LUXEMBOURG, April 27 (Reuters) - European Union banks are upset by proposals from 13 smaller EU states to boost the power of national supervisors in setting lenders' capital buffers against the risk of failure, a move that could increase banks costs.
New banking rules, proposed by the European Union executive last year, would lower the discretion of national watchdogs in setting the amount of capital that multinational banks have to hold in their subsidiaries to absorb losses.
In a document seen by Reuters, most eastern European states and other smaller EU states are urging changes to the proposed measures.
"If the proposal gains traction banks will react strongly," a banking industry official said.
The proposal comes from nearly half of the 28 EU states.
They are Belgium, Luxembourg, Hungary, Cyprus, Bulgaria, Croatia, Czech Republic, Latvia, Lithuania, Poland, Slovakia, Slovenia and Romania.
They are all countries with a large presence of foreign banks in their territory and they fear that the new rules would reduce their control of foreign lenders and increase risks for their taxpayers if banks failed.
Major banking groups in the EU operate from headquarters in the largest states with subsidiaries in smaller nations.
The commission proposals are meant to make it easier for bigger banks to operate in different countries as if they were a single entity. This is expected to strengthen the EU single market and complete the bloc's flagship plan for a banking union.
The proposal from the 13 states "is a major setback for the idea of the banking union and the single market," the banking official said.
Banks supported the European Commission's proposals because they would have reduced their costs by allowing less stringent buffers at national level.
The commission's proposals need to be approved by a majority of the 28 EU states and by the EU parliament before they become law. (Reporting by Francesco Guarascio; Editing by Toby Chopra)