Banks in the European Union could face fines of up to 10 percent of turnover if they fail to comply with tougher capital and liquidity rules, the bloc's financial services chief said on Wednesday.
Michel Barnier, the EU's internal market commissioner, unveiled draft laws in Brussels to implement the new global Basel III accord which will force banks to hold more and better quality capital from 2013 in a bid to keep taxpayers off the hook in a future financial crisis.
The draft measures largely mirror Basel III, which was approved by leaders of the top 20 economies (G20) last November such as a minimum core equity capital ratio equivalent to 7 percent of a bank's riskier assets.
But it goes further in some cases by introducing tougher sanctions, ways to dilute the influence of credit ratings, and improvements to corporate governance, such as requiring boards to consider more female members and introduce whistle-blowing programs.
If institutions breach EU requirements, the proposal will ensure that all supervisors can apply sanctions that are truly dissuasive, but also effective and proportionate, the commission said in a briefing note.
For example, administrative fines of up to 10 percent of an institution's annual turnover, or temporary bans on members of the institution's management body.
The fines would apply to unauthorized banking services, failing to notify authorities when acquiring holdings above a certain threshold, not meeting governance requirements, going beyond limits on exposures to other banks, failing to meet liquidity rules and falling short on reporting data to supervisors.
Barnier stuck to his plan for making the Basel standards fixed in EU law, meaning that member states can only require banks to hold extra capital under a limited set of circumstances.
He said he wants to create a single rulebook so that the same standards are applied in every corner of the EU, a step banks will welcome as it gives them supervisory consistency.
Higher levels of capital requirements in one member state would also distort competition and encourage regulatory arbitrage, the commission said.
Britain, Spain, Sweden and other EU states have argued that Basel III is simply a minimum standard that allows countries freedom to top up at will -- with some of them already insisting local banks comply with Basel III already or levels above it.
Many of the UK banks, for example, hold capital of around 10 percent. EU states and the European Parliament have the final say on Barnier's draft measures and some changes are likely.
The Commission said there is some flexibility built into the draft measures that will allow individual member states to require banks to hold more capital:
-- if the property market is overheating, member state can set higher capital levels and tighter loan-to-value limits on commercial and residential loans;
-- member states can require banks to build up a counter cyclical buffer up to 2.5 percent, to ensure financial stability or dampen excess lending as outlined under Basel III, that can be tapped when some loans turn sour;
-- member states can require extra capital at an individual bank if its activities appear very risky but this step has to be justified.
Barnier spelt out how he wants banks to rely less on external ratings from agencies such as Moody's, Standard & Poor's and Fitch for calculating regulatory capital buffers.
This stops short of a more draconian U.S. law which prohibits banks for relying on external ratings at all, which has proved difficult to implement in practice.
The EU measure also leaves the door open to some banks in Germany and elsewhere to include silent participations -- a form of hybrid debt -- in their core capital calculations but only if of high enough quality.
This month's stress test of EU banks barred the inclusion of most silent participations amid doubts this form of capital would be able to absorb losses fast enough in a crisis -- sparking a pullout from the test by German landesbank Helaba.
Barnier said the criteria he has proposed is consistent with the stress test.
Basel III introduces a global set of standards for liquidity for the first time, addressing a key lesson from the crisis that several banks failed due to funding problems.
The EU measures says banks will be required to have appropriate short-term liquidity coverage as of 2013, with details finalized by 2015.
A separate legislative proposal will be put forward at a later date to introduce a binding longer-term liquidity buffer due by 2018. The European Banking Authority will test different criteria for what will be eligible for inclusion in short-term liquidity buffers.
Basel III states that some 60 percent of the buffer must be in the form of highly liquid government bonds which will remain zero risk weighted.
(Reporting by Huw Jones. Editing by Jane Merriman)