THE BANKING FILES
THE banking reforms proposed by the Vickers Commission could be illegal under EU law, according to an internal Treasury document obtained by City A.M.
UK authorities are currently locked in fractious negotiations with Brussels over the details of new EU capital rules, with the European Commission (EC) arguing against giving Britain the flexibility it needs to put in place either the Vickers rules or the Bank of England’s new macro-prudential regime.
The HM Treasury (HMT) document seen by City A.M. says that any attempt by Britain to put extra capital rules in place, which forms one of Vickers’ main planks, “may be subject to legal challenge” if there are not significant changes to the draft rules being discussed.
When EU Commissioner Michel Barnier visited the UK, he tried to reassure regulators that Vickers would be allowable under EU law.
However, he was merely referring to a minor concession giving states limited flexibility to set temporarily higher capital requirements for individual firms – under Pillar 2 of the EU Capital Requirements Directive IV.
The Treasury strongly disagrees that the concession is enough to avoid legal problems. Its document says that the flexibility in question “is not designed to be applied to all firms at a systemic level and if used in that way may be subject to legal challenge”, raising the prospect that banks could take the UK to EU courts to dismantle the Vickers rules and the Bank’s new macro-prudential powers.
At issue is the UK’s attempt to gold-plate capital requirements. Vickers outlined a string of proposals that go further than the internationally agreed Basel III requirements, such as forcing retail banks to hold more common equity as capital and giving regulators the power to require further equity on top of that for some banks. The Bank of England’s new powers to adjust capital levels are also in question.
But the UK is making little headway in the argument. The EC, which has a huge influence on negotiations, insists that the EU must have a “single rulebook” for capital.
And City A.M. understands that Barnier, who was in charge of formulating the rules and who is advising MEPs and ministers on the matter, told a private meeting of bankers in Brussels last week that he has no sympathy for the UK’s stance.
The revelation that EU law could disrupt the government’s flagship overhaul of the banking and regulatory system will add fresh impetus to calls for a renegotiation or withdrawal from the EU.
Conservative MP John Redwood said: “I’ve always asked why the government is going ahead with so much UK regulation when they are prepared to accept EU regulations. Clearly, we don’t need both – one set of regulations for the price of three.”
He added that if Britain wants its own bank capital regime, “we need to understand that a lot of powers on this have already gone. If we’ve now decided we want to do it at home… it strengthens the case for renegotiation.”