The EU finance ministers have agreed that banks must have more capital to counter their risk-taking. That way, it's hoped they won't need bailing out by the taxpayer.
The European Union has long agreed that banks should be forced to keep capital in reserve in case their investments go wrong, but it has been harder to find unity over the precise form of that contingency plan. That was one of main items on the agenda at the meeting of Europe's finance ministers in Brussels on Tuesday.
As so often, it was Britain who held up agreement, but this time with a twist: surprisingly, the British thought the new rules being considered didn't go far enough. British Finance Minister George Osborne said he would "look like an idiot" if he went back with watered-down rules, and he wanted national governments to retain the right to impose even tougher regulations than those of the EU.
The Swedish government agreed, and both felt it was important to reach a compromise.
"This is a time of considerable uncertainty in the eurozone economies," said Osborne as he arrived in Brussels. "We are reaching a point where we have got to make a decision to see the eurozone stand behind their currency. A very important part of that is strengthening the entire European banking system and that is what we intend to do today."
The compromise, proposed by the Danish EU presidency, allows individual governments to impose higher core capital requirements than the EU's seven percent. Sweden plans 12 percent, while Britain wants ten.
The other EU finance ministers could have simply outvoted Britain and Sweden, but they felt it was important to have London, Europe's biggest financial market, on board.
The case for tougher rules is currently being demonstrated in Spain and Italy: credit ratings agency Moody's has just lowered the ratings of a number of Italian banks, and the Spanish banking industry is in deep trouble, having lent money far too readily during a property boom.
Indeed, Austrian Finance Minister Maria Fekter thinks that Spain's real problem is its banks.
"Spain has done excellent work with regard to fiscal reform," she said. "But there's still plenty of homework to be done in the banking sector."
The EU has more than 8,000 banks, and it's now up to the European parliament and the member states to agree on how the new regulations will be implemented. They are meant to come into effect at the start of 2013.
But will they prevent a new banking crisis? German Finance Minister Wolfgang Schäuble pointed out in a press conference after the meeting that while the new rules were important, they weren't all that was needed. The EU, he said, was trying many different methods to remove false incentives and make short-term profit unsafe.
"There's a whole range of measures that are being deployed one by one," he said, "and all of them together will hopefully contribute to preventing a repeat of such a crisis."
But the finance ministers were less successful in agreeing on new names to lead the EU's most important financial institutions. The heads of the European Bank for Reconstruction and Development and the European Financial Stability Facility are both Germans, and since Schäuble is expected to become the next head of the Eurogroup, it's seen as inappropriate that Germans should continue to have those top jobs. Many member states are staking a claim, and, as usual, the decision will probably be taken at the very last minute.
Author: Christoph Hasselbach, Brussels / mll
Editor: Ben Knight