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LONDON, April 27 (Reuters) - The European Union's banking regulator told member states on Friday he would take them to court if they allowed local lenders to circumvent tougher capital rules.
European Banking Authority chairman Andrea Enria issued the blunt warning as EU countries finalise stricter standards for bank buffers and apply lessons from the financial crisis when many lenders were rescued by taxpayers.
EU finance ministers will hold a special meeting next week in a bid to end a deadlock over how to turn the global Basel III accord on tougher bank capital standards into EU law.
Enria is concerned capital standards will be diluted if states, rather than the EBA, have the last word on whether capital held by banks in their buffers passes quality checks.
If only member states endorsed instruments being used in buffers, it would convey the misleading impression that such instruments also have EU-wide recognition, he said.
In a speech in Dublin at a central bank of Ireland conference on regulation, Enria said he would act if the draft law failed to give him the necessary legal tools to impose consistent pan-EU bank capital standards.
"If we consider that some instruments that are not of sufficient quality have been accepted, we also have the possibility to open formal procedures for breach of European law," Enria said.
The EBA clashed with Germany, the EU's biggest state, last year over what types of capital could be included in an EU stress test of lenders, and effectively won the day.
It has also set a temporary 9 percent core capital target for banks in the EU by the end of June to help shore up investor confidence.
Enria said that in the past supervisors were "played against each other" by banks wanting to include increasingly complex hybrid instruments - a mix of debt and equity - in their capital buffers which failed to absorb losses during the crisis.
Some EU countries say that as there is no common definition of a share in Europe, it would not be possible to say that core capital buffers must only comprise pure equity, as Britain is pushing for.
Instead, the EU law will list criteria for including non pure-equity instruments in core buffers.
Enria said a strong mechanism was needed to monitor how this list was respected to make sure "there is no watering down the requirements".
"Having strong enforcement tools is essential: Supervisors have lost control of the definition of capital once and we should not allow this to happen again," Enria said.
"We already hear that new ways are being devised to smooth the impact of permanent write-downs or to circumvent the prohibition of dividend stoppers for hybrid instruments." (Editing by Dan Lalor)