BRUSSELS (AP) — European finance ministers early Thursday failed to reach a deal that would force banks to build up higher capital cushions against financial shocks amid disagreements over the powers of national regulators.
The 27-country European Union is in the process of writing an international agreement on capital defenses for banks into European law. The so-called Basel III deal was negotiated by the world's largest economies in the hope of avoiding a repeat of the financial meltdown brought on by the collapse of U.S. investment bank Lehman Brothers. The 2008 crisis demonstrated that many banks did not have enough of a capital cushion to absorb sudden losses on subprime mortgage loans and other risky activities.
Danish Finance Minister Margrethe Vestager, whose country currently holds the EU presidency, called the new rules "one of the most important files taking the lessons from the financial crisis."
Once enacted, Basel III would require lenders to increase their highest-quality capital — such as equity and cash reserves — gradually from 2 percent of the risky assets they hold to 7 percent by 2019. An additional 2.5 percent would have to be built up during good times.
The new rules will apply to more than 8,300 banks in Europe, forcing them to compile billions of euros in extra capital by selling shares or assets or reining in bonuses and dividends.
What is at issue in Europe now is that some states, led by the U.K., want to set even higher capital requirements for their own banks than the ones set out in Basel III. They argued that since there is no pan-European bank resolution fund — and it's therefore national taxpayers that have to foot the bill if something goes wrong — it's national governments that should get to decide what makes their banks save.
In more than 15 hours of talks, Vestager hashed out a complex system of checks that would allow national regulators to set higher capital requirements for their own banks as long as they don't hurt growth in other EU states.
Several smaller European states do not have a big domestic banking system, so they depend on subsidiaries and branches of foreign banks to provide loans to businesses and households. The EU's executive Commission is worried that if some states unilaterally set higher buffers for their domestic lenders, those banks would cut down on their foreign activities.