Funding of European banks threatened

European banks are being forced to sell more long-term bonds as regulators seek to prevent another financial crisis. European insurers say their own regulator will stop them from buying such debt.

Basel III’s liquidity rules mean European banks may need to raise as much as euro 2.3 trillion ($3.2 trillion) in long-term funding, according to New York-based McKinsey & Co. Insurers, the biggest buyers of such debt, are being dissuaded from buying long-term bonds under the European Union’s Solvency II rules, which makes them more expensive to hold.

“The two bits of regulation are at tension with each other,” said Simon Hills, an executive director at the British Bankers’ Association, which represents more than 200 lenders from 60 countries. “One bit is saying you should have more funding with a longer duration and the other is saying watch out when buying this stuff if you are an insurance company. It’s a big problem for banks.”

European Commission President Jose Barroso called for a new system of financial regulation built on “common ground” among countries, regulators and international organisations following the worst financial crisis in 70 years. His efforts, which were supported by leaders such as Germany’s Chancellor Angela Merkel and President Barack Obama, are being undermined by mismatching rules for banks and insurers, say industry executives and lobbyists, who are pushing to relax the new regulations.

Basel III, due to be implemented in 2019, proposes requiring banks to hold enough cash or liquid assets to meet liabilities for a year.