BANKS with large insurance arms could sidestep the toughest elements of the new Basel III capital requirements, according to not-yet-released draft European Union legislation.
The draft plans to roll Basel III out across the EU could let banks count more capital held within their insurance arms towards the quota they must hold, than institutions outside the bloc are allowed to.
That would benefits banks such as Lloyds Banking Group, which has a large insurance arm, or French banks such as BNP Paribas and Société Générale, the Financial Times reported yesterday.
The EU draft of the rules would also allow banks to continue issuing hybrid capital such as preference shares or co-co bonds for longer than currently anticipated.
Basel III bans banks from counting any hybrid debt instruments issued after its new standards were published in 2010 – whereas the EU draft would allow them to include any hybrid debt issued up until until the European Commission's CRD IV implementing legislative draft is formally adopted, expected in July.
A number of European national regulators have publicly suggested that contingent convertible bonds, or CoCos, may be used to supplement the capital levels of banks which are deemed systemically important.
Credit Suisse issued CoCos earlier this year after Swiss regulators confirmed these instruments will form nine per cent of a too-big-to-fail buffer for itself and UBS.
Basel III rules, though set by its committee, can be tailored by individual regulators.