This week, the European Commission’s Economic and Monetary Affairs Committee approved amendments to the "Capital Requirements" Directives. The legislation must be approved by the full parliament and by member states in order to become law. The legislation “seeks to improve risk management and avoid a repetition in [the] future of the current banking crisis, with bank failures putting pressure on other banks and leaving the whole financial system at risk.” Specifically, the legislation would require:
- Greater transparency for large exposures: a bank would not be able to expose more than €150 million or more than 25% of its own funds to a client or a group of clients, including exposures to other banks or insurers, and existing reporting requirements would be enhanced
- Enhanced supervision: as an interim step towards an integrated EU-wide supervisory system, establish a college of supervisors to facilitate cooperation among national authorities dealing with cross-border financial institutions
- More robust risk management: develop principles for liquidity risk management
- Retention of securitization exposures: institutions must retain at least 5% of the total value of the securitized exposures or, alternatively, retain an economic interest in the transaction in the form of an "explicit and unconditional warranty" regarding compliance with due diligence criteria
- Enhance regulation of credit default swaps: call for regulation of the CDS market, including establishing an EU clearing house to reduce the risks of these instruments
If the legislation is approved, members states will have to implement the law by October 31, 2010 and it will take effect at the beginning of 2011.