A new beginning

Noticia FT

Banks will face stricter requirements on what capital they must hold to support their operations, under new rules unveiled in Brussels on Wednesday.

 

The long-awaited reforms to the so-called Capital Requirements Directive are being used by lawmakers in Brussels to tighten banking practices and supervision in the wake of the credit crunch.

However, although the proposals were drafted after the financial crisis first struck in August last year, they predate the latest series of bank failures. Senior officials at the European Commission have already acknowledged that, while the CRD reforms are a useful step towards improving bank standards, they will almost certainly need to be supplemented by other measures.

 

Many of the changes are highly technical. However, among the most eye-catching – and contentious – is a proposal that banks which are involved in the so-called “originate-to-distribute” model, used by institutions to devise and then offload securitised products that have been at the heart of the current financial crisis, should be forced to retain some of the risk.

 

Under the new rules, originators will be required to retain capital for at least 5 per cent of the exposures they securitise. Commission officials had originally wanted to set the figure at 15 per cent, but the move prompted an outcry by banking groups and the limit was revised downwards.

 

There will also be a 25 per cent limit on all inter-bank exposures, a measure which has been particularly contentious in some EU countries, such as the UK.

 

On the supervision front, the commission is also proposing that “colleges” of supervisors should be set up for all banks with cross-border operations, with a bank’s home supervisor having the most powerful say.

 

This has also raised concerns among some EU member states, particularly smaller countries who fear they will end up playing second fiddle to watchdogs in states with big, established financial markets.

 

The legislation requires approval by both the European Parliament and member states, and could undergo further alterations in the process. The parliamentary timetable is particularly tight because of elections next year, so negotiations may be pressurised.

 

The commission, meanwhile, will bring forward separate legislation later this month requiring credit rating agencies to register and meet certain standards if they wish to operate in Europe.