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UPDATE 3-EU Commission proposes tweaks to global bank capital rules

Published 2016-11-23, 10:50 a/m
© Reuters.  UPDATE 3-EU Commission proposes tweaks to global bank capital rules

* Shows fragmentation of global financial rules

* EU's Dombrovskis calls on U.S. to respect global rules

* Bank targets on leverage, funding, trading books (adds vote of EU Parliament)

By Francesco Guarascio

BRUSSELS, Nov 23 (Reuters) - The European Commission proposed new capital rules for banks on Wednesday in line with those agreed by global regulators but with several tweaks, in a sign of a growing fragmentation of financial rulebooks around the world.

The EU's executive arm proposed adapting its rules on capital requirements and loss-absorbing buffers to agreements reached in the Basel Committee of global financial regulators, which oversees U.S., European and Japanese lenders.

But instead of simply replicating the rules agreed with its international partners, the Commission proposed changes and some new provisions that may upset non-EU banks and regulators.

After the 2007-2008 financial crisis, governments of major economies pledged to keep their banking rules closely harmonised.

But that close alignment is starting to fray, with the EU trying to reduce the impact of the rules on economic growth and the region's beleaguered banking industry.

"We have put forward new risk reduction proposals that build on the agreed global standards while taking into account the specificities of the European banking sector," said Valdis Dombrovskis, the EU commissioner on financial services.

The move comes as the European Union is battling a new set of reforms expected to be adopted by the Basel Committee in the coming weeks on banks' models for calculating risk, which the EU thinks may favour U.S. banks.

On Wednesday the European Parliament voted against the draft Basel proposals, adding their weight to concerns raised by France, Germany and the European Commission.

In another sign of the fragmentation of global financial regulation, U.S. President-elect Donald Trump has talked about possibly reviewing rules introduced after the financial crisis.

"We expect our international partners to stick to globally-agreed standards," Dombrovskis told reporters when asked about the Trump's intentions.

And in what could be an area of disagreement between the EU and other major economies, Brussels is proposing top U.S. or Asian banks to reorganise their operations in Europe to be better overseen by EU watchdogs - a move that is expected to increase financial stability but also costs for lenders.

"The problems are that this new rule is inflexible, and looks like an aggressive reaction to developments in the U.S., at a moment when greater regulatory co-operation and convergence are seen as critically important in the market," said James Perry, financial regulation partner at law firm Ashurst.

MEASURES PROPOSED

The Commission has also proposed a new set of requirements for European banks aimed at keeping their lending in check and ensuring they have stable funding sources.

Under the proposals, EU lenders would be required to hold a binding 3 percent leverage ratio. The measure will be integrated at a later stage with higher requirements for systemic banks, the Commission said in a note.

Banks would also have to meet a Net Stable Funding Ratio (NSFR) aimed at limiting excessive reliance on the type of short-term funding that was among the causes of the global financial crisis.

Brussels is also proposing tighter capital requirements on banks' trading of shares, bonds or derivatives, because of their higher volatility.

In a deviation from global rules, the Commission said the new rules will be phased in beyond the globally-agreed 2019 starting date. Brussels is also proposing several exceptions for the NSFR banks welcomed the Commission's proposals as they softened some global requirements.

"This package is about implementing global standards and about re-calibrating provisions where evidence has established that the earlier regulatory response was heavy-handed," Wim Mijs, head of the European Banking Federation, said, praising the reduction of regulatory complexity sought by the proposals.

As widely anticipated, new global rules to force systemic banks to hold sufficient capital buffers to absorb losses, the so-called Total loss absorbing capacity (TLAC), will be introduced in the EU legislation with tweaks to the EU's standard called Minimum Requirement for own funds and Eligible Liabilities (MREL).

In changing the rules governing MREL, the Commission also proposed tweaks to bail-in regulations which are aimed at reducing losses for taxpayers in case of a bank crisis, while hitting the lenders' creditors.

With the aim of increasing the funding of the real economy, which is still struggling in some euro zone countries, the Commission also proposed lower requirements for bank lending to small companies and for infrastructure projects.

The proposals made by the Commission need the approval of EU states and the European Parliament to become law.

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