EU's planned banking reform faces barrage of criticism

By Francesco Guarascio

BRUSSELS (Reuters) - Plans to overhaul European Union rules on bank capital were strongly criticized by several EU finance ministers on Tuesday, increasing uncertainty over financial regulation.

The European Commission, the executive arm of the EU, proposed in November a wide-ranging reform of rules on bank capital requirements and loss-absorbing buffers, mostly to incorporate into EU law agreements reached at global level.

But as EU finance ministers debated the proposals for the first time, many blasted the Commission plan, raising concerns about several elements.

Ministers from Eastern European countries and smaller EU states, such as Luxembourg, rejected a Commission proposal to allow EU banks to hold capital only in their home countries.

The reform is intended to reduce costs for banks, which would no longer be required to hold capital buffers across national subsidiaries.

But smaller countries in which foreign lenders operate fear that may mean bank subsidiaries are insufficiently capitalized, with negative consequences for local taxpayers if they fail.

European schemes to protect banks and depositors at EU level are already in place, but smaller states think that is not enough.

Luxembourg finance minister Pierre Gramegna urged the Commission to make sure the proposal would not reduce financial stability and security for local bank depositors.

British finance minister Philip Hammond criticized another Commission proposal which would require non-EU systemic banks to reorganize their activities in the EU under a holding company.

The plan aims at making big lenders safer but would also increase their costs. Big U.S. banks would be the first to be hit, but as Britain prepares to negotiate its exit from the EU, London fears British lenders may be affected after Brexit.

European Central Bank Vice President Vitor Constancio also chipped in, saying the proposals did not sufficiently address the divergent application of banking rules in EU states, and warning that supervisors may find it difficult to oversee banks.

Germany, the biggest EU economy, has also criticized the Commission's plan for not appropriately reducing bank risks. Berlin fears it could end up rescuing lenders from weaker euro zone states with German taxpayers' money, if banks are not pushed to ensure their capital shields are sufficient.

(Reporting by Francesco Guarascio; Editing by Catherine Evans)

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