EU to Change Bank Rules to Limit US Contagion

Banks must tie up more capital to cover risky operations in future by having limits on how much they can lend to one party, the European Commission proposed on Wednesday.

The European Union executive wants to apply lessons learnt from the credit crunch by updating existing EU rules on bank capital.

"These new rules will fundamentally strengthen the regulatory framework for EU banks and the financial system," EU Internal Market Commissioner Charlie McCreevy said in a statement.

EU states and the European Parliament have the final say on the reforms, which will restrict lending by banks beyond a certain limit to one party and improve supervision of cross-border banks.

Banks that sell securitised products or repackaged debt such as those that turned toxic in the credit crunch, will have to share the risk with buyers. This will be done by the bank retaining a stake of at least 5 percent in the products.

McCreevy said he would also propose at a later date to reform EU rules guaranteeing people's bank deposits.

AP

Under existing EU rules, all bank deposits are guaranteed for at least 20,000 euros ($28,250) and McCreevy will propose improvements to speed up payouts and increase the level of coverage.

While European officials insist the continent does not need a bailout plan of the scale under debate in the United States, EU president France called for stronger policing of EU financial markets and said an Oct. 15 meeting of EU leaders in Brussels would largely focus on the bloc's response to the crisis.

"We must go towards (having) a European policeman regarding how markets function, the supervision of banks and insurers. It would mean a reinforcement of European regulators in all that is related to financial mechanisms," France's minister for European affairs, Jean-Pierre Jouyet, told France Inter radio.

He called on the European Central Bank to take into account the current situation in future interest rate decisions though he did not explicitly urge a reduction in rates.

The Oct. 15 meeting will also look at whether mark-to-market accounting rules, seen by critics as exacerbating writedowns at banks, could be eased, an EU official said. Under mark-to-market, a bank periodically has to price assets according to the going rate, a hard task when many of the toxic securitised products are shunned.

French Prime Minister Francois Fillon told French daily Les Echos that making the rule "more intelligent" was one of the ideas on the table awaiting a response from European partners.

U.S. regulators on Tuesday gave the financial industry a reprieve from the mark-to-market rule in a bid to slow or reverse mortgage-related losses on banks' balance sheets.

The EU's response so far has largely been at national level, with Ireland on Tuesday guaranteeing all bank deposits in a bid to insulate its sector from further fall-out from the global credit crunch.

Jean-Claude Juncker, chairman of the Eurogroup of 15 nations using the euro single currency, told French radio on Wednesday the repercussions of the crisis would be felt for months, but vowed that EU officials would not let any big bank fail.

He told Europe 1 radio that Europe did not need a bail-out plan such as the $700 billion rescue package being debated in the United States but said he would be among EU officials meeting in Paris on Saturday to study responses to the crisis.

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