The full Parliament has given the green light to the revision of the directive regulating the capital requirements of banks. The approved changes will improve risk management and help prevent future financial crises like the present. The legislation, which will be implemented from late 2010, will forbid banks lend more than 25% of their funds to a single customer (or customer group) and will introduce a 5% retention for the securitization of bank products, such as resale mortgage securities.

The revision of the directive on capital requirements for banks aims to improve risk management and prevent future crises like the current in the banking system. This legislation will serve to enhance the efficiency of supervision and crisis management, while amending the rules on securitization exposures and the long term.

In October the European Commission presented a proposed revision of EU rules on capital requirements for banks, to strengthen financial stability, reduce risks and improve supervision of banks operating in more than an EU country. Under the new rules, banks can not lend above a certain limit to a single borrower, while national supervisory authorities will have a better overview of the activities of international banking groups.

The European Parliament and Council have reached an agreement in order that new rules will be approved before the conclusion of the legislature. The plenary endorsed the compromise with 454 votes in favor, 106 against and 25 abstentions. The new rules will apply from the end of 2010.

Securitization: 5% retention

To avoid the risks associated with the securitization of products, as with mortgages in packages of investment and selling the original ending, the agreement provides a formula which will diversify risk, as it stipulates that banks must retain a 5% of the proposed investment package.

Stricter rules for long-term exposure

The new legislation will tighten the rules on long-term exposure, including interbank trade. Under the compromise, a bank can not lend more than 25% of their funds to a customer or group of customers. Only exceed this limit in the case of interbank transactions of up to 150 million euros.
 
This item will be reviewed before the end of 2011 to achieve greater harmonization of national provisions.

Colleges of supervisors

The agreement envisages the creation of colleges of supervisors to facilitate cooperation between national authorities dealing with international financial institutions. This measure will help foster cooperation on supervision.
 
According to the compromise text, the Commission must submit a legislative proposal to increase the retention rate of 5% by the end of 2009. This revision was made after consulting the Committee of European Banking Supervisors.