Banks set to face tougher capital rules in Europe

Banks will have to tie up more capital to cover risky operations in future under European Union (EU) rules due to be unveiled shortly as policy-makers seek to limit contagion from the US financial crisis.

The executive European Commission wants to apply lessons learnt from the credit crunch, which this week claimed more bank victims in Fortis and Dexia in Belgium and Bradford & Bingley in Britain.

While officials insist the continent does not need a bailout plan of the scale under debate in the United States, EU president France called for stronger policing of EU financial markets and said an October 15 meeting of EU leaders in Brussels will largely focus on the bloc's response to the crisis.

"We must go towards [having] a European policeman regarding how markets function, the supervision of banks and insurers. It would mean a reinforcement of European regulators in all that is related to financial mechanisms," France's Minister for European Affairs, Jean-Pierre Jouyet, told France Inter radio.

He called on the European Central Bank to take into account the current situation in future rate decisions though he did not explicitly urge a reduction in rates. EU Internal Market Commissioner Charlie McCreevy was due in Brussels yesterday to unveil a long-awaited reform to an EU directive on capital requirements which thousands of banks will have to apply and will leave some with less money to use in their business.

EU governments and the European Parliament will have the final say but speedy adoption of the reform is expected.

The draft reform proposes several key changes. Banks that sell securitised products or repackaged debt such as those that turned toxic in the credit crunch, will have to share the risk with buyers. This will be done by the bank retaining a five per cent stake in the products, a provision some banks say will kill the securitisation market. The Commission will propose limiting all financial exposures between banks to 25 per cent of their own funds, a step smaller banks may find burdensome.

Colleges of supervisors will have to be set up for all cross-border banks with the bank's home supervisor having the last say. Some EU states will fear playing second fiddle to watchdogs in other member states.

The October 15 meeting will also look at whether mark-to-market accounting rules, seen by critics as exacerbating writedowns at banks, could be eased, an EU official said.

Under mark-to-market, a bank periodically has to price assets according to the going rate, a hard task when many of the toxic securitised products are shunned.

French Prime Minister Francois Fillon told French daily Les Echos that making the rule "more intelligent" was one of the ideas on the table awaiting a response from European partners. US regulators on Tuesday gave the financial industry a reprieve from the mark-to-market rule in a bid to slow or reverse mortgage-related losses on banks' balance sheets. The EU's response so far has largely been at national level, with Ireland on Tuesday guaranteeing all bank deposits in a bid to insulate its sector from further fall-out from the global credit crunch.

Jean-Claude Juncker, Chairman of the Eurogroup of 15 nations using the euro single currency, told French radio yesterday the repercussions of the crisis would be felt for months, but vowed that EU officials would not let any big bank fail.

He told Europe 1 radio that Europe did not need a bailout plan such as the $700 billion (Dh2.26trn) rescue package being debated in the United States, but said he would be among EU officials meeting in Paris on Saturday to study responses to the crisis.