Include bank rule conflicts in trade talks, EU tells U.S

By Douwe Miedema

WASHINGTON (Reuters) - A conflict over a U.S. plan to force foreign banks to hold more capital should be part of talks about a free trade agreement between United States and the European Union, a top EU official said.

Michel Barnier, the 27-nation bloc's regulation commissioner, said a comparison between EU and U.S. rules that prohibit banks from gambling with their own money should also be on the agenda of the talks.

The two sides have agreed to include the rules for access to their markets by foreign companies in the trade talks, but not the wider and more contentious issue of financial regulation.

"The difference is to know whether we have one channel for negotiations, or two. And if there is a single channel, things will be deeper, more global and faster," Barnier told a lunch with journalists on Tuesday.

Talks on the landmark free-trade agreement between the two blocs - the world's largest trade and investment partners - got off to a good start, U.S. and EU officials said last week. The two sides aim to reach a deal by late 2014.

Barnier met U.S. Treasury Secretary Jack Lew this week, U.S. Trade Representative Michael Froman, Securities and Exchange Commission Chair Mary Jo White, as well as a number of politicians dealing with banking regulation.

He has lashed out against a new Federal Reserve rule that forces foreign banks units to allocate more capital, which he has said could sow discord among supervisors and lead to retaliation abroad.

The EU push to include the rule - which one of Barnier's staffers called an "obvious potential area of conflict" - into the trade talks is at odds with the U.S. position of keeping the two discussions separate.

When meeting Barnier, "Lew emphasized that prudential and financial regulatory cooperation should continue in existing and appropriate global fora," according to a readout of the meeting by a U.S. Treasury official.

But Barnier continues to push for including financial regulation with market access under the trade talks.

"There's no question of having such an agreement on access without having a regulatory level playing field. This would make no sense at all," Barnier said at the lunch.

Barnier last week struck a deal with the top U.S. derivatives regulator on how to treat foreign companies in their respective regions, which he said was a good example of how such complex issues should be dealt with.

(Reporting by Douwe Miedema; Editing by Tim Dobbyn)