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Further amendments to the Capital Requirements Directive - briefing

14 July 2009
by eub2 -- last modified 16 July 2009

The European Commission has adopted a proposal to further amend the Capital Requirements Directive. The proposed amendments address capital requirements for the trading book and re-securitisations, disclosure of securitisation exposures, and remuneration policies. They form part of the Commission's response to the financial crisis by strengthening the regulatory framework in those areas, which were relevant to the causes of the crisis.


Proposed amendments to the Capital Requirements Directives

The purpose of the Capital Requirements Directives (2006/48/EC and 2006/49/EC) is to ensure the financial soundness of banks and investment firms. Together they stipulate how much of their own financial resources banks and investment firms must have in order to cover their risks and protect their depositors. This legal framework needs to be regularly updated and refined to respond to the needs of the financial system as a whole. The main changes proposed are as follows:

* Capital requirements for re-securitisations

Re-securitisations are complex financial products that have played a role in the development of the financial crisis. In certain circumstances, banks that hold them can be exposed to considerable losses. The proposal will impose higher capital requirements for re-securitisations, to make sure that banks take proper account of the risks of investing in such complex financial products.

* Disclosure of securitisation exposures

Proper disclosure of the level of risks to which banks are exposed is necessary for market confidence. The new rules will tighten up disclosure requirements to increase the market confidence that is necessary to encourage banks to start lending to each other again.

* Capital requirements for the trading book

The trading book consists of all the financial instruments that a bank holds with the intention of re-selling them in the short term, or in order to hedge other instruments in the trading book. The proposal will change the way that banks assess the risks connected with their trading books to ensure that they fully reflect the potential losses from adverse market movements in the kind of stressed conditions that have been experienced recently.

* Remuneration policies and practices within banks

The proposal will tackle perverse pay incentives by requiring banks and investment firms to have sound remuneration policies that do not encourage or reward excessive risk-taking. Banking supervisors will be given the power to sanction banks with remuneration policies that do not comply with the new requirements.

Regulatory Capital
Source: European Commission