EU capital rules remain on tight deadline

European Union (EU) plans for implementing the complex Basel II bank safety rules remain on a very tight schedule, and yesterday's issue of a EU progress report is a positive step, officials at European banking organisations said.

Some European bankers fear that major European banks could be put at a competitive disadvantage to North American, Japanese and Swiss rivals if the Cad 3 timetable lags far behind the Basel II schedule. The officials were commenting on the European Commission’s working document on its plans for new capital adequacy rules – commonly known as Cad 3 – which are closely modelled in most respects on the risk-based Basel II bank capital accord proposed by global banking regulators.

The commission said that the working document would provide the basis for a “structured dialogue” co-ordinated by the commission at the European level, and by EU member state regulatory agencies at the national level, which will continue until the end of January.

The publication of the EU paper allows debate on the proposals to begin in Europe and will help the commission, the EU’s executive body, keep to its target of bringing the new rules into force at the same time as Basel II in late 2006, a spokesman for the British Bankers’ Association (BBA) said.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that in effect regulates international banking, wants to apply Basel II in the first instance to the large international banks of the world’s leading economies. The commission wants to apply the rules to all banks and investment firms in the EU, which by 2006 could comprise 25 nations compared with 15 at present.

Banks using advanced methods of measuring their risks under Basel II should enjoy lower protective capital charges than banks using the simpler approaches currently applied under the Basel I accord now in force in EU countries. A delay in implementing Cad 3 could mean that European banks will have to bear the burden of higher charges compared with their rivals until the new rules come into force in the EU, banking analysts said.

The commission yesterday said its timetable will be tight, but should allow for new laws to be agreed and national implementation agreed by the end of 2006.

A spokesman for the European Banking Federation (EBF) in Brussels said that whether the target is achievable is in the hands of EU member states and the European parliament. The spokesman stressed that it is important for the competitiveness of the European banks that the 2006 deadline is met.

The commission said it hopes to publish a third consultation document on its capital adequacy proposals in late spring or early summer next year, shortly after the Basel Committee issues its own third consultative paper on Basel II.

The Commission plans to adopt a Cad 3 proposal in the first part of 2004 after the Basel Committee issues its final version of Basel II by the end of 2003.

Banking industry analysts said obstacles to a smooth ride for Cad 3 are the European parliamentary elections in 2004 and the planned enlargement of the EU in the same year. Another source of possible problems is the different speeds at which member states can implement Cad 3. Some countries have already empowered their financial regulators to put the rules into effect, while others will need local parliamentary approval after EU parliamentary approval.

The commission is preparing a so-called “consequences report” on the impact of Cad 3 for all sectors of the EU economy, in particular the small to medium-sized business area. This report will be completed in advance of a legislative proposal by the commission.

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