BRUSSELS—European countries have narrowed their differences over new rules on bank capital ahead of a key meeting of finance ministers, but European officials say a big gap remains over whether member states should be allowed to impose higher requirements on their own banks.
The ministers meet Wednesday in a gathering called specifically to pin down rules over how much capital banks in the bloc should be forced to hold on their balance sheets. Also in dispute is whether banks should be able to count capital held in insurance subsidiaries as their own.
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Vítor Constâncio, ECB vice president, last week said member states should be able to impose stricter rules.
The original proposals were put forward last July by the European Commission, based on agreements reached by the Basel Committee of international banking regulators, which is named after the Swiss city where they meet. Member states, the Commission and the European Parliament must reach agreement on the new rules, to be phased in from the start of next year, and the Commission had hoped for a decision this summer.
Some EU member states, led by the U.K., are urging a strict interpretation of the Basel proposals, saying failure to follow through could risk a repeat of the 2008 financial crisis. Others warn that with Europe's economy sinking back into recession, a rigid interpretation of capital and liquidity requirements could further crimp lending and damage the recovery.
The commission said its proposals were aimed at reinforcing the EU's single market, and meant to reflect "maximum harmonization" among EU member states. They would, it said, enforce a "level playing field" among countries and avoid regulatory arbitrage, the tendency for banks to migrate to jurisdictions with the lightest regulation.
France supports this notion, while a number of EU member states, including the U.K. and Sweden, have insisted the EU should impose only minimum standards.
This would give countries flexibility to implement much higher capital requirements on domestic banks that are important to their financial systems. The U.K., which has a huge banking sector relative to the size of its economy and bailed out three major banks during the financial crisis, wants the freedom to impose heavier capital requirements on its lenders.
The European Central Bank also favors EU member states having flexibility to impose stricter capital rules. "The ECB strongly supports the establishment of a single European rulebook for financial institutions...which at the same time allows for flexibility at national level by member states to apply more stringent prudential requirements where systemic risks arise," European Central Bank Vice President Vítor Constâncio said last week.
The latest discussions would set a minimum requirement for bank capital of 8% of risk-weighted assets, plus an additional countercyclical buffer of a maximum 2.5% and a further so-called conservation buffer eventually rising to 2.5%. A countercyclical buffer would allow for increases in capital during the growth stage of the economic cycle.
The main points of contention are over an additional buffer for systemically important banks. Danish officials, whose country holds the rotating presidency of the EU, have proposed a compromise that would allow a further buffer eventually reaching 5%. But member states wishing to impose this higher burden would have to justify it to the commission and the European Systemic Risk Board, the European agency charged with reducing the chance of financial crises. The two bodies would have the authority to ask countries to adjust their rules.
EU officials say most member states have accepted some kind of ceiling but the U.K. and some other governments continue to oppose it.
Also in dispute is whether capital held by related insurance subsidiaries should be counted in bank capital, as the commission proposed last year. The Basel Committee ruled out this option, but governments such as France, where banks and insurance firms are often held by the same financial holding company, favor combining their capital.
"Europe has traditionally championed international financial standards... Not complying with [international financial standards] now would have unfortunate effect of undermining the global authority of the Basel Committee and that's not in interest of Europe," said Nicolas Véron, a senior fellow at the Brussels-based think-tank Bruegel.
—Geoffrey T. Smith contributed to this article.
A version of this article appeared April 30, 2012, on page C3 in some U.S. editions of The Wall Street Journal, with the headline: Europe Battles Toward Bank Capital Rules.
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