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EU's Barnier warns U.S. of tit-for-tat action over banks

European Commissioner for Internal Market and Services Michel Barnier addresses the European Parliament during a debate on the European Bank
European Commissioner for Internal Market and Services Michel Barnier addresses the European Parliament during a debate on the European Bank

By Huw Jones

LONDON (Reuters) - The European Union's financial services chief warned of tit-for-tat action if the United States pushes ahead with plans to impose extra capital requirements on foreign banks.

In December, Federal Reserve Board Governor Daniel Tarullo said foreign banks should be required to hold as much capital as their U.S. counterparts, regardless of how their overseas parent companies are funded.

The EU fears this will fragment global capital markets and its financial services commissioner Michel Barnier said big European banks were as well capitalized as American banks.

"I don't want to be forced to do the same as the Americans," Barnier told reporters on the sidelines of a British Bankers' Association conference in London.

"My objective is to find agreement with the Americans on foreign banks. My mindset is not one of threats but my objective is to find a free and fair banking relationship. If we don't find such an agreement, we will end up having to do the same thing," Barnier added.

In a speech to the conference, Barnier defended the bloc's new law to cap bankers' bonuses from 2014, saying it would ensure lenders manage risks properly.

Britain is challenging the cap in the European Court of Justice, arguing that limiting a bonus to no more than fixed pay from 2014 - or twice that amount with shareholder approval - will make banks riskier by pushing up fixed pay.

Barnier said he regretted that Britain was taking legal action. "I remain confident that the measures are balanced and reasonable, in the interests of financial stability. And that our legal basis is the right one," he said.

Shareholders of banks should play a role in controlling overall pay packages at banks, including fixed pay, he added.

Many European banks had to be shored up by taxpayers during the 2007-09 financial crisis, triggering public anger that bonuses were still being paid in some cases.

NOTHING DRAMATIC

Top lenders across the EU face a third stress test and accompanying asset quality review next year, raising concerns that more capital holes will emerge.

This comes ahead of handing supervision for 130 leading banks in the euro zone to the European Central Bank from November 2014.

"Despite substantial improvement, more needs to be done on the quality of banking assets. We don't expect dramatic results. But of course, these exercises may throw up certain funding gaps," Barnier said.

Banks with shortfalls will need to reduce their assets or tap markets, he said.

"If banks are not able to raise capital in the markets - which could still be the case for a few - we will have a clear framework in place, with bail-in, and national and if necessary European backstops," Barnier said.

But while countries who cannot afford to pay for the repair of weak banks will be able to apply for an international bailout, as Ireland did, direct euro zone aid for the banks affected remains unlikely in the face of German opposition.

The banking union has raised concerns in Britain that it faces being sidelined in EU financial rule making but Barnier said the bonus cap was the only law Britain has been outvoted on since he took up the reins in 2009.

He acknowledged the banking union raised fears in Britain.

"But rest assured. We have no interest in undermining the UK, no interest in threatening London's place as the largest European financial centre," Barnier said.

He will leave his post next year when a new European Commission is appointed and one of his last legislative proposals will be on cutting risk in banks.

There may still be banks that are too big to save and too complex to resolve, Barnier said.

"That is why we are working on a common framework on the structural reform of banks and plan to come forward with a proposal in the coming weeks," he added.

The proposal will be based on a report chaired by Finnish central bank governor Erkki Liikanen which recommended ways to cut risks in banks by separating out trading.

Britain is already planning such changes recommended in its own Vickers Report by requiring high street banks to ring-fence their deposit-taking arms with extra capital. France and Germany are also taking steps to cut risks from trading at banks.

Barnier said his draft law, due in November, would respect the different banking models in Europe.

(Additional reporting by John O'Donnell in Brussels; Editing by Steve Slater and Susan Fenton)

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