EU ministers agree on flexible bank capital rules

July 7, 2009

European Monetary Affairs Commissioner Joaquin Almunia and Sweden's Finance Minister Anders Borg (R)    By Dave Graham and Marcin Grajewski
   BRUSSELS, July 7 (Reuters) – European Union finance ministers agreed in principle on Tuesday to make capital rules for banks more flexible to reduce their likelihood of worsening boom-and-bust cycles in the economy.  The ministers also raised doubts about a German proposal to relax temporarily the Basel II rules on capital requirements for banks to boost lending and accelerate a recovery from the worst economic crisis since World War Two.
   Under the agreed plan on long-term rules, which the EU’s executive European Commission will use to draft legislation in October, banks would have to build higher capital buffers in good times so they can be reduced during downturns.
   This would help prevent financial institutions lending too much money when economic growth is high and allow them to provide more loans in bad times.
   The scheme is intended to ensure the 27-nation EU is better prepared for any repeat of the global financial crisis, which was triggered by bad loans in the United States and spread quickly through the world’s economies.
   “The council (of EU governments) agrees that further work is necessary to mitigate pro-cyclicality by creating counter-cyclical capital buffers, i.e. to be raised in good times and to be drawn in downturns,” the ministers said in a statement after their monthly meeting in Brussels.
   Pro-cyclicality is an aspect of economic policy that could magnify economic or financial fluctuations.
   “It is important that we mend the banking system so that credit gets running again. We need stronger regulation, more efficient regulation,” said Swedish Finance Minister Anders Borg, whose country holds the EU’s presidency.
   Sweden has said it hopes to show during its six-month presidency that EU leaders are up to the task of guiding Europe out of crisis after widespread criticism of their efforts and a record-low turnout at a European Parliament election last month.
   It has made an overhaul of the financial regulatory system one of its priorities.
   Germany asked for the Basel II rules on capital requirements to be relaxed for a limited period so that the supply of credit does not dry up to such an extent that firms are put at risk. But the plan drew little enthusiasm.
   “There was also a very broad majority of countries that did not have exactly the same view (as Germany),” Borg told a news conference, adding that the ministers would discuss the issue at an EU meeting with central bank governors in October in Sweden.
   Borg added that the European Commission would look at the matter and report back to the ministers.
   German Finance Minister Peer Steinbrueck said his country would press on with its plans, but that it remained fully behind Basel II and committed to building up capital buffers in future.
   “What we’re saying is that in this particular situation, which will hopefully be over soon, we need to do what’s necessary to get out of this pro-cyclical effect,” he said.
   Led by Steinbrueck and French Economy Minister Christine Lagarde, the ministers also increased pressure on the International Accounting Standards Board to alter accounting standards to let U.S. and European banks compete evenly.
   “We must encourage the IASB to make the proposals not at the end of the year, but in the autumn,” Steinbrueck said.
   But he said he sometimes doubted whether the IASB would be able to create a level playing field.
   Accounting standard setters are under pressure to relax rules forcing banks to value impaired assets at depressed prices. The rules have led to writedowns and put pressure on banks to find capital at a time when credit is often scarce.

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