EU consults on tightening banking capital rules

BRUSSELS, April 16 (Reuters) - The European Commission launched a public consultation on Wednesday into proposals to increase how much capital banks must set aside to cover risk as the global credit crunch uncovered loopholes in the system.

EU Internal Market Commissioner Charlie McCreevy has already announced that the EU's capital requirements directive (CRD) needs updating and will make formal proposals in October.

The directive, which enforces globally agreed standards known as Basel II in the 27-nation EU, came fully into force only in January but the U.S. subprime mortgage crisis has sparked calls for reform.

EU finance ministers, who will have joint say with the European Parliament on adopting the changes, have already agreed to adopt the reform before next April.

Analysts said the impact will be to force banks to set aside more capital to cover complex securitised products that have fallen in value following defaults in the U.S. home loans market that sparked the credit squeeze.

Many of these products were kept off balance sheets to avoid capital requirements rules.

Separately on Wednesday, the global Basel Committee on Banking Supervision launched a crackdown, saying it aimed to raise the costs of complex debt securities and risky practices.

However, bankers say if Basel II was properly enforced -- the United States has yet to implement it in full -- some of the issues raised by the credit crunch would be resolved.

For full report on the Basel Committee click on [ID:nL16662578] (Reporting by Huw Jones, Editing by Paul Bolding)