By John O'Donnell and Huw Jones
BRUSSELS/PARIS (Reuters) - European bank shares rose on Friday on hopes that new international capital rules for lenders would be applied with a lighter touch in the European Union as Germany and France demand more leeway.
But at the same time, the International Monetary Fund urged rapid action to force the world's biggest banks to hold a lot more capital than new minimum requirements due to come in from 2013.
Berlin and Paris have pushed for flexible treatment of some types of bank capital including controversial hybrid bonds as the EU grapples with new rules that are designed to make banks shock-proof in an economic dip, an EU source said on Friday.
Germany wants lighter treatment of some hybrids, bonds that combine characteristics of debt and equity, which have been used in the past to bolster banks' capital cushions but are now out of favor with regulators after the financial crisis.
Both France and Germany, home to Europe's top insurers and where there are close ties between insurers and banks, also want to protect the status of banks' stakes in insurers when calculating their capital.
Europe's banking index was up about 1 percent, outperforming the benchmark FTSE Eurofirst 300 index.
French bank Credit Agricole was among the top gainers. Those banks with big insurance arms, such as Britain's Lloyds and France's Societe Generale and BNP Paribas, also rose.
On Friday, the Financial Times said the European Commission had proposed that banks be allowed to side-step part of a recent international accord on bank capital, seen as a sign that Berlin and Paris had pushed through demands for light-touch regulation.
But Germany and France's bid for softer handling of an industry many blame for the credit crisis seemed at odds with the views of the International Monetary Fund which urged tighter safeguards for big banks through additional capital buffers.
An IMF staff discussion paper on Friday suggested that some of the world's biggest banks should top up capital beyond newly agreed standards, known as Basel III.
Leaders from the world's top 20 economies (G20) have already asked the Financial Stability Board to come up with recommendations in time for a November summit to stop taxpayers having to bail out troubled banks.
The aim is to provide extra safeguards such as capital charges and tougher supervision for so-called systemically important financial institutions -- such as Goldman Sachs, Morgan Stanley, Deutsche Bank and HSBC.
ROW LOOMS
The European authorities are working on new rules to make banks set aside more capital to absorb losses in line with the Basel III accord to bolster the strength of the world's lenders.
But one German banker told Reuters that his country was winning the argument for flexibility in the treatment of a unique form of German hybrid capital, known as silent participations, relied on by regional groups known as landesbanks.
The EU law, however, is far from being finalized.
All EU countries, including Britain, which has demanded tougher rules, have first to approve the proposal. The European Parliament, which has campaigned for tighter regulation, will also have a chance to beef it up.
The position of Berlin and Paris puts them on course for a clash with London.
Britain's finance minister, George Osborne, recently co-wrote a letter to Michel Barnier, the European official in charge of financial reform, demanding there be no retreat from the capital regime agreed internationally -- Basel III.
"The UK fully supports the implementation of Basel III as agreed by the G20 leaders without any watering down," a British diplomat told Reuters.
(Reporting by Karolina Tagaris and Sudip Kar-Gupta in London, Arno Schuetze and Jonathan Gould in Frankfurt; Additional reporting by Juliette Rouillon and Jon Hopkins; Editing by Jon Loades-Carter and Jane Merriman)
