National Bank Regulators Would Get Enhanced Power Under EU Plan

By John Rega and Meera Louis

Sept. 30 (Bloomberg) -- Regulators in individual European Union countries would get enhanced authority to police banks' foreign subsidiaries under a draft proposal before the EU.

Conceived in the months before the worsening of the current financial crisis, the plan is intended to make it easier for regulators to identify troubled banks earlier by giving the authorities a broader overview of lenders' financial health.

Each bank's home country regulators would have the power to set overall capital requirements for lenders headquartered within their borders, according to the draft, obtained by Bloomberg News. Currently, foreign subsidiaries are the primary province of the country in which they operate.

Government-led bailouts this week of three European lenders -- Brussels- and Amsterdam-based Fortis, U.K.-based Bradford & Bingley Plc and Germany's Hypo Real Estate Holding AG -- add urgency to the plan. Those actions prompted fears that the crisis that bankrupted Lehman Brothers Holdings Inc. and prompted a proposed $700 billion U.S. bank rescue will engulf Europe.

``It makes sense to have one set of regulations about capital, and to talk to one regulator about it,'' said David Green, the former head of international policy at the U.K. Financial Services Authority. ``The trick is to get the balance between coherent decision-making and the interests of the home regulators, and their stakeholders.''

The plan by EU Financial Services Commissioner Charlie McCreevy, which will be released Oct. 1, seeks to close gaps in the EU's diffuse regulatory system by giving home-country regulators more of an overview of multinational banks. McCreevy said yesterday that the financial turmoil of the past year may affect growth and lead to further pressure on public finances.

`Preserve Control'

``We have been for a long number of years trying to get some kind of European supervisory authority for those institutions that have cross-border reach,'' McCreevy said in an interview with RTE Radio in Dublin. ``It is particularly difficult to get agreement among member states who want to preserve control of supervision within their own member states.''

Oliver Drewes, a spokesman for McCreevy, declined to comment on the plan.

The shift may draw resistance from smaller and Eastern European countries where banks based in Frankfurt, London, Paris and other financial centers hold large market shares.

Regulatory Friction

It could also cause friction between larger regulators, Green said. Spain's Banco Santander SA has bought U.K. banks including Abbey National, Bradford & Bingley and Alliance & Leicester Plc.

``If I am, say, the FSA, I might be uncomfortable with leaving all of Abbey's regulation to Spain because Santander owns Abbey,'' Green said.

The plan, which may still be revised by EU commissioners at an Oct. 1 meeting, must be approved by national governments and the European Parliament. Both policy-making bodies must agree for the package to become law, which would take effect at the start of 2011.

The legislation also seeks to boost capital requirements for asset-backed securities, set stricter limits for how much risk a banks can take on from any one source and harmonize rules for what type of ``hybrid securities'' count as stock capital. The rules would update the EU's implementation of the global standards known as Basel II.

EU finance ministers have lined up behind McCreevy's plan to mandate ``colleges'' of regulators for each multinational bank, to bolster cooperation and speed up information sharing, especially in the case of a crisis.

Home-Country Authority

The draft commission proposal may advance the idea by giving the home-country authority greater say within the college over how much total capital banks must hold to guard against losses. An initial plan in June kept largely within the current responsibilities, with the EU's Committee of European Banking Supervisors in London mediating disputes between regulators.

``The challenge ahead is to maintain this momentum to deliver the full principle of consolidated supervision,'' the European Banking Federation in Brussels said in a statement. The group said it ``strongly welcomes the planned amendments'' to supervisory arrangements.

The commission also may ease proposed restrictions on bank investments in asset-backed bonds, according to the draft. The draft reduces the amount that the sellers of such securities would have to hold, to 5 percent from 10 percent, in order for EU lenders to be able to freely buy the instruments.

McCreevy is pushing the idea to make lenders more cautious and better able to reduce risk.

To contact the reporters on this story: John Rega in Brussels at jrega@bloomberg.net; Meera Louis in Brussels at mlouis1@bloomberg.net.