Parliament backs tighter capital rules for banks

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The European Parliament yesterday (6 May) adopted tougher bank capital rules in a further step to restore confidence to markets shaken by the worst financial crisis in decades.

MEPs voted 454 in favour and 106 against (amid 25 abstentions) to update rules with which EU banks will have to comply from 2010.

“This is obviously just a first step, a response to the financial crisis, but it won’t be enough,” said Othmar Karas, the Austrian centre-right lawmaker who steered the measure through Parliament.

The vote confirms a position agreed by EU member-state ambassadors at the end of April. It then needs the final agreement of the Council, now considered as a formality.

To make markets safer for investors, banks will be required to retain five percent of the securitised products they originate and sell. Securitised products, such as mortgage-backed securities, were at the heart of the credit crunch.

Despite being highly rated, they quickly became untradable as underlying home loans defaulted, forcing banks to make huge writedowns and triggering a series of government rescues.

Banks have warned the securitisation market is moribund and that a high mandatory retention requirement would stop its revival, but said privately they can live with five percent.

The reform also caps how much a bank can lend to another bank, to protect the wider financial system from being hurt should loans turn sour.

It will also set up colleges of supervisors for all big cross-border banks, so that all the national regulators that oversee operations across the EU can meet regularly to share information and spot any problems early. However, a more coordinated EU supervisory system has been ruled out, and doubts remain over the efficiency of the college-based oversight.

The reform is set to take effect in 2010, but another round of reform to the rules is already being planned.

In June, EU Internal Market Commissioner Charlie McCreevy will propose to give supervisors powers to require a bank to top up its capital if its remuneration policy encourages risky activities.

The Basel Committee, which drafts high-level principles on bank capital, will propose changes later this year to its Basel II rules, which the EU’s capital requirements directive has put into law.

The changes are set to include the requirement for banks to stick to a simple leverage ratio and this will be introduced into the EU through a future reform of the capital requirements directive.

(EURACTIV with Reuters.)

Financial markets across the globe went into a tailspin following the US sub-prime mortgage crisis in early August 2007, forcing central banks to make massive cash injections to keep the system rolling and fend off a possible liquidity crisis.

At the beginning of October 2008, after the crisis had begun to hit Europe hard, the Commission presented long-awaited proposals to review capital requirements for banks (EURACTIV 02/10/08).

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