The European Commission has abandoned plans to publish laws on bank capital rules this month, the EU executive said, amid a dispute that puts a question mark over its centrepiece reform to the way banks work.
Charlie McCreevy, the EU's outgoing commissioner in charge of the banking shake-up, had intended to propose a law that would have demanded banks set aside more capital for the loans they give.
But in the face of opposition from industry and global discord as to how such new rules would work, Mr McCreevy has dropped plans to publish a proposal before his mandate officially ends on October 31st, leaving it for his successor to take up some time in 2010.
"The issue is not ripe to be decided on yet," said Oliver Drewes, a spokesman for McCreevy.
The lapse casts uncertainty over the fate of the controversial new rules because it is unclear who will replace Mr McCreevy, a vocal advocate of light-touch regulation.
It may delay the introduction of the rules, which many hoped would curtail bank's borrowing and with it their appetite for risk-taking that have been blamed for causing the worst economic slump in a generation.
It will also concern those in Brussels who believe that the momentum to change the way banks work may be fading as the European economy shows signs of recovery.
Mr McCreevy's successor is unlikely to be in place until the new year as the EU is in the throes of adopting a new constitution as well as appointing a fresh commission. Mr McCreevy will remain in office beyond the end of the month, but he will be powerless.
"The time to act is now," said one official. "When we have just had a crisis. If a bank is too big to fail, then it's too big."
Elemer Tertak, the director of financial institutions at the Commission, confirmed the delay but underlined the EU executive arm's commitment to introducing tough new capital rules, including a so-called leverage ratio.
The leverage ratio, which many see as the most powerful tool to cap banks' activity, gives them little wriggle room when setting aside capital to protect themselves against unpaid loans, for example.
Previously, a bank could argue that some loans were less risky and required them to save less capital. The leverage ratio does away with this distinction and demands a fixed percentage of all loans, for example.
But Mr Tertak said there was disagreement about how to use the leverage ratio. A second contentious proposal is dynamic provisioning, a way of forcing lenders save for a rainy day.
"There are differences," he said. "France, for instance, says we need a leverage ratio but it should not be binding. It should be something that gives guidance. Others want it binding, like the US and Switzerland."
International agreement will be crucial to changing the rules and it would be hard for the EU to act alone.
Brussels is awaiting the recommendations later this year of the Basel committee, a group that sets international capital standards for banks.
"The commission chose to wait for the Basel committee," said one senior lawmaker. "There has been heavy pressure from the banking industry on the commission to take its time after the rush on hedge funds proved to be a mistake."
Reuters