Drama in last chapter of trading-book plan

By Anna McLauchlin

Date: 09/06/05

The EU is wavering over whether to delay extra rules for investment banks on the amount of capital they have to hold.

The new capital requirements - under what is known as the 'Trading Book Review' - would apply to banks trading shares or using financial instruments to hedge their risks.

They were supposed to be incorporated in the European Parliament's draft of a new law known as the Capital Requirements Directive (CRD).

The CRD, currently making its way through the EU legislative procedure, will enshrine in EU law a new set of risk capital rules for credit institutions. These were drawn up by a supervisory body known as the Basel Committee, but when the European Commission wrote the CRD the Trading Book Review had not been created.

As a result, German Christian Democrat Alexander Radwan had agreed to integrate the extra rules into his draft for MEPs to vote on in plenary session in September.

But some investment banks, notably UK firms with big trading interests, are unhappy about one of the rules, which would force them to increase the amount of capital they would need to hold for unsettled or failed trades, and have demanded a debate on the issue.

They are pushing for the rules to be modified before being put into the Parliament's draft.

"We're confident that there is time to sort out [those parts] of the review that need more work," said one British banking source.

The banking industry met the Basel Committee and the International Organisation of Securities Commissions (IOSCO) in New York on 1 June to put forward its concerns.

If there is no consensus, the Commission may have to put the rules in a separate piece of legislation, which a Commission official said would delay adoption until at least 2007.

An expert from the European Banking Federation (EBF) warned that the delay could hinder Europe's financial markets. "The EBF's position is that the review should be adopted as a package in September," she said. "Banks need as much certainty as possible and if it is not included a huge chunk will be uncertain which is not practical."

Article reports that the European Commission was undecided whether to incorporate the so called Trading book review, setting out capital requirements and other rules for investment banks, into its proposed Capital Requirements Directive, or to pass it separately at a later point.

• Primary Source