January 21, 2015 / 12:21 PM / 5 years ago

Bank-style regulation offered as temporary fix for money market funds

LONDON, Jan 21 (Reuters) - Bank-style regulation of money market funds (MMFs) has been proposed as a temporary compromise as draft European Union rules for the trillion euro ($1.2 trillion) sector face the prospect of being blocked for a second time by European lawmakers.

The rules proposed by the European Commission in Sept. 2013 aim to increase transparency and stability for MMFs, which are used by companies as an interest-earning cash deposit facility, but they have created deep splits among European Parliament memebers.

Europe is trying to impose curbs on these funds to avoid the kind of panicked withdrawals seen when U.S. bank Lehman Brothers collapsed in 2008 and one U.S. fund failed.

Lawmakers on the left want a tough regime including a fixed percentage of total capital being set aside to maintain stability, while parties on the right say that such measures would kill about half of Europe’s MMF sector, thereby robbing the region’s flagging economy of much-needed funds.

The divisions raise doubts that consensus can be found before the European Parliament’s economic affairs committee votes on the draft law for a second time next month, with a full parliamentary vote scheduled for March.

The doubts prompted the European Commission, which often helps to broker deals on divisive rules, to suggest the compromise while lawmakers wrangle over the 800 amendments tabled so far.

“We are slightly afraid that we are in need of a more immediate solution,” Tilman Lueder, a senior commission official dealing in investment funds policy, told the committee.

“On balance, we see a lot of merit in some of the proposals to apply bank-like regulation (as an interim measure).”

Banking sector rules require lenders to hold capital in proportion to the risks on their books, unlike the fixed 3 percent buffer of capital to total assets proposed by the commission in its original draft.

Banks must also demonstrate they have enough liquidity to continue operating if markets freeze temporarily. ($1 = 0.8639 euros) (Editing by David Goodman)

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