Yesterday, the European Council, at a meeting of the Competitiveness Council, adopted a directive aimed at:

  • “strengthening capital requirements and disclosure for the trading book and for re-securitization instruments in the banking sector”; and
  • “ensuring that remuneration policies in the banking sector do not generate unacceptable levels of risk.”

The directive imposes higher capital requirements for certain assets that banks hold in their trading books and for certain re-securitization instruments, based in those investments’ complexity and sensitivity to losses, with the intention of bringing EU policies on these issues in line with the approach contemplated by the Basel Committee on Banking Supervision. The directive also enhances disclosure requirements in accordance with internationally agreed standards in areas such as securitization exposures in the trading book and sponsorship of off-balance-sheet vehicles.

Remuneration policies of financial institutions will be subject to supervisory oversight under the new directive. Specifically, the directive (1) imposes a binding obligation on credit institutions and investment firms to ensure that remuneration policies and practices are consistent with sound and effective risk management and (2) brings remuneration policies within the scope of supervisory review so that supervisors may require firms to take necessary measures to rectify any problems.