EU considers tougher capital rules for banks

Market turmoil is making EU regulators look afresh at Basel II’s capital requirements

BRUSSELS – Banks in the European Union should hold more capital against their exposures to asset-backed bonds, says European internal market commissioner Charlie McCreevy.

The European Commission says the lessons of the current market turmoil must be worked into amendments to the EU’s Capital Requirements Directive (CRD) – its legislative implementation of the Basel II Accord.

According to the proposals, EU banks would be limited in the amounts they can lend to a single counterparty, with intensified cross-border supervision for the EU’s biggest banking groups. McCreevy says: “These new rules will fundamentally strengthen the regulatory framework for EU banks and the financial system.”

Any new capital requirements plans will require approval from the EU parliament and the European Council – the executive of member state governments – which will require national finance ministries and regulatory authorities across the 27 member states to reach an agreement.

The statement comes the same week the German government announced the biggest banking bailout in its history, when a consortium provided €50 billion in state and private funding to struggling lending bank Hypo Real Estate. Governments in France, Belgium and the Netherlands, meanwhile, were driven to act to bail out two cross-border banks – Fortis and Dexia – costing almost €18 billion.

The EU has come up with proposals in a number of areas. These include an increase in the level of retail deposits guaranteed by members’ central banks. Such a proposal – in line with a move by the Irish government this week – would again require member state consensus, especially as the responsibility for depositor protection does not fall under the aegis of the European Central Bank.

The securities industry has also received an unveiled threat of hefty fines unless market participants comply with new transparency rules on data disclosure and due diligence, also part of the ongoing amendments to the CRD.