Banks fear EU rules will hit firms’ hedging

Tim Wallace
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FOREIGN banks will be put at a huge competitive disadvantage when trying to sell hedging products to EU firms, banking groups have warned, if damaging incoming rules are not amended quickly.

Under the CRD4 directive plans, banks must hold extra capital against derivatives to cover the risk that they may lose value in future.

The EU negotiators recognise this makes hedging products – which firms buy from banks to protect themselves against risks like exchange rate moves or interest rate rises – much more expensive and so have exempted deals between EU banks and EU firms from the rules.

But they have not exempted non-EU banks from the credit valuation adjustment (CVA) charge, which could push up prices for customers and so damage the economy.

“CVA charges in these cases would amount to a punitive cost for these entities and could stifle growth in the real economy,” said Christine Brentani from the Association of Financial Markets in Europe (AFME).

“The exemption should apply to all non-financial entities and not just those established in the EU.”

European parliamentarians and leaders have been fiercely debating the proposals which are already behind schedule.

The most high profile row so far flared up around bank bonuses, with French and other politicians pushing to cap variable pay at the same level as salaries – a change which is likely to come in as only Britain now publicly opposes the move and banks feel unable to defend themselves.