Will EU Have Two Tracks for Banking Rules?

Separate banking rules for the euro area and non-euro countries, proposed as part of the European Union's efforts to keep the U.K. in the bloc, were greeted with skepticism by lawmakers from Berlin to Brussels on concerns that they could damage the single market.

A draft EU-U.K. settlement published on Feb. 2 foresees the possibility of “different sets of union rules” on prudential requirements for banks and other measures to bolster financial stability for the bloc's nine non-euro states, including the U.K., and the euro area. This bifurcation may be necessitated by the need for “more uniform” rules for the currency bloc, according to the draft.

“A two-track approach to banking regulation would damage the European Union,” said Lothar Binding, the Social Democratic Party's lead lawmaker for finance in Germany's lower house of parliament. “It undermines the attempt to reach a level playing field within Europe. This approach would create chaos in the financial system in Europe, which the EU aims to avoid. It reflects a tendency toward renationalization.”

Since the financial crisis, the EU has been working to standardize bank rules across member countries, an effort overseen by the London-based European Banking Authority (EBA). That has been complicated by the creation of a banking union in the euro area focused on the European Central Bank, which supervises the currency bloc's lenders, and the Single Resolution Board, which handles failures.

The draft settlement, which EU leaders will discuss at a summit later this month, is intended to help keep the U.K. in the 28-nation bloc by satisfying Prime Minister David Cameron's demands for greater sovereignty.

Andrea Enria, head of the EBA, said on Friday that “common rules and convergence in supervisory practices are essential to preserve the integrity” of the single market. If divergence were allowed, it would have to be managed carefully, he said.

“If a multilayered single rulebook is to be introduced to achieve this in practice, then it has to be managed in an integrated fashion to avoid that regulatory differences generate barriers and uneven competitive conditions in the cross-border business between 'ins' and 'outs,”' he said.

'Ambiguous' Proposal for Different Banking Rules

Andrew Bailey, chief executive officer of the U.K. Prudential Regulation Authority, said any divergence among banking rules would be minimal because most rules begin with a single global source, the Basel Committee on Banking Supervision, and are then applied at national level.

“This is very much at the edges of the rule book,” he said at an EBA conference on Friday. “It would be quite wrong to think this is the heart and soul and a large part of the rule book, which is common” because of its origins at Basel and implementation at EU level.

The draft agreement is “ambiguous,” and much will depend on the wording of the final agreement reached by EU leaders, and how those words are applied in practice, said Frederic Oudea, chief executive officer of Societe Generale SA.

“The question is, will you have at the end of the day a single market or not?” Oudea said on Friday. “It needs to be further looked at. If it's not the single market then it will be an issue, but let's wait, it's too early.”

For Sylvie Goulard, a French lawmaker in the European Parliament, the “key issue” is already clear: “Do we fight to safeguard the single market, or don't we?”

Allowing different sets of banking rules “destroys what the EBA has been doing and everything since we have created” EU-level regulators, Goulard said. “If you take seriously the wishes expressed by the U.K.—to make Europe more effective, less fragmented, more competitive—I don't see why we should go in this direction.”

–With assistance from John Glover and Silla Brush.

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