Europe split over U.S. bank capital plans

(Adds Darling, Deutsche Bank, Canada, more Noyer quotes)

LONDON, Sept 4 (Reuters) - Continental European officials defended the globally-agreed Basel II capital rules for banks on Friday despite a U.S. call for its effective replacement with a tougher new regime within three years.

Britain and Canada offered broad support for U.S. Treasury Secretary Timothy Geithner’s plan for a radical reform so that banks set aside enough capital to avoid a rerun of the government bailouts during the credit crunch.

But France and Germany were cool as they pushed for more countries to adopt the Basel II rules in full, something which the United States has resisted.

Geithner wants the new framework to be broader and tougher, requiring banks to hold more capital and be in place by the end of 2012 -- an ambitious target as Basel II took a decade to thrash out. [nN03126032]

He was due to present his proposal to a meeting of G20 finance ministers in London on Friday and Saturday but was already meeting some opposition.

French Economy Minister, Christine Lagarde, said revisions to Basel II would ensure banks have sufficient capital, and suggested that simply a “good and sound” explanation of what Basel II was needed to persuade G20 ministers it was enough.

“It has been significantly improved, amended over time to take into account the... liquidity principle that was not part of the Basel II solution,” Lagarde told reporters on the sidelines of the G20 meeting.

“I think we need to see clearly what is the problem, where is the issue, and what is the position of Basel II as amended before we jump to any new rules.”

A G7 source said Germany was also wary and a board member of its biggest bank, Hugo Banziger of Deutsche Bank, said Basel II did not need replacing.

“There is absolutely no reason why that should be replaced... Basel II is a very good platform. Minor things need to be adjusted and other things need to be developed,” Banziger told a Bank of France panel discussion.


European Central Bank Governing Council Members Christian Noyer and Nout Wellink said in a Bank of France report on regulation that planned refinements to Basel II would lead to improvements.

“Blaming Basel II is certainly short-sighted. If we should blame something, we should blame Basel I,” Noyer said.

“I am not taking from what (Geithner) said that it is against Basel II. I think the problems he raises are to a large extent addressed now by the Basel Committee.”

British Finance Minister, Alistair Darling told Reuters in an interview he agreed with the United States that, across the world, banks needed to strengthen their capital position.

“Inevitably, different countries have different emphases. It’s very important that people recognise that the capital positions of banks have to be strengthened. It’s important that we see all of these proposals as a whole.”

Canada’s Finance Minister, Jim Flaherty, also offered broad support for Geithner’s proposal.

“Certainly we have common cause with the U.S. With respect to capitalization requirements. Without being immodest, these kinds of recommendations have the world converging toward the Canadian position,” Flaherty told reporters.

But Nout Wellink, who is also chairman of the Basel Committee on Banking Supervision which drafted the Basel II rules, said in the Bank of France report that changes to Basel II would make markets safer.

“Taken together, the recent and planned initiatives of the Basel Committee will promote a more robust banking sector and limit the risk that weaknesses in banks amplify shocks between the financial and real sectors,” Wellink said.

Noyer said more changes were needed to address the root causes of risks to financial stability, such as monitoring of system wide risks from banks. But there was still no widely accepted method to measure such risk “if this risk is able to be captured”, he said.

Click on [G20] for more from the meeting.

(Additional reporting by Louise Egan, Sumeet Desai and Matt Faloon, editing by Patrick Graham)

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