2nd Jun 2020

Brussels puts forward stricter rules for banks

  • New rules in the financial sector are supposed to prevent crisis "lightning striking twice" (Photo: Wikipedia)

Banks in the European Union will have to restrict their investment in risky operations under new rules proposed by Brussels as part of a response to the current financial crisis.

"We are acting ambitiously to prevent lightning striking twice," said Jose Manuel Barroso, the president of the European Commission, the EU's main regulator introducing the new legislation on Monday (13 July).

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

The blueprint aims to revise the bloc's existing rules on capital requirements for banks in two key areas – securitisation and remuneration, viewed by experts as the key factors contributing to the crisis in the financial sector.

Both are linked with risk taking in the financial sector: securitisation involves pooling and repackaging of cash-flow-producing financial assets into "securities" then sold to investors that could worsen or lose their credit if the transaction is improperly structured.

Banks' remuneration policies can motivate their managers to seek short-term profits in risky areas such as securities which could lead to further problems.

But under the proposed new EU rules, the risk-taking would be more costly and more strictly supervised: banks will be restricted in their investments in highly complex re-securitisations if they cannot demonstrate that they have fully understood the risks involved.

The new rules will also tighten up disclosure requirements to increase the market confidence that is necessary to encourage banks to start lending to each other again, and "roughly double" their current trading book capital requirements.

On top of that, national supervisors will be asked to review banks' payment regulations and impose sanctions if they do not follow the newly agreed principles – if and when the Brussels' bill gets adopted by the European Parliament and national governments.

"The requirements on pay and bonuses are designed to put an end to the culture of excessive risk-taking for short-term success at the expense of long-term profitability and sound risk management," said EU internal market commissioner Charlie McCreevy.

"This package of amendments will strengthen the risk management, transparency and sound investment practices that are key to a healthy and stable banking system," he added.

The EU executive filed its proposal on the same day as the so-called Basel Committee on Banking Supervision announced it had adopted its final draft on global reform of the financial sector which will also demand banks to hold more capital against re-securitised products, according to the Financial Times.

However, the full details of the world's banking reform to be adopted by the key global powers will only be published later this year.

The Basel Committee on Banking Supervision is an institution created in 1974 by the central bank Governors of a group of ten nations - Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the US.

Vestager hits back at Lufthansa bailout criticism

Commission vice-president in charge of competition Margarethe Vestager argued that companies getting large capital injections from the state during the corona crisis still have to offset their competitive advantage.

German court questions bond-buying and EU legal regime

The German Constitutional court ordered the European Central Bank to explain its 2015 bond-buying scheme that helped eurozone stay afloat - otherwise the German Bundesbank will not be allowed to take part.

No breakthrough at EU budget summit

EU leaders failed to reach agreement on the EU's long-term budget, as richer states and poorer 'cohesion countries' locked horns. The impasse continues over how to fund the Brexit gap.

News in Brief

  1. Trump threatens to use army to crush unrest in US
  2. Trump wants Russia back in G7-type group
  3. Iran: Fears of second wave as corona numbers rise again
  4. WHO: Overuse of antibiotics to strengthen bacterial resistance
  5. Orban calls EU Commission recovery plan 'absurd'
  6. ABBA's Björn new president of authors' rights federation
  7. Malta and Libya to create anti-migrant 'units'
  8. France reopening bars and parks next week

Stakeholders' Highlights

  1. UNESDAHow reducing sugar and calories in soft drinks makes the healthier choice the easy choice
  2. Nordic Council of MinistersGreen energy to power Nordic start after Covid-19
  3. European Sustainable Energy WeekThis year’s EU Sustainable Energy Week (EUSEW) will be held digitally!
  4. Nordic Council of MinistersNordic states are fighting to protect gender equality during corona crisis
  5. UNESDACircularity works, let’s all give it a chance
  6. Nordic Council of MinistersNordic ministers call for post-corona synergies between economic recovery and green transition

Latest News

  1. Malta fiddles on migrants, as Libya burns
  2. Borrell: EU doesn't need to choose between US and China
  3. Post-Brexit and summer travel talks This WEEK
  4. State-level espionage on EU tagged as 'Very High Threat'
  5. Beethoven vs Virus: How his birthplace Bonn is coping
  6. EU's new migration pact must protect people on the move
  7. Spain takes 'giant step' on guaranteed minimum income
  8. Vestager hits back at Lufthansa bailout criticism

Join EUobserver

Support quality EU news

Join us