LONDON, April 5 (Reuters) - Germany has told the European Union not to tamper with rules that allow banks which are part of a network offering financial help in a crisis to benefit from lower capital and liquidity requirements, a letter seen by Reuters showed.
The EU's executive European Commission is due on April 18 to set out draft reforms to rules for handling stricken banks.
It comes at a time of heightened sensitivity in the sector following UBS' shotgun merger with Credit Suisse, and the collapses of several U.S. banks, including Silicon Valley Bank.
German Finance Minister Christian Lindner said in a letter to the European Commission and the Eurogroup, that the EU executive should respect the "clear agreement" made in June last year to preserve the framework for so-called Institutional Protection Schemes.
"From what I have now learned... this will not be the case," Lindner said.
An EU official said the Eurogroup asked the commission to strengthen and harmonise rules governing the use of national deposit guarantee schemes funds when a bank is in trouble.
"The Commission has consulted extensively member states and stakeholders before finalising the proposal. It will be a balanced proposal, taking into account the specificities of national banking models, and a useful reform on the path towards completing the Banking Union," the EU official said.
The schemes link banks in a national network, allowing a struggling lender to get financial aid from the scheme's other members, forming part of a country's protections for bank depositors.
Participating banks pay into the network, and benefit from reductions in some capital and liquidity requirements. Such schemes have been set up in Germany, Austria, Italy, Spain and Poland.
CARVE OUT
Lindner said the commission's current plans would introduce a "number of new and significant restrictions" on IPS schemes by treating them like deposit guarantee schemes.
Other elements in the draft plans, such as the very broad scope of the rules, would lead to "very difficult negotiations", Lindner said.
A "clear and precise carve-out for IPS from newly introduced restrictions would be the easiest and cleanest way" to respect last year's agreement not to tamper with IPS, Lindner said.
"My team will provide concrete drafting suggestions for such a carve out to your colleagues," Lindner told EU financial services commissioner Mairead McGuinness in the letter.
A report for the European Parliament last year said IPS represents a central and substantial component of depositor protections in Germany.
But there are questions over whether banks in an IPS pay enough into an EU central bank rescue fund, and whether it is clear which authority is in charge if a lender in a scheme is failing, the report said.
