On October 1, the European Commission published its proposals to revise the EU Capital Requirements Directive. The revisions are stated to have been prompted by the current financial market turbulence and to be aimed at ensuring adequate protection of creditor interests and overall financial stability.

The proposals focus on large exposures, risk retention in securitizations, the use of so-called supervisory “colleges”, and consistent treatment of tier one capital and liquidity risk.

The Commission believes that the current large exposures regime leads to high costs and a lack of clarity. Particularly, the Commission is concerned that the present regime fails to tackle potential market failures such as inter-bank exposures. An amended limit-based backstop regime for large exposures is to be introduced and the Commission proposes to limit inter-bank exposures to the higher of 25% of the lending bank's own funds or €150 million.

The proposals include a requirement designed to address potential conflicts of interest in the “originate to distribute” model by requiring originators and sponsors of credit risk transfer to retain at least 5% of the risks they have underwritten. The Commission has also made proposals aimed to create an efficient structure for supervisory colleges to facilitate information sharing and coordination among the supervisors of large cross-border groups of companies.

The proposals will amend European Directives 2006/48/EC and 2006/49/EC and now pass to the European Parliament and the European Council of Ministers for consideration under the EU's co-decision procedure.