20th Mar 2023

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).

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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.

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