EU finance ministers yesterday struggled to reach a deal on forcing banks to set aside more capital to cushion future losses, with Spain saying the bloc had to dispel doubts about the strength of its lenders.
The EU’s 27 members are divided over how much capital banks should hold in future to protect themselves against the kind of losses which have brought down dozens of lenders in Europe and the US, often requiring bailouts funded by taxpayers.
Spain, whose banks have suffered huge losses inflicted by a property crash that is continuing unabated, said new rules were vital for handling future turmoil.
“At this time of financial crisis, we need to clear up all doubts about the quality of European banks,” economy minister Luis de Guindos said. “We need to guarantee a level of quality capital that is enough to face future crises.”
Many of the over 8,300 banks and financial institutions in Europe are struggling, and Standard & Poor’s this week cut the credit rating of 11 banks in Spain, which has sunk into its second recession in just over two years.
Madrid has told Spanish banks to raise almost €54bn in capital this year on top of a sharp rise in provisions against losses since the property bubble burst in 2008.
German finance minister Wolfgang Schäeuble warned reporters not to expect a quick deal about future capital rules at the Brussels talks, called in the hope of achieving a breakthrough after some countries demanded changes to a pan-European formula.
Denmark, holder of the bloc’s six-month rotating presidency, has stepped up efforts to find a deal and Schäeuble said he believed an agreement was possible in the coming months.
Their aim is to translate the higher capital standards set by the Basel committee of regulators into EU law, turning it into reality for banks by the start of next year.
The Danes want to achieve a consensus and strike an accord with the European Parliament by the end of June.
One compromise would be to allow a margin of flexibility so countries that want can require their banks to increase their capital buffers up to a certain limit, perhaps as much as 10% or 12% of risky assets for up to two years. This compares with Basel’s minimum of 7%.
Yet there is a split over whether the green light is needed from the European Commission, the EU’s executive arm, before a country can require capital levels above the Basel minimum.
Handing more power to Brussels is anathema to Britain, which is fighting to maintain its autonomy in policing the City of London, Europe’s financial capital.
Europe’s capital regime, when decided, will be closely studied in the US and may influence how policymakers there interpret the Basel standards, while investors are eager to see the EU repair its vulnerable banking sector.
“Not having a European banking union... on common capital requirements... makes it very difficult for the euro project to work,” said Eric Stein, a portfolio manager at Eaton Vance in Boston that invests in European assets.
“If nothing happens, it will be a continued area for stress in Europe and send a very negative sign.”