European Banking Authority to check whether
instruments in core buffers are valid, but countries like
Germany oppose this role for EBA, a parliamentary source said.
EU lawmakers like Sharon Bowles, the British Liberal
Democrat, want to end the ease with which a zero risk weighting
can be attached to sovereign debt holdings.
The logjam means it will be impossible for the EU to
finalise all rules by January, though the EBA has already forced
banks to hold far more capital than they would need to under the
early part of the Basel phase-in.
The Basel Committee published similar, but far less
critical, reports on the United States and Japan.
The United States was not compliant in one aspect - how it
treats securitisation - because it proposed an alternative
approach whose impact was hard to quantify at present. Japan's
Basel framework was "pleasing" and compliant.