By Andreas Kröner, Jonathan Gould and Huw Jones
FRANKFURT/LONDON (Reuters) - The European Union may opt out of new global rules aimed at preventing another financial crash because officials are worried they put European banks at a disadvantage at a time when they are losing market share to U.S. rivals.
European regulatory and banking sources said the rules, nicknamed "Basel IV" by bankers because they are an addition to "Basel III" capital rules that are already in place, unfairly penalize Europe's banks.
U.S. regulators, and other supporters of the proposals, say they are needed to make sure banks have enough spare capital to match the amount of risk they have taken.
The plans would change the way banks assess risks on their balance sheet, which then determines how much capital they must hold as an emergency buffer.
EU officials say the changes will make European banks and their large loan portfolios look more risky, and hence need more capital, than U.S. banks which provide more bond financing and package mortgages on for trading elsewhere.
"If we can't reach a compromise that's acceptable for us, we have to pull the emergency brake and opt out," a European regulatory official said on condition of anonymity due to sensitivity over the Basel talks.
"Nobody wants that, because it would damage the trust in European banks and regulators. But it's clear that there are red lines for Europe."
The Basel Committee, a group of global regulators, which drew up "Basel III" capital rules after lenders were rescued by taxpayers in the 2007-09 financial crisis, wants the extra changes to be agreed by the year end.
But the appetite for regulation is waning as policymakers prioritize growth and if European regulators refuse to sign on to the new rules, the project could be undermined.
Even if they are agreed by members of the committee, the rules are not legally binding until they have been approved by the European Commission, EU parliament and jointly by EU states.
Any of the 28 member countries could decide not to apply the rules which would undermine the goal of a global approach to preventing financial crises.
A spokeswoman for the Basel Committee declined to comment on Monday.
NO CAPITAL INCREASE PLEASE
EU leaders want to avoid forcing banks to significantly raise capital requirements, a message that Basel's oversight body headed by European Central Bank President Mario Draghi passed on to the committee.
"We expect the Basel Committee to honour its commitment of not significantly increasing its capital requirements," a spokeswoman for the European Commission said on Monday.
European banks, by and large, already meet or exceed the Basel III bank capital rules well before they take full effect in 2019, but bankers say "Basel IV" could force them to increase their capital buffers by up to 10 percent.
Michael Lever, head of prudential regulation at banking trade body AFME, said the new rules will likely increase capital at least by 6 percent on average.
And as U.S. banks gain market share in Europe, this could be damaging for business.
European bankers and regulators say that in the current proposal, the risk weightings would particularly raise capital requirements for low risk mortgages.
"There would be effects that are not justified," a second European regulatory source said.
An EU official said the bloc would "decide on the best course of action" if the final rules from Basel point to a big hike in capital.
Basel Committee Secretary General William Coen said this month the aim was not to increase capital but to end big differences in how banks set aside capital. The body headed by Draghi has endorsed the direction of the reforms, he said.
Europe is particularly sensitive to Basel's rules as lenders provide the bulk of financing for its economy, unlike in the United States where markets are the main source of cash.
Investors are already questioning whether banks in countries like Italy are not holding enough capital, and Germany was prompted on Monday to dismiss "speculation" that Deutsche Bank needs state aid.
U.S. regulators are pushing for the changes, which include a tougher "floor" or level of capital a bank cannot go below irrespective of its internal risk calculations. Some U.S. officials have said they suspect that some banks have been gaming risk-weightings to ease capital requirements.
The United States is already going further than the planned Basel rules in some respects by reining banks' ability to use their own models for calculating capital, and instead use a standard approach provided by regulators.
Some European regulators say the floor undermines the core objective of Basel rules, that capital requirements should be directly linked to the level of risk at a bank. Regulators in Japan also have reservations about Basel's proposals.
"A standardised floor would not be in line with our objectives and should not be part of the final framework," an EU official said.
Bankers say, however, that keeping the floor proposal is a U.S. condition for accepting a dilution of the curbs Basel has proposed on the use of models at banks for capital calculations - a more widespread practice in Europe.
Bankers said Europe's threat to derail the rules could be little more than "pounding the table" ahead of the next round of Basel meetings in Chile on November 28-29.
"I think the deal will get done. There is too much political capital behind it not to be done," said AFME's Lever.
However, some elements could be delayed, such as reform of weightings for operational risks, though they constitute a far smaller portion of overall capital requirements, bankers say.
"Credit risk, including the floor, is the whole ball of wax, so if you delay that, you delay the whole thing," a banking industry official said.
(Additional reporting by Mayia Nikolaeva in Paris, editing by Anna Willard)