The European Parliament adopted tougher bank capital rules today as a first step towards restoring confidence in markets shaken by the worst financial crisis in decades.
The Parliament voted by 454 in favour, 106 against with 25 abstentions on updating rules that European Union banks will have to comply with from 2010.
"This is obviously just a first step, a response to the financial crisis but it won't be enough," said Othmar Karas, the Austrian centre-right lawmaker who steered the measure through parliament.
To make markets safer for investors, banks will be required to retain 5 per cent of the securitised products they originate and sell. The reform also caps how much banks can lend each other and sets up so-called colleges of supervisors for each cross-border bank so that regulators can work more closely.
"It creates more faith when people are losing trust. It's a clear signal to the market that people should be more careful, more transparent and have better controls," Mr Karas said.
Banks will be required to retain 5 percent of securitised products they originate and sell - and top up capital against it -- to try to ensure they have properly assessed risks in the products.
The percentage will be reviewed later this year to see if a higher rate is needed.
The EU's internal market commissioner, Charlie McCreevy, who drafted the law, welcomed the moves to resist industry attempts to scrap the retention provision.
"A retention rule has a merit of something that is not nonsense but plain common sense. Banks are not risk free. This is a crucial lesson of the financial crisis," former Irish minister for finance Mr McCreevy said.
"I am pleased the Commission has been given a second chance to tighten up the text in the course of 2009," Mr McCreevy said.
The EU is the first major body to mandate retention of securitised products, a step that the International Organisation of Securities Commissions, a global regulatory grouping, recommended on Tuesday
The reform is an attempt to apply lessons learnt from the financial market crisis by ensuring banks set aside enough capital and do not need bailing out when markets fall.
Securitised products, such as mortgage-backed securities, are at the heart of the credit crunch.
Despite being highly rated, they quickly became untradable as underlying home loans defaulted, forcing banks to make large writedowns and triggering a series of government rescues.
Banks have said the securitisation market is moribund and that a high mandatory retention requirement would stop its revival, but they say privately they can live with 5 per cent.
The reform also limits to 25 per cent how much of a bank's own funds can be exposed to a single client or group of clients or not more than €150 million. The aim is to avoid destabilising the financial market if a loan turns sour.
Reuters