Stand-off traps EU's "too big to fail" bank reform in limbo

By Huw Jones

LONDON, Oct (HKSE: 3366-OL.HK - news) 26 (Reuters) - European Union lawmakers have failed in their latest attempt to revive a draft law giving regulators powers to split up risky banks in order to prevent a repeat of the costly taxpayer bail-outs during the financial crisis.

A two-year stalemate between the European Parliament's centre left and centre right has so far played into the hands of the region's banks who want the 2014 proposal scrapped, arguing that other post-crisis rules already tackle the issues.

Centre right parties are against automatically splitting up banks if risky trading passes a set threshold, while the centre left is against giving supervisors too much discretion under what is known as the bank structural reform (BSR).

This impasse is despite EU states, who have joint say on the draft law, having agreed a position ahead of final negotiations.

Lawmakers responsible for the measure and Valdis Dombrovskis, European Commission vice president and in charge of financial services, made no progress at a special meeting in Strasbourg on Tuesday night, following a year or so in limbo and an inconclusive committee vote.

"I think there will be a stalemate for quite some time," said Gunnar Hoekmark, the Swedish centre-right lawmaker who is steering the measure through parliament.

"Either the socialists accept our offer or we will still be where we are," he said, adding that Dombrovskis gave no indication he would withdraw the stalled draft law.

BANK FEARS

The political stand-off is a sign of how policymakers are treading a fine line in balancing regulation with the need to avoid crimping the ability of banks to lend to companies and stimulate much-needed economic growth.

But concerns over banks needing state bail-outs still looms large in Continental Europe, most recently when Deutsche Bank (LSE: 0H7D.L - news) faced a crisis of confidence over its ability to weather a fine of up to $14 billion threatened by U.S. regulators.

Jakob von Weizsaecker, the German lawmaker negotiating on behalf of the centre left, said that events at European banks in recent months have shown that the "too big to fail" problem in euro zone banks still needs addressing.

"(The) meeting last night was timely as it shows that the problem we want to solve has not gone away," he said.

Debate over the reform will likely be eclipsed in coming months by a separate draft EU law that implements a global decision to require big banks like Deutsche Bank and Societe Generale (Swiss: 519928.SW - news) to issue debt known as TLAC that can be written down in a crisis to replace burnt through capital.

Britain's decision to leave the EU would also likely affect the scope of the BSR. The UK has already ordered its banks to wrap their retail arms with their own capital cushion from 2019. (Editing by Alexander Smith)