Clarissa Tan

Basel III and the EU’s strange desire not to compete

Basel III and the EU's strange desire not to compete
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Greece is the centre of European attention, but as George Osborne met with other EU finance ministers today there was another issue bubbling in the background — Basel III. This had been brewing for a while and is yet one of those matters that threatened to isolate Britain from the rest of the EU (though some would argue this is a good place to be).

The Chancellor this morning appears to have agreed to the Basel III accord, which stipulates the amount and quality of capital that banks are required to keep. But this was after much haggling — and an Osborne outburst where he said signing on to the original banking capital rules would make him look ‘like an idiot’ — saw amendments being added. Whether the revamped agreement will show that Osborne stood firm or capitulated remains to be seen as more details emerge.

One thing stands out in all the brouhaha — Britain had actually been asking for the right to go over and above the requirements stipulated by the accord. Basel III requires banks to have a capital buffer equivalent to 7 per cent of risk-weighted assets; Britain wanted the national discretion to top up minimum capital buffers to 10 per cent or more if the need arose. Most of the other EU countries — with the notable exception of Sweden — weren’t enamoured of this: they feared that safer banks in the UK would drive even more capital to the City of London and away from them.

Besides the key issue of national sovereignty, this is also one of those areas where it looked like the EU was hoping to drag everything to the lowest common denominator – why can’t an independent country make its financial institutions sounder if it wants to? Yes, the reality is of course more complex, but in essence this is what it boiled down to. Many EU nations, particularly the cash-strapped eurozone ones, are walking a fine tightrope between restoring faith in their financial sectors and not making too-stringent requirements of their banks at a time when stimulatory lending is required. They’re thus operating on the principle of fear – nullifying the competition instead of competing back. It’s no way to get your economies back in business.