Global Regulators Chide EU on Bank Capital Rules

Global bank regulators warned the European Union it risked watering down agreed bank capital rules designed to avert another financial crisis and called for more consistency in implementing the regulations.

The Basel Committee on Banking Supervision said in a report it wanted to resolve "consistency issues" with the EU's approach to enforcing their Basel III rules.

The report will be presented this month to leaders of the G20 economies who in 2010 approved the tougher Basel bank capital requirements being phased in from next January.

The report studies how the EU, Japan and United States plan to implement Basel III and whether all G20 countries will be ready for next year's deadline.

"The findings of these reviews are preliminary... Nevertheless, there is a possibility that national implementation will be weaker than the globally-agreed standards in some key areas," the report said.

"The initial assessment process has identified a large number of features of the current EU Basel III proposals that will require further investigation," the committee said.

Some of these EU-focused concerns will be cleared up.

"There seems to be a small number of issues, however, that are potentially material and will need to be subject to a detailed assessment by the review team," the committee said.

The report provides weighty ammunition for countries like Britain which accuse other EU countries of weakening Basel, in particular the quality of capital the bloc's 8,300 banks must hold.

The committee identified three concerns over the definition of capital being fleshed out by the EU, and questioned the ability of some instruments to fully absorb losses so that taxpayers do not have to rescue lenders again in the next crisis.

Germany is keen to allow its banks to hold a form of hybrid debt which many regulators see as untested.

The draft EU rules would allow banks to count capital from other entities like insurance arms, which Basel bars.

The committee also said the EU's "maximum harmonization" approach whereby Basel is a ceiling and not a floor "may work to limit the room an individual regulator has to adopt compliant regulations on its own."

Britain has lobbied hard to be able to impose tougher capital levels on local lenders.

The EU's executive European Commission challenged some of the committee's findings, saying there must be some tailoring of the rules as they will apply to all the bloc's banks.

The committee said Japan's implementing framework "suggests broad consistency" with most of Basel.

The United States had not published any rules when the committee wrote its report last month. The Federal Reserve published draft rules last week.

But the committee said Basel must be applied to all "internationally active" banks and will review whether the United States will include all such lenders.

The U.S. authorities told the committee they were confident all relevant banks will be covered.

The committee also looked at why there are difference in how banks tot up their risk weighted assets to calculate their capital buffers. There was no definitive consensus and additional work is being pursued, it said.

There is a possibility that some G20 countries will not be ready by January to start phasing in Basel III.

Like the United States, Argentina, Hong Kong, Indonesia, Korea, Russia and Turkey had not issued rules when the report was drawn up.

The United States and some other countries have also missed globally-agreed deadlines for introducing Basel II, a forerunner accord, or tougher Basel rules for trading books.

The Basel Committee wants consistent application of its rules to avoid unfair advantages for banks in some countries. It will update its report for a G20 meeting in November. (Editing by David Cowell)