March 2, 2012 / 12:40 PM / 6 years ago

EU mulls plan for systemic bank buffer compromise

* EU compromise proposes new systemic bank buffer

* New buffer would give UK room to ring-fence retail arms

* EU compromise ditches govt debt zero risk weight review

By Huw Jones

LONDON, March 2 (Reuters) - Local supervisors would have powers to force banks to hold extra capital on top of globally agreed minimums, according to a draft compromise from EU president Denmark that would allow Britain to strengthen safeguards for retail lenders.

The EU is tightening up rules to make banks safer, in a bid to avoid a repeat of the last financial crisis when taxpayers had to bail out failing lenders.

Denmark is proposing the creation of a new, optional buffer of core, top quality capital of up to 3 percent, called a systemic risk buffer, which would sit on top of the 7 percent minimum buffer set by the global Basel III accord being introduced from 2013.

“Each member state may introduce a systemic risk buffer of common equity tier 1 for the banking sector or one or more subsets of the sector,” the “package of flexibility” compromise authored by Denmark said.

The bloc’s member states and European Parliament are in the middle of approving a draft law that turns Basel III into binding EU rules.

The law, however, worries countries like Britain and Sweden that want room to impose higher capital requirements on banks locally when needed.

“Following discussions in the (EU) council working group it has become clear that further flexibility is needed,” the Danish paper said.

Britain’s supervisors already force local lenders like Barclays, HSBC, Lloyds and Royal Bank of Scotland to hold 10 percent or more in capital.

Banking officials say if adopted, the compromise would ensure there was no barrier to Britain introducing its “Vickers” reform.

This involves forcing the retail arms of banks to be ring fenced with extra core capital, taking the total to 10 percent, which includes the Basel III 7 percent minimum, by 2019.

Basel contains the option of an extra “counter cyclical” buffer that can be made mandatory if credit markets become overheated.

“We already have buffers on buffers. I think it could be to allow Britain to deal with its Vickers plan,” a senior European banking industry official said.


The bloc’s financial services chief Michel Barnier has said that the draft law he authored gives supervisors leeway to top up capital requirements. The Danish compromise would hard wire this reassurance into law.

Barnier and the European Banking Authority are pushing to create a “single rulebook” so that banks in all 27 member states comply with the same rules in a consistent way.

Basel III also introduces mandatory liquidity buffers for banks and a leverage ratio to rein in excessive use of debt to extend lending. The Danish compromise widens the range of assets that can be included in liquidity buffers.

If the EU goes ahead with significant deviations from Basel III, it faces a challenge by the global body that devised them, the Basel Committee on Banking Supervision whose accord was given full backing by world leaders.

The Danish compromise also removes an earlier proposal to review the zero “risk weight” attached to a bank’s holdings of sovereign debt for calculating safety buffers.

EU lawmakers want this reviewed, saying the bloc’s bailouts of Ireland, Greece and Portugal show that not all sovereign debt is risk-free.

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