Britain and Sweden, backed by eastern European allies, squared off with Germany, France and other EU states today over rules to harden the defences of banks against any crisis.
European Union finance ministers are in Brussels to debate the ''Basel III regulation'' that will require banks to increase their capital buffers so they can withstand financial shocks.
The meeting comes amid concerns about the health of the Spanish banking sector, still reeling from a property bubble that burst in 2008.
Officials say Madrid's struggles are not on the agenda.
"We feel that it is very important that we have strong banks, and that means strong capital in the banks, so we are looking for a solution today," Swedish Finance Minister Anders Borg said on arrival for the talks.
"Either we have strong banks or the taxpayers take the risk, and I prefer to have strong capital in the banks than to take risks with the taxpayers," he said, adding that EU states were still "a little bit away" from a compromise.
Britain, Sweden and others want the freedom to impose tougher capital requirements on their banks than the Basel rules, should they want to do so, but the Franco-German bloc is pushing for all 27 EU states to follow the same line.
"The British want the possibility to impose tougher requirements on a national level. But we have to take care that we have standardised rules," said German Finance Minister Wolfgang Schaueble.
The Franco-German bloc fears that allowing one nation to set higher threshholds would spark a "race to the top," as governments would compete to show their banks have the biggest reserves, said a senior EU diplomat.
While the European Commission and nations such as France want "maximum harmonisation," another EU diplomat said Britain argues that capital rules are a sovereign issue since taxpayers would be affected by any bank failures.
The two blocs are also at odds over whether banks should be allowed to count capital from their insurance businesses in order to meet the Basel capital requirements.
"This type of capital is not viable," an EU diplomat said, adding that the Germans "want to cover up the fact they are under capitalised."
The Basel III rules, which governments must start to implement in 2013, require all banks to strengthen their capital reserves by raising total core reserves to 7% from 2% at the moment.
The Danish presidency to the EU has proposed a compromise that would allow governments to impose an extra 3% buffer, with anything above that requiring European Commission permission. But Britain and Sweden are against letting the commission, the EU's executive arm, making such decisions.
London wants the council of EU governments or the European Systemic Risk Board, a financial oversight body, to have a say instead. France, Germany and others concerned that forcing banks to park too much capital would curb efforts to encourage them to invest in Europe's sickly economy, the senior diplomat said.
