On capital adequacy, the Council agreed on two draft directives which, with some amendments to fit the EU market, will bring the EU’s rules into line with the requirements of Basel II, which sets standards for all internationally active banks. The EU’s Capital Requirements Directive (CRD) will have a wider scope, applying to some 8,000 EU credit institutions and investment firms including some small domestic banks. It requires banks to scrutinise, through proper internal systems, the types of risk they face and to be able to satisfy the banking supervisory authority that they hold sufficient capital to guarantee those risks. There are three levels banks can work with, allowing lower capital requirements for banks financing SMEs and small borrowers.
In the CRD, one contentious issue was the provision on consolidated supervision for cross-border banking groups. The proposal provides that national banking supervisors should work together to reach agreement on the adequacy of risk assessment methods. If they cannot agree, a "lead supervisor" from the parent company would take the decision. Smaller EU states are concerned that their supervisors might not be heard against the already established supervisors from larger states.
The Statutory Audit Directive was designed to deal with financial scandals such as Parmalat and Ahold (two European companies whose accounts were found to be full of irregularities, hiding large-scale losses). The directive clarifies the duties of statutory auditors and sets down obligations of independence and quality assurance. It provides for external public review by regulators and sets up a committee to ensure co-operation between regulatory authorities at European level. The directive also foresees the adoption of international auditing standards through co-operation with third country regulators.
The Council also reached agreement on an improved system of taxation for company mergers and strengthened measures to combat money laundering and terrorist financing. It welcomed the extension of the Lamfalussy process to all financial sectors.
