The European Commission's new revisions of its EU rules on capital requirements for banks will impose higher capital requirements for resecuritizations and propose stronger disclosure requirements for securitization exposures.The revision will also require banks to have sound remuneration practices that do not encourage or reward excessive risk-taking.
Under the new rules, banks will be restricted in their investments in highly complex re-securitizations if they cannot demonstrate that they have fully understood the risks involved, while national supervisory authorities will review banks' remuneration policies and have the power to impose sanctions if the policies do not meet the new requirements.
The proposal, which amends the existing Capital Requirements Directives (CRD), represents part of the EU's response to the financial crisis, and reflects consultation with member states, banking supervisors and industry. It now passes to the European Parliament and the Council of Ministers for consideration.
“These proposals address risks linked to two major causes of the current crisis, securitization and remuneration,” said Commission President José Manuel Barroso. “We are acting ambitiously to prevent lightning striking twice. The proposals aim to ensure that banks hold enough capital to reflect the true risks they are taking. In particular, banks will have to offset risks associated with highly complex resecuritization products and deal with perverse incentives created by pay and bonus schemes.”
Barrosso said that the CRD will oblige banks and investment firms to have remuneration policies consistent with effective risk management. Supervisors will be given the powers to take measures, including increased capital requirements, to address any failures.