Thomson Reuters
EU bank supervisors propose quick-fix buffer plan
07.17.09, 10:57 AM EDT
By Huw Jones
LONDON, July 17 (Reuters) - European Union banking supervisors proposed a quick-fix plan on Friday for banks to build up an extra cushion of capital to tap when markets turn sour and lessen the likelihood of government-backed bailouts.
The G20 group of industrialised and emerging market countries agreed in April that banks should set aside extra 'countercyclical' capital buffers and want progress during 2010.
But there is no global consensus yet on how exactly this could be done, whether through changing accounting rules, bank capital rules or a mix of the two as is expected.
In the meantime, the EU's national banking supervisors are proposing a 'quick-fix' solution within the current regulatory framework and avoid time-consuming legislation.
It would also be done on a bank-by-bank basis, avoiding the need for legislation to change set minimum capital requirements.
Againsti this background, CEBS members agree that any countercyclical adjustment should be calibrated to individual banks' portfolios and based on risk-sensitive concepts,' the CEBS said in a statement.
The EU's bank capital requirements directive (CRD) regulates bank capital in the 27-nation bloc. It is based on a globally-agreed framework known as Basel II.
The Committee of European Banking Supervisors (CEBS) is proposing a new buffer could be calculated by working out the likelihood of a bank's creditor defaulting in a downturn compared with normal market conditions, as is done at present.
The difference between the two would determine how much extra capital is needed for the new buffer.
Spanish banks are already forced to create a cushion for rocky markets through a method known as dynamic provisioning. This is done through accounting rather than the bank capital rules.
The CEBS proposal falls within the supervisory aspects of the Basel II framework, known as Pillar 2. It could be enforced fairly quickly in the form of non-binding guidelines to national regulators.
It could also serve as a testbed for more fundamental changes anticipated to the Basel II framework's Pillar 1 minimum mandatory capital requirements levels.
The Basel Committee on Banking Supervision, which devised Basel II, is itself looking at how it could change the framework to meet policymaker calls for a new buffer.
Banking officials say the Basel Committee appears to be leaning towards a more radical solution by changing the set mandatory minimum capital requirement figures that are applied across the board.
This would typically take a year or two to come into force.
CEBS said only one European bank has rejected its interim buffer proposal out of hand during preliminary soundings. It has yet to complete an impact assessment to show how much of a burden it will be on banks.
(Reporting by Huw Jones; Editing by Victoria Main) Keywords: EU BANKS/CAPITAL
(Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com)
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