* Britain demands leeway to ensure its banks are stable
* EU ministers set to tackle issue at May 2 meeting
* ECB's Draghi underscores importance of bolstering banks
By John O'Donnell
BRUSSELS, April 25 Britain clashed with France
on Wednesday over demands that London be allowed to force banks
to top up capital beyond new EU levels, diplomats said, in a
long-running dispute threatening to undermine a central plank of
European financial reform.
The European Union is attempting to translate higher capital
standards set by the Basel Committee of regulators and central
bankers into EU law by the end of this year, a move to make it
costlier for banks to engage in high-risk lending or investing.
But EU diplomats, meeting on Wednesday, disagreed over the
shape of the draft law, with Britain wanting more freedom to set
higher standards for its banks, in the face of opposition from
Britain argues it is entitled to take extra steps to make
banks safer, to protect the interests of taxpayers who could be
called on to bail them out if they face collapse.
But France is concerned that international banks based in
London could cut lending elsewhere in Europe if they have to
beef up capital.
Some diplomats suspect the dispute is fuelled by concern
that deposits and other business might flow to British banks
were they to be better capitalised than French and German rivals
and thus safer in the eyes of investors.
As diplomats debated the issue in central Brussels, the
European Central Bank president, visiting the nearby European
Parliament, underscored the urgent need to bolster banks.
"I consider it of crucial importance that banks strengthen
their resilience further, including by retaining earnings and by
retaining bonus payments," Mario Draghi told parliamentarians,
who are also pushing for new bonus curbs in the law.
"The soundness of banks' balance sheets will be a key factor
in facilitating both an appropriate provision of credit to the
economy," he said.
Last year, the ECB took the unprecedented step of lending
banks one trillion euros to avert a confidence spiral but many
analysts believe that without significant fresh capital, it will
be impossible to rebuild confidence in the region's lenders.
The disagreement on Wednesday leaves it to finance ministers
from the EU's 27 countries to strike a deal when they meet next
week, as time runs out to finalise the rules Europe wants by
But the chances of a breakthrough next Wednesday are also
seen as slim.
"The question is if there should be little room for
manoeuvre on Basel or more room for interpretation," said one
official. "It is likely this will be the first of many
Clarifying the precise rules on capital, almost five years
after the start of the financial crisis that toppled some
lenders and hit many countries hard, would remove some
uncertainty for banks, already nervous about lending as Europe
slides into recession.
The new European capital regime will also influence how
stringently Washington interprets the global Basel standards on
"It is a very political question," said one French diplomat.
"It is about the degree of EU regulation and the degree of
member states' initiative."
George Osborne, Britain's finance minister, has won backing
from countries including Sweden for its position.
Britain also objects to what it sees as a watering down of
Basel standards in EU law if it were to recognise a unique form
of shareholder capital often used for German regional
landesbanks that does not always absorb operational losses.
It is opposed to any use of an insurers' capital in a
bank-insurance conglomerate to support the bank in such a group.
One diplomat complained about countries trying to carve out
exceptions that best suit them. "They have made a Swiss cheese
out of it," he said.
Others struck a conciliatory note, saying that some EU
members, including Germany, were prepared to consider British
demands for flexibility.
Far more than the technicalities of bank balance sheets,
however, the dispute is the result of a struggle for influence
and power in a bloc shaken by the worst financial crisis in a
Britain has been fighting to maintain its authority over the
City of London, Europe's financial capital, as other EU members
move to centralise supervision and regulation of banking and
Under one possible compromise, countries like Britain would
be given leeway to impose higher standards of capital on their
banks, but the EU's executive Commission would keep tabs on such
Many EU diplomats expressed support for a recent call from
the ECB's Draghi that such a task should instead be given to the
European Systemic Risk Board, a Frankfurt-based risk-monitoring
body dominated by the European Central Bank.