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European rules would not stand in the way of Vickers

The directive implementing capital requirements for banks within the European Union will not stop the Government imposing the higher requirements on retail banks recommended by the Independent Commission on Banking, says the head of the European Banking Authority.

Under rules already agreed under Basel III, banks will have to hold 7 per cent core tier one capital from 2019. The rules are being introduced in the European Union through the European Commission’s proposed Capital Requirements Directive 4.

In a hearing with EBA chairman Andrea Enria, members of the joint committee on the draft Financial Services Bill raised concerns from the Treasury and the Bank of England governor Mervyn King that CRD4 would stop the UK applying the 10 per cent capital requirement on ringfenced retail banks proposed by Sir John Vickers’ commission.

Basel’s Pillar II capital requirements mean additional requirements can be placed on banks to cover risks not mitigated by the 7 per cent minimum in Pillar I. Enria said the directive proposes that Pillar II be used for classes of banks with specific risks rather than single firms as it is under Basel.

He said this and the discretionary counter cyclical capital of up to 2.5 per cent, which can push the level of capital banks must hold under pillar I to 9.5 per cent, allows the flexibility for the UK to apply the higher requirements. “The flexibility is in the directive,” he said.

However, he warned any additional requirements beyond the standard 7 per cent in CRD 4 could undermine the level playing field provided by the single rule book and so must be discussed at a European level.

He said: “Each and any increase in capital requirements should be considered as possible without scrutiny at the European level. Clearance is a strong word, but it needs to be discussed at European tables, co-ordinated with other authorities and be subject to some sort of review.”

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