Risk of EU-US standoff grows as bank capital directive enters final phase in Europe

LONDON, July 5, 2005 (Global Risk Regulator) -- New capital rules to bolster the solvency of European banks will move significantly closer to becoming law across the 25-nation EU bloc next week if, as expected, a key parliamentary committee completes its scrutiny of the legislation by voting on a raft of amendments. However, this milestone in the passage of the Capital Requirements Directive (CRD) will also make it very difficult to introduce any further major changes to the proposed law, and raises the possibility of a standoff between Europe and the US over elements of the new capital rules.

The CRD transposes into EU law the proposed Basel II accord, which is likely to be adopted by 100 countries around the world, starting in 2007. Since the June 2004 publication of the Basel II text, following six years of sometimes tough negotiations, Europe, the US and other countries have been engaged in incorporating the new rules into their own laws and regulations.

But, while this procedure is moving to a conclusion in Europe, the US rulemaking process has been derailed. At least one of the federal regulatory agencies in Washington believes fairly fundamental changes to the Basel II accord may be required. In Europe, regulators say that accommodating such demands is about to become virtually impossible.

José Mariá Roldán, head of banking regulation at the Bank of Spain, and chairman of the Committee of European Banking Supervisors, says: "I don’t see how we can [make significant changes to the CRD after mid-July]." He does not entirely rule it out. But says it would be "very hard."

"The Europeans have a dilemma," says one close observer. "They are deeply reluctant to make any further changes to their new capital requirements law, but neither do they want to see the US walk away."

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