EU Agrees To Stricter Bank Rules

May 16, 2012Europe/Middle Eastby EW News Desk Team

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Members of the European Union have agreed on how to write new global rules for safer banking, after months of bitter clashes between Britain and the rest of the Union. The rules, based on standards set by Basel III, aim to increase financial stability by making banks better equipped to managed their risks and absorb shocks similar to those of the last few years.

The EU is set to make its banking sector more resilient to financial shocks, as stricter capital requirements for banks and investment firms were given political approval by the Economic and Financial Affairs Council yesterday.

The breakthrough moves the EU a step closer to being the world’s first large jurisdiction to implement the Basel III capital rules, an internationally agreed blueprint for avoiding another banking crisis and eliminating the need for future bailouts.

At the same time, they will contribute to sustainable economic growth by ensuring that credit continues to flow to the real economy and by introducing harmonised rules required by the single market.

The deal became possible after George Osborne, the UK chancellor, dropped his critical objections to diluted capital standards after receiving assurances that Britain could implement its planned banking reforms without the approval of the EU.

Under pressure from Osborne, EU states can impose even stricter capital requirements on top of the rules.

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It is expected that the European parliament will aim for the adoption of the new rules by the end of June this year.

EU Internal Markets Commissioner Michel Barnier said:

Our overall objective remains to strengthen the resilience of the banking sector in the EU while ensuring that banks continue to finance economic activity and growth. The final compromise must contribute to financial stability, the necessary basis for growth and employment.

When the new rules are passed, banks will be required to hold more top-quality Tier 1 capital to be able to cover unexpected losses. This common equity capital will be raised from 2 percent under current rules to 4.5 percent.

In addition, two capital buffers must be introduced throughout the EU, namely the conservation buffer without which banks will not be able to payout dividends and bonuses, and the counter-cyclical buffer to avoid excessive lending.

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