Europe set to delay bank capital rules as U.S. row simmers

Europe is preparing to follow the United States in delaying the introduction of stricter rules on bank capital while it lobbies for a rethink of the U.S. stance, EU sources said.

The delay could push back the start of global rules in Europe, known as Basel III, by about six months, or even longer if diplomats and lawmakers fail to break a deadlock on a law meant to be phased in from the start of 2013.

On the surface, the postponement would be good news for small banks in particular, because it would give them a chance to adapt to a complex new law still being finalised by EU member countries and the European Parliament.

But any hold-up would compound uncertainty after the U.S. decision to abandon the January 2013 target, undermining the global Basel accord and promised capital reforms to prevent a re-run of the financial crisis.

"Whatever happens, the new law cannot become effective on January 1," said one EU official, who spoke on condition of anonymity. "The middle of the year would be a realistic assessment."

The secretary general of the Basel Committee, which designed the new regime, insisted on Tuesday that its launch would go ahead as planned, but conceded that some countries would miss the deadline.

"A large number of jurisdictions have everything in place and are ready to go on Jan. 1, 2013," Wayne Byres told Reuters on the sidelines of a financial sector conference in Abu Dhabi.

"We are persisting with the date, and those not ready on Jan. 1 can be ready thereafter."

IN PRACTICAL TERMS, IMPOSSIBLE

Brussels is worried that the decision in Washington to ignore the deadline will put EU banks at a disadvantage against U.S. rivals allowed to put off applying its strict standards.

The delay has caused concern in the EU's executive European Commission. Michel Barnier, the commissioner in charge of regulating finance, has written to U.S. Federal Reserve Chairman Ben Bernanke to express his worries, officials said.

In his letter, a copy of which was also sent to U.S. Treasury Secretary Timothy Geithner, Barnier pushes for clarity on when Washington will introduce the capital rules and flags the risks if the United States and Europe take different tacks, people familiar with the matter told Reuters.

"The U.S. is dragging its feet, which is not fair," one of the officials said.

But privately, many officials in Brussels concede that the same is likely to happen in the 27-member European Union and that the bloc will also be forced to delay implementation, marking a further setback in efforts to reform finance.

By standardising EU capital rules, the law would also make it easier for the European Central Bank to supervise lenders, the first step towards a banking union - a cornerstone of closer fiscal integration in the euro single currency area.

"In practical terms, it seems to be impossible to do something that is implemented by January 1, but officially that hasn't been said," a senior lawmaker in the European Parliament said.

Banks have been pushing for a delay of the new rules until the beginning of 2014, arguing that the U.S. move would put them at a disadvantage.

INDECISION

The global accord hatched by central bankers and regulators meeting in Basel, Switzerland, demands that lenders set aside more capital to cover losses such as unpaid loans.

It also lays down higher standards in determining what kind of assets a bank can use to meet these capital levels. For example, a limit on the use of hybrid debt that banks previously relied on, but which unravelled in the crisis.

The European Union is struggling to agree on many aspects of the package, including what kinds of assets can be considered liquid, or available at short notice.

The European Parliament is also demanding tough limits on bonus payouts in the EU law that introduces Basel; a demand that has irritated Britain.

After months of tortuous, often late-night negotiations between the parliament and EU member states, issues such as bonus caps remain unresolved and agreement on the broader rules has yet to be reached.

"There is a general feeling in the context of the euro zone crisis that not only is there a democratic deficit, but also an executive deficit. The institutions are just not able to take decisions," said Nicolas Veron of Brussels think tank Bruegel.

"We see that in the crisis, with Greece and the euro zone, but also on issues such as Basel," he said.

The drawn-out process of signing off a law has also frustrated regulators. "This is not a good situation," said one. "They are holding themselves up for ridicule if they don't adapt on time." (Additional reporting by Stanley Carvalho in Abu Dhabi; Editing by Rex Merrifield and David Goodman)