UK slams EU for watering down rules

THE BANKING FILES

THE UK is becoming increasingly alarmed at Europe’s attempts to water down international capital regulations for continental banks, which would put the City at a disadvantage, City A.M. can reveal.

HM Treasury (HMT) slams what it calls Brussels’ “weakened” approach to implementing capital rules in an internal lobbying document obtained by City A.M..

The document shows how Britain’s stance has hardened because it does not trust lax European regulators to enforce the rules properly.

HMT demands that the EU focus on “promoting supervisory best practice” and tighten up the rulebook, suggesting that the UK is anxious that other regulators’ refusal to gold-plate capital rules could make other states a more attractive place to do business.

As this newspaper revealed recently, HMT has had detailed discussions with banks who say that the UK’s ultra-stringent liquidity requirements are hampering credit growth.

But the details of the regulations are set by the Bank of England and the FSA, with HMT reduced to tinkering. The hard-line approach taken by BoE governor Mervyn King combined with other countries’ failure to adopt the same measures has prompted worries in the Treasury that the City could become a less competitive financial centre.

In the document, the UK argues that the current draft capital rules, known as the Capital Requirements Directive IV, “exacerbate the fracture at the heart of the prudential framework in the EU” and “invites financial engineering”.

The watering-down “will mean that the capital base for EU banks will be significantly weakened over a prolonged period of time”, it says.

Unlike its row with Brussels over the UK’s demand for flexibility to bring in its flagship banking overhaul, Britain has broader support for its arguments on hardening up capital rules. It has marshalled quotes from the IMF, ECB and European Financial Stability Board to support its case.

HMT declined to comment.