Osborne slams EU bank talks, fears "idiot" deal

BRUSSELS Wed May 2, 2012 10:55pm BST

Britain's Chancellor of the Exchequer George Osborne tours Google Inc's technology campus during the official opening in east London March 29, 2012. REUTERS/Chris Ratcliffe/Pool/

Britain's Chancellor of the Exchequer George Osborne tours Google Inc's technology campus during the official opening in east London March 29, 2012.

Credit: Reuters/Chris Ratcliffe/Pool/

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BRUSSELS (Reuters) - George Osborne accused fellow European Union finance ministers of contemplating a deal to tighten bank capital rules that would make him look "like an idiot", in an outburst that marked high tension during day-long talks in Brussels.

In remarks at the negotiating table, relayed on television to watching journalists, Osborne, who says he wants much tougher controls to avoid a repeat of the current crisis, fumed that complex regulations being discussed could dent the credibility of Europe and harm London, its top financial market.

"I am not prepared to go out there and say something that is going to make me look like an idiot five minutes later," Osborne said, referring to conditions in new rules that could be viewed as loopholes to let some banks in Europe sidestep a 7-percent minimum capital ratio agreed by global regulators.

However, five months after Prime Minister David Cameron angered Britain's partners by vetoing an EU fiscal treaty, a visibly agitated Osborne told his peers: "I am not asking for some UK carve out ... I will not be painted as somehow anti-European, demanding something especially for London."

Yet Michel Barnier, the EU commissioner in charge of financial regulation, hit back at Osborne, saying he was looking for an effective opt-out with a proposal that would let Britain impose higher capital ratios than elsewhere in Europe on its banks - something France and others fear could disadvantage continental institutions.

"London is a very important centre but... there are other centres alongside London which also merit consideration," said Barnier, a former French government minister.

Osborne, however, was adamant. "People will listen to what I say ... I represent the largest financial centre in Europe.

"You've got to allow me to sit down and go through the issues. You have not done that," he said, adding he had resorted to checking news on his mobile phone as he waited to be involved in discussions that had by that time gone on for 10 hours.

He accused other ministers of trying to water down the EU's version of rules laid down by global regulators on the Basel committee which are designed to guard against future financial crises, and said he could not support them.

At the heart of the dispute is the freedom states have to enforce stricter capital rules than those agreed for the EU.

Britain and Sweden, which have two of the largest banking sectors in Europe relative to their economies, want the freedom to take extra steps to make banks safer.

STRUGGLE

Ministers face pressure to break this deadlock, which comes as many of Europe's 8,300 banks struggle with billions of euros of unpaid loans ahead of a self-imposed June deadline to finalise new capital rules.

London remained reluctant to compromise despite calls from Spain, whose banks have suffered huge losses inflicted by a property crash, that rules were vital.

"At this time of financial crisis, we need to clear up all doubts about the quality of European banks," Spain's Economy Minister Luis de Guindos said earlier in the day.

"We need to guarantee a level of quality capital that is enough to face future crises."

Standard & Poor's cut the credit rating this week of 11 banks in Spain, which has sunk into its second recession in just over two years.

Denmark, holder of the bloc's six-month rotating presidency, had redoubled its efforts to find a deal, calling the exceptional meeting on Wednesday, but their efforts crumbled in the face of resistance to their pan-European formula.

Their aim is to translate the higher capital standards set by the Basel Committee of regulators into EU law, turning it into reality for banks by the start of next year.

The Danes want to achieve a consensus and strike an accord with the European Parliament by the end of June.

NEGATIVE MESSAGE?

As much as the technicalities of bank balance sheets, the dispute is the result of a struggle for influence and power in a bloc shaken by the worst financial crisis in a generation.

Britain has been fighting to maintain its authority over the City of London, Europe's financial capital, as other EU members move to centralise supervision of banking and finance.

Europe's capital regime, when decided, will be closely studied in the United States and may influence how policymakers there interpret the Basel standards, while investors are eager to see the EU repair its vulnerable banking sector.

"Not having a European banking union ... on common capital requirements ... makes it very difficult for the euro project to work," said Eric Stein, a portfolio manager at Eaton Vance in Boston that invests in European assets.

"If nothing happens, it will be a continued area for stress in Europe and send a very negative sign."

London and Stockholm argue they need to protect the interests of taxpayers who could be called on to bail banks out if they face collapse.

France wants capital standards to be more uniform across the EU and is worried that international banks based in London could cut lending elsewhere in Europe if Britain forces them to raise their capital yet further.

Some diplomats suspect the dispute is fuelled by concern that deposits and other business might flow to British banks were they to be better capitalised than French and German rivals and thus safer in the eyes of investors.

One compromise discussed by ministers would be to allow a margin of flexibility so countries that want can require their banks to increase their capital buffers up to a certain limit, perhaps as much as 10 or 12 percent of risky assets for up to two years. This compares with Basel's minimum of 7 percent.

(Additional reporting by Claire Davenport; Editing by Alastair Macdonald)

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