EU FINANCE ministers yesterday backed proposals for urgent reforms to lessen the impact of economic cycles on the banking sector.

Meeting in Brussels, ministers agreed fundamental changes were needed to banking and accounting rules to encourage banks to build up bigger capital cushions in good times, which could be drawn on in an economic downturn.

But there was little support for German pleas to relax bank capital rules temporarily to encourage more immediate lending.

“We need to focus more and more on long-term issues . . . We need to see strong buffers in banks in good times. It is important that we mend the banking system so that credit gets running again,” said Anders Borg, Sweden’s finance minister, chairing his first Ecofin meeting under the Swedish presidency.

Mr Borg said a “large majority” of countries had backed this stance, so the onus was now on the European Commission to come forward with more concrete proposals. Senior officials confirmed they would be putting forward “a mechanism to mitigate procyclical effects . . . on banks” in October.

French officials were delighted with the outcome. “We were the only ones talking about this a year ago,” said one.

But efforts by Peer Steinbrück, Germany’s finance minister, to achieve a temporary relaxation of the so-called Basel II rules on capital requirements to aid bank lending drew little support, although the commission is to study this issue and report back.

Mr Steinbrück argues that the procyclical risk provisions in those rules require banks to hoard capital during the recession and refrain from risky lending, exacerbating the crisis and threatening another credit crunch later in the year.

Although Germany does not oppose the Basel II standards in principle, Berlin’s domestic concerns put it in the unusual position of opposing tighter banking restrictions. The country faces a general election in September and politicians have grown increasingly critical of banks for not passing on cheap European Central Bank funds to customers.

However, finance ministers’ call for longer-term reforms to address procyclicality did generate a more sceptical response among some players in the City of London, Europe’s biggest financial centre. The Institute of Chartered Accountants in England and Wales said it believed too much weight was being put on potential accounting rule changes, rather than on banks’ prudential capital rules. – Copyright The Financial Times Limited 2009