EU finance ministers agree to bump up bank capital

BRUSSELS, Nov 10 (Reuters) - European Union finance ministers adopted a preliminary agreement on Tuesday to sharply boost the amount of capital banks must hold to offset risky trading activities.

EU states and the European Parliament have the final say on the reform. Finance ministers also asked EU president Sweden to start talks with parliament with a view to final adoption of the reform at first reading.

"The Council (of EU finance ministers) agreed on a general approach... on a draft directive aimed at strengthening disclosure and capital requirements for the trading book and resecuritisation instruments in the banking sector," an EU statement said.

The reform will also prevent bank pay policies "that generate unacceptable levels of risk", the statement added.

The measure was proposed by the EU's executive European Commission in July to strengthen the bloc's bank capital requirements rules (CRD) by applying lessons from the worst financial crisis in decades.

It is part of wider, global efforts spearheaded by the G20 group of leading countries to force banks to top up their capital and liquidity levels and lessen the likelihood that huge taxpayer backed bailouts of banks will be needed in the next crisis.

The reform puts into EU law principles agreed by the global Basel Committee on Banking Supervision which finalised its new rules on trading book capital in July and are due to take effect from the end of 2010.

Capital requirements on assets held on a bank's trading book currently attract far lower capital than if they were parked on the firm's main book. This resulted in too little capital being held when the credit crunch started unfolding over two years ago.

The Basel Committee estimates that trading book capital will be two to three times higher under the new rules, a shift analysts say will prompt a rethink by some banks as to whether they want to continue trading certain complex or risky assets.

The EU reform will also introduce even higher capital requirements on resecuritised products such the complex collateralised debt obligations squared found at the heart of the credit crunch.

The measure will also give supervisors teeth to enforce guidelines drawn up by the global Financial Stability Board to curb remuneration policies at banks to stop too much risk taking.

Supervisors will be able to punish breaches, such as by forcing a bank to top up its capital requirements.

(Writing by Huw Jones; Editing by Victoria Main)