LONDON The European Union's tougher bank capital rules are making it harder for smaller lenders to compete and should be scaled back, Germany and Britain say in an EU document seen by Reuters.
It is the latest sign of how policymakers are being more accommodative towards lenders in a bid to boost the flow of funds to companies at a time of sluggish economic growth.
The 28-country bloc introduced stricter capital rules for lenders following the 2007-09 financial crisis that forced taxpayers to bail out undercapitalized banks.
Germany and Britain, two of the bloc's biggest banking centers, say the new EU capital rules are modeled on the global Basel III accord, which is aimed at the biggest lenders who have deep enough pockets to comply with complex rules.
"The overall complexity of the current framework has some potentially very serious and undesirable effects that we believe warrant a thorough discussion with a view to coming up with appropriate policy responses in the EU," the document written by Germany and Britain said.
Complexity in the regulatory framework is a factor contributing to greater concentration in the sector and acting as a significant barrier to entry, thereby reducing diversity, it added.
A regulatory framework that allows banks of all sizes to flourish would be more supportive of competition and innovation, helping customers get better products, it said.
Currently, managers at small lenders have less time to focus on "serving the economy" as they have to devote so much effort to complying with complicated rules, such as reporting data to regulators, the document said.
"Germany and the UK believe that now is an appropriate time for the EU to consider how to achieve a more proportionate and fit-for-purpose prudential framework for smaller/less complex banks and credit institutions."
Britain has already made changes to help new banks enter the market, such as by fast-tracking approval and easing initial capital requirements, but the sector is still dominated by a handful of high street lenders like HSBC (HSBA.L), Lloyds (LLOY.L), Barclays (BARC.L) and RBS (RBS.L).
Britain and Germany said banking supervisors still err on the side of caution when it comes to applying rules more proportionately to smaller lenders.
The United States does not apply the Basel rules to its local and state banks, which means these banks are better able to lend to the local economy, creating a competitive advantage over the EU, the document said.
The two countries say reporting requirements in the current rules could be scaled back to come up with a "truly simplified bespoke regime" that gives customers and the financial system the same protection.
Banks in Germany and Britain have already expressed concern over blanket application of the bloc's strict curbs on banker pay to smaller lenders where bonuses are far more modest.
(Reporting by Huw Jones; Editing by Rachel Armstrong, Louise Heavens and Adrian Croft)