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European governments agree on new capital rules, bank resolution measures

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European governments agree on new capital rules, bank resolution measures

European Union ministers have agreed to reform banking capital rules in a move aimed at boosting financial stability across the trading bloc following the financial crisis.

Elements of the agreement were criticized by the U.K.'s finance minister Philip Hammond who said a departure from global standards to favor big banks in the eurozone could heighten risk, Reuters reported.

However, the European Council, which comprises finance ministers of member states, said the package agreed May 25 in Brussels contributes significantly to further reducing risk in EU banks while it is also an essential element for the completion of the banking union begun in 2012.

The accord comes after two years of debate among all 28 EU countries on how to implement internationally agreed rules drawn up after the financial crisis. The proposal aims to implement reforms set out internationally, including elements agreed by the Basel Committee on Banking Supervision and by the Financial Stability Board to ensure banks are more resilient in the event of future financial shocks.

The measures, which relate to bank capital requirements and the recovery and resolution of banks in difficulty, need final approval from the European Parliament in June before they are implemented.

On capital requirements, the proposal includes the implementation of a binding leverage ratio to prevent banks from excessively increasing leverage and a binding net stable funding ratio.

On recovery and resolution of banks in difficulty, the EU's Single Resolution Board, or SRB, will be given a clearer mandate to set the capital buffer that banks should hold against risk of failure. This will be set at 8% of large banks' total liabilities and own funds, though the SRB will be entitled to call for higher buffers from banks it deems less safe and lower buffers from those it regards as less at risk.

However, under the agreement, there will be more favorable treatment for large banks which belong to the EU's banking union in the eurozone, like BNP Paribas SA of France and UniCredit SpA of Italy, as their exposure to other countries in the eurozone area will be treated as safer domestic exposure.

Bank rescue fund

The overall accord, agreed after two previous failures to reach agreement, also paves the way for a deal to create a common backstop for the EU's bank rescue fund, the Single Resolution Fund to be used if the fund is short of resources.

This is because introducing internationally agreed banking capital rules would reduce risk and this in turn would allow more risk to be shared by EU countries. This would make it easier to create a common backstop fund for the Single Resolution Fund which the council of finance ministers has previously agreed could be created ahead of its agreed start date of 2024.

"The agreement on the banking package today will enable us to make progress on the other elements of the banking union," said Vladislav Goranov, finance minister of Bulgaria, which currently holds the EU presidency.

"Today's agreement will send a positive signal to the market. We hope therefore that the European Parliament will be able shortly to start negotiations allowing us to agree these proposals and enact them as soon as possible."

It was earlier feared the agreement might be delayed because of the emergence in Italy of a government led by the right-wing League and the populist Five Star Movement that is likely to be highly critical of the EU. In the event, Italy and Greece abstained from today's vote and said the deal on capital requirements should be matched by a deal on shared banking risk by June, while France and Germany fully backed the deal.