EU lawmakers seek to toughen bank capital rules

By Huw Jones

STRASBOURG, Oct 20 (Reuters) - Banks should be forced to retain a big slice of the securitised products they sell as part of tackling the worst market turmoil in 80 years, European Union lawmakers said on Monday.

"The causes of the present crisis are insufficient regulation of selling," said Othmar Karas, a centre right member of the European Parliament.

The bloc's executive European Commission has proposed a draft law that would require banks that sell securitised products, such as the ones that turned toxic in the credit crunch, to retain a 5 percent stake as an incentive to ensure high underwriting standards.

Banks say this would kill the securitisation market and are trying to come up with less draconian alternatives.

Several members of parliament, which has the final say with EU governments on the bank capital requirements reform, said 5 percent is too low.

"I can hear the mobilisation of the banking world to explain to us why this is a terrible idea," French socialist Pervenche Beres told parliament's economic affairs committee.

"I don't find these alternative solutions convincing but I can just imagine the lobbying that will go on," Beres said.

Support for a higher retention figure was cross party.

"What is now on the table is a ridiculous proposal. It's easy to circumvent or price into the products," added Dutch socialist Ieke van den Burg.

"I think 5 percent is not enough," said centre-right member Werner Langen. However, British Liberal Sharon Bowles said retention should be just one tool in a toolbox.

SUPERVISION TRAP

The draft law also proposes colleges of supervisors to oversee the 44 cross-border banks in the EU like Deutsche Bank (DBKGn.DE) and HSBC (HSBA.L) that make up the bulk of deposits.

A bank's home supervisor would have the leading role in a college, whose proposal has raised tricky political issues for regulators that oversee branches elsewhere in the 27-nation EU or for watchdogs supervising major non-EU banks.

"Colleges seem to be the only game in town at the moment but it does require us to consider what to do with the Bank of China being a lead supervisor in Europe," said British socialist Peter Skinner.

A separate EU plan setting up colleges for cross-border insurers is being blocked by 12 states who fear their regulators will end up playing second fiddle to watchdogs in Frankfurt, London or Paris where many big insurers have their home base.

"I think we are caught in a trap. ... This discussion is going to have a knock-on effect in the way we deal with the banking sector," Beres said

A decision by the Commission to set up a "high level" group to present ideas on reforming financial supervision early next year could also stall progress in the insurance and banking reforms.

Lawmakers aim to vote in committee on the banking reform in January with full parliament voting in March. (Editing by Brian Moss)