European Union lawmakers yesterday approved a legal text urging global banking regulators not to significantly raise capital requirements for lenders, the EU’s latest move to influence a review of rules seen as too favourable to US banks.

The text was approved by the European Parliament’s economic committee just a few weeks before a meeting of the Basel committee of banking regulators on November 28-29, which is expected to finalise new rules on how banks assess risk and set aside capital cushions to absorb losses.

EU leaders have called for changes to the proposed Basel reform, which will affect top banks globally, fearing it would increase costs for European lenders, while favouring their US rivals, and may result in a fall in lending in Europe.

One of the reform’s objectives is to reduce the use of internal models used by some banks to determine risk and capital buffers after regulators found huge variations in calculations.

European banks like Deutsche Bank are likely to be hit hardest

Internal models are used mostly by European banks while American lenders rely on standardised models. The Basel reform would increase the use of standardised models.

This could force some European banks to set aside more money against risk and would raise costs for a sector already struggling in Europe because of low interest rates and a sluggish economy.

Eurozone banks like Deutsche Bank, which is already facing question marks over capital, are likely to be hit hardest unless changes are made to the proposed rules.

The text adopted by the EU Parliament’s economic committee calls for changes to the planned reform to avoid “unduly penalising the EU banking model”. EU lawmakers have the power to amend the new global banking rules when they are turned into EU laws.

The document would need a supporting vote by the entire European Parliament, scheduled for November 21-24, to become a formal resolution.

In a sign of a possible compromise, the chairman of the European banks watchdog said on Wednesday that the Basel committee was set to make significant changes to the proposed reform.

The reform is meant to clarify the application of existing global banking rules, known as Basel III, but European bankers see the changes as so wide that they have labelled the process as Basel IV, as if it were a whole new set of rules. (Reuters)