EU highlights why only disclosure can be global standard (update)

As the negotiations over restructuring the debt of Greece heat up, Michel Barnier, the EU internal markets commissioner, laid out the rules for bank capital requirements.  While the required level of capital is important, what was more significant was the limit placed on national bank regulators preventing them from adopting and enforcing even higher capital requirements.

A Telegraph article by Harry Wilson suggests that the reason for this limit is that not all countries would be able to implement a higher capital standard.

One of the strengths of current asset and liability-level disclosure for banks is that it can be uniformly enforced regardless of the financial condition of the country the bank is headquartered in.

Banks will be forced to hold more capital of a higher quality as part of the package of reforms that will hand the EU sweeping powers to intervene in the financial system to prevent a future crisis....

Michel Barnier, EU internal markets commissioner, said regulations were a "tremendously important step forward in learning the lessons from the crisis"....

In line with the Basel III capital agreements, European banks will be required to maintain a core tier one capital ratio of 8pc, of which common equity will have to make up 4.5 percentage points of the total, up from two percentage points. In addition, banks will in good years be expected to set aside an undetermined additional store of capital as a "countercyclical buffer" and the largest banks will also face an additional surcharge. 

In what could prove to be contentious, national regulators are limited in their ability to impose extra capital requirements on their domestic banks, with the EU saying it wanted to prevent countries from "distorting" the market. 

"Financial stability can only be achieved by the EU acting together; not by each member state on its own," said the EU. 

"The apparent aim of the Commission is that, by creating uniform prudential standards, those jurisdictions that would struggle to impose higher standards will not be perceived as less safe, and capital requirements will not become a basis for inter-state competition," said Jeremy Jennings-Mares, a capital markets partner at law firm Morrison & Foerster. 

"It is frankly extraordinary that the UK has to fight in Europe to retain this discretion for national supervisors," said Ash Saluja, at law firm CMS Cameron McKenna. 

Senior British regulators, including Lord Turner, the chairman of the Financial Services Authority, have argued that higher capital requirements could be imposed in future. 

David Miles, a member of the Bank of England's Monetary Policy Committe, has said a capital ratio of 20pc could be appropriate.

Update

Subsequent to the original post, Michel Barnier reversed course on not allowing national regulators to set higher capital standards.  According to a Reuters' article,

The UK will still be able to ring-fence its retail banks and impose extra capital limits on them under the European Union's proposed capital and liquidity rules, the bloc's financial services chief said. 

Michel Barnier, the EU's internal market commissioner, told the Financial Times on Friday he had split his proposal into two to give governments such as the UK and Spain more flexibility to impose additional demands on parts of their banking sector. 

The draft laws, unveiled on Wednesday, would make the EU the first jurisdiction to begin implementing the new global Basel III accord, which aims to make banks safer by making them hold more and better quality capital against unexpected losses.

The UK and other countries such as Sweden previously raised concerns that the draft EU laws would make it difficult for countries like Britain to tighten capital controls on banks beyond the levels which had been agreed internationally.

Some investors had also believed that Barnier's Capital Requirements Directive 4 would bar the UK's Independent Commission on Banking, chaired by John Vickers, from pursuing its bid to force banks to ring-fence their retail operations. 

"It seems (the Vickers Commission) may be proposing 10 percent for retail banks. That would be possible in my proposal. We think we have the flexibility we need," he told the FT. "We do think the (Vickers) proposals can be integrated into our framework." 

He also said that his proposal "foresees a much expanded use of the countercyclical buffers" that would allow countries like the UK to pile extra capital requirements on top of the 7 percent for "financial stability" reasons. 

"In the directive are all the issues relating to supervision where national flexibility is needed. There is flexibility for supervisors on the buffers," he said. 

Barnier added that he was confident that his proposal would eventually win the full support of the UK. "It becomes more credible if we have the UK on board, given the support of its financial sector," he said.