The European Commission has come out with a second set of amendments to its Capital Requirements Directives to bring re-securitisations and pay schemes under stricter supervision.
The proposal will allow regulators to impose higher capital charges on banks if they cannot prove they have understood the risks of investing in complex re-securitisations, and will force bank governors to keep an eye on bonuses and bankers' pay or face sanctions. They build on recommendations issued by the Basel Committee on Banking Supervision in January, as well as calls from the G20 after its meeting last April.
Last October, the EU executive released the first in a line of amendments to the CRD, which means banks will now have to retain five per cent of the value of their own securitised products and will be prevented from exposing more than 25 per cent of their own funds to any one client.
These amendments were finally approved by MEPs last May, after a battle between Parliament and Council over the retention rate.
MEPs had wanted to see a legally binding 10 per cent charge on the debt banks want to sell on in their own securitised products, but managed to secure a review clause in the compromise text that could allow for an increase in the rate in 2010, before the changes become law.
To limit parliamentary wrangling over a second round of capital requirements, the Commission has now said it will delay the changes until 2011.
The amendments are to be followed, in October, by a third set, part of the EU executive's ongoing response to the financial crisis.
"The proposals aim to ensure that banks hold enough capital to reflect the true risks they are taking. I am calling on member states and the European Parliament to back these proposals and on other jurisdictions to act on similar lines," Commission President José Manuel Barroso said in a statement.
The new amendments to the CRD will see banks being levelled with higher charges for re-securitised products, which are complex securities (asset-backed financial instruments created by pooling and repackaging underlying assets) that the Commission says are at the root of the recent turmoil on financial markets. It means banks will face capital requirements three times higher than those required for ordinary securities - which could be as low as around 20 per cent for the best "AAA" rated re-securitised product, or as high as 1,250 per cent.
Re-securitisations will also be subject to faster-rising capital requirements independent of their credit rating if the investor is not able to prove that he has employed due diligence in the deal.
Banks will have to disclose the level or risk to which they are exposing themselves, and will have to assess the risk of future losses and reflect that in their trading book (items held for re-selling in the short-term), to bring it more into line with the way institutions report items on their banking book (items held for maturity and not actively traded).