European Law Report - Boosting finances
With the credit crunch hitting hard not only the United States but also the European Union (EU), a package of financial measures has been proposed by the European Commission to respond to the current financial crisis. The crash of financial markets...
With the credit crunch hitting hard not only the United States but also the European Union (EU), a package of financial measures has been proposed by the European Commission to respond to the current financial crisis.
The crash of financial markets has led central banks to make massive cash injections to ward off a possible liquidity crisis. The need for this step came about due to the banks' lack of having a long-term management plan which could see them through a financial crisis. In response, the EU Commission has moved in to supervise the financial sector with its proposal for a directive on financial institutions and crisis management, thus revising the Capital Requirements Directives currently in force.
One of the long-awaited proposals put forward is the revision of banks' capital requirements. Under the proposed rules, banking institutions will have to hold a higher amount of capital to protect themselves against the risk of failure.
In particular, the Commission is proposing a limited guarantee for financial institutions which issue securitised products. In the inter-bank market, banks will not be able to lend or place money with other banks beyond a certain amount, while borrowing banks will effectively be restricted in how much and from whom they can borrow. Banks would have to hold at least 25 per cent of their own funds to guarantee their lending operations.
The new measures are in line with the Commission's "calculated exposure" approach, which urges banks to restrict the exposure that they incur. Credit institutions would have to report biannually to the competent authorities every large exposure, including details of the client to which the credit institution has a large exposure, the exposure value, and the credit protection.
In the case of banking groups that operate in multiple EU states, the Commission envisages improved supervision.
Their supervision will be carried out not only at national level, but also with higher cross-border cooperation. According to the proposal, any multinational group will have a college of supervisors, made up by the authorities of the states where the company operates.
The respective national supervisory authorities will be granted rights and obligations in relation to supervision, with increased co-operation, in order to enhance their effectiveness.
Another proposal relates to the minimum level of coverage that European banks have to guarantee for saving deposits. At the moment the EU rules foresee that all deposits in EU banks are covered for €20,000, a legal minimum introduced by the first pan-European deposit guarantee scheme 14 years ago, although a number of member states do cover deposits for even higher amounts. Under the new proposal, the minimum will be raised with individual savings of up to €100,000 becoming fully guaranteed by banks. Under the scheme, the guarantee will be backdated and will apply from October 1, 2008 to the first €50,000 in any savings account. Within a year, the ceiling will be raised to €100,000.
In a further attempt to boost savers' trust, the Commission is proposing that if a bank collapses, depositors should receive the money covered by the guarantee scheme within three days. Currently, a payout can take between three and nine months.
The proposals to change banking rules will strengthen market confidence.
Their introduction is envisaged in two years' time and while it may be too late for the measures to have any impact on the current meltdown of financial markets, the proposal is surely a step ahead in the right direction.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.
The crash of financial markets has led central banks to make massive cash injections to ward off a possible liquidity crisis. The need for this step came about due to the banks' lack of having a long-term management plan which could see them through a financial crisis. In response, the EU Commission has moved in to supervise the financial sector with its proposal for a directive on financial institutions and crisis management, thus revising the Capital Requirements Directives currently in force.
One of the long-awaited proposals put forward is the revision of banks' capital requirements. Under the proposed rules, banking institutions will have to hold a higher amount of capital to protect themselves against the risk of failure.
In particular, the Commission is proposing a limited guarantee for financial institutions which issue securitised products. In the inter-bank market, banks will not be able to lend or place money with other banks beyond a certain amount, while borrowing banks will effectively be restricted in how much and from whom they can borrow. Banks would have to hold at least 25 per cent of their own funds to guarantee their lending operations.
The new measures are in line with the Commission's "calculated exposure" approach, which urges banks to restrict the exposure that they incur. Credit institutions would have to report biannually to the competent authorities every large exposure, including details of the client to which the credit institution has a large exposure, the exposure value, and the credit protection.
In the case of banking groups that operate in multiple EU states, the Commission envisages improved supervision.
Their supervision will be carried out not only at national level, but also with higher cross-border cooperation. According to the proposal, any multinational group will have a college of supervisors, made up by the authorities of the states where the company operates.
The respective national supervisory authorities will be granted rights and obligations in relation to supervision, with increased co-operation, in order to enhance their effectiveness.
Another proposal relates to the minimum level of coverage that European banks have to guarantee for saving deposits. At the moment the EU rules foresee that all deposits in EU banks are covered for €20,000, a legal minimum introduced by the first pan-European deposit guarantee scheme 14 years ago, although a number of member states do cover deposits for even higher amounts. Under the new proposal, the minimum will be raised with individual savings of up to €100,000 becoming fully guaranteed by banks. Under the scheme, the guarantee will be backdated and will apply from October 1, 2008 to the first €50,000 in any savings account. Within a year, the ceiling will be raised to €100,000.
In a further attempt to boost savers' trust, the Commission is proposing that if a bank collapses, depositors should receive the money covered by the guarantee scheme within three days. Currently, a payout can take between three and nine months.
The proposals to change banking rules will strengthen market confidence.
Their introduction is envisaged in two years' time and while it may be too late for the measures to have any impact on the current meltdown of financial markets, the proposal is surely a step ahead in the right direction.
Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.