European Parliament adopts new capital rules for banks

8 May, 2009: The Legislative Report amending the capital requirements for banks to improve transparency and supervision of the financial systems and to avoid future financial crisis was adopted in the Parliament with 454 votes in favor and 106 votes against the motion. The European Parliament, Council of Ministers and the European Commission delegations agreed to have the new legislation approved before the end of the current legislative term. The ‘Capital Requirements’ Directives, sought revision of the previous directives to improve crisis and risk management. The few notable points of the new legislation are:

• Council to establish the colleges of supervisors to facilitate cooperation among national authorities dealing with cross-border financial institutions
• The banks could not expose more than 25% of its own funds to a client or group of clients. The exception to this threshold limit will be exposure between credit institutions but capped to not more that Euro 150 million. This limit on the exposure will be subject to review by the end of 2011
• In case of securitization the legislation mentions that a retention of 5% of the total value of the securitized exposure to be retained by the issuing institution, ensuring material interest in the performance of the proposed investments. This again was subject to review by the end of 2009.
• With respect to Credit Default Swaps as well, there was a need felt for stricter regulations to bring about transparency in trade and to set up a central clearing house to be supervised by the European Union to reduce the risk of these instruments. The legislative proposal in this regard is to be out forth by the Commission by the end of 2009

The European Legislation, Councils of Ministers and the European Commission agreed on the insertion of the review clause and also to increase the retention rate by 31^st December, 2009 after consulting the Committee of European Banking Supervisors. These legislations are to be complied with by the end of the year 2010. This is just a step in response to the present financial crisis. EU in the last month had also approved of the new rules for the Credit Rating Agencies (see report below) in a similar effort to improve transparency and to gain investors’ confidence.[Reported by: Nidhi Bothra]

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