On 2 May, the Economic and Financial Affairs Council was expected to reach a general approach on the proposals amending the EU's rules on capital requirements for banks and investment firms, the so called revised capital requirements rules (CRD IV), intended to transpose into EU law the Basel 3 agreement, an international agreement approved by the G-20 in November 2010. However, the EU finance ministers were unable to reach an agreement on new bank capital requirements. On the one hand, the UK and Sweden seeking to introduce tougher capital requirements, and France and Germany on the other calling for full harmonisation. In fact, George Osborne could not accept a compromise agreement drafted by Denmark, which holds the EU’s Presidency, and endorsed by the other Member States.
The EU’s rules are based on the Basel 3 agreement, whereas the UK has been trying to toughen them up, France and Germany want to water down the proposals. George Osborne refused, therefore, to accept the watered-down EU's version rules, which could breach the international agreement. He said to the EU finance ministers, “We are not implementing the Basel agreement, as anyone who will look at this text will be able to tell you”. Then, the Chancellor said “I’m not prepared to go out there and say something that will make me an idiot five minutes later.”
Brussels wants to prevent the UK from imposing stricter capital rules than those agreed for the EU, impinging, consequently, on national sovereignty. Under the Basel III rules governments are required to raise banks' capital reserves from 2% to 7%. But, the UK as well as Sweden want higher capital requirements than the 7% established by the Basel 3 agreement. In fact, they want national regulators to be able to impose tougher bank requirements without having to seek permission from the European Commission. Swedish Finance Minister, Anders Borg, said, "Either we have strong banks or the taxpayers take the risk, and I prefer to have strong capital in the banks than to take risks with the taxpayers". However, France and Germany are calling for full harmonisation on bank standards, and according to European Commission the UK’s plan would distort the internal market.
Under the EU Presidency’s compromise deal member states would be allowed to impose stricter capital requirements than what is provided in the Commission’s proposal, including requiring their banks to increase their capital buffers, on top of the 7% required by the new rules, up to 3% for total bank exposures and 5% for national exposures, without approval from the European Commission. However, as regards domestic exposure, if bank subsidiaries are established in another member state and there is no agreement between national supervision authorities, the European Banking Authority (EBA) will mediate, then if a member state wishes to go further, it would have to seek permission from the Commission. George Osborne could not accept such compromise, as he believes the UK has the right to set tougher capital requirements for its banks than the 7% imposed by the Commission.
However, the UK cannot veto such proposals, as they are subject to the ordinary legislative procedure with QMV required in the Council. In fact, according to the Council’s conclusions “the president of the Council noted the support of a qualified majority of delegations in favour of a provisional compromise text” on the reform of rules on capital requirements for banks. Margrethe Vestager, Danish Economy Minister, said, "We discussed a huge number of things, from 10am when the meeting began until now, two in the night. We can say we have an agreement, it needs technical work until it's completely done – by 15 May”. The EU Council Presidency is therefore expecting to reach a final agreement on the overall package at the Council next meeting on 15 May. In fact, they are expecting to reach a first reading agreement with the European Parliament.#
It is very unlikely for the UK to form a blocking minority, as its allies seem to have agreed to the above-mentioned compromise. Hence, because of QMV, as noticed by Juliet Samuel, in the CityAM, “the UK faces the prospect of losing control over its bank regulations despite being home to Europe’s biggest financial centre.”
The UK is, therefore, losing authority over the City of London through measures decided by QMV. Hence, as Bill Cash said, the Chancellor, when necessary, must be able to override European legislation to protect the taxpayer and the City of London. The Bill Cash’s Parliamentary Sovereignty Bill would have been a fundamental instrument to protect British national interests. It would have provided where necessary for the overriding of the European Communities Act.
On 15 May the Council unanimously agreed a general approach on the proposals amending the EU’s rules on capital requirements for banks and investment firms, the so called revised capital requirements rules (CRD IV), intended to transpose into EU law the Basel 3 agreement.
George Osborne has decided to drop his opposition to the package as the UK has won assurances that it could implement the Vickers banking reforms. However, the package fails to adequately transpose the Basel agreement as it has been softened at Germany and France request.
Under the EU Presidency’s compromise text, member states would be allowed
“to impose, for up to two years (extendable), stricter prudential requirements for domestically authorized financial institutions”. Moreover, according to the Council’s conclusions, “Such a decision by a national authority could only be overruled if, following a negative opinion by the EBA, the European Systemic Risk Board (ESRB) or the Commission, the Council votes by qualified majority against the measures.”
Under the compromise deal, member states would be able to require their banks to increase their capital buffers, on top of the 7% required by the new rules, up to 3% for total bank exposures and 5% for domestic and third country exposures, without having to seek prior approval from the European Commission.
The EU’s presidency will now start negotiations with the European Parliament, on the basis of the Council’s general approach. They are aiming at reaching agreement on the package at first reading, by the end of the month. It remains to be seen what will come out of the negotiations.