Brussels, 10/03/2009 (Agence Europe) - On Monday 9 March, the Parliamentary economic and monetary affairs committee adopted the report by Othmar Karas (EPP-ED, Austria) on the draft directive amending European rules on own-fund requirements for banks (see EUROPE 9752). It recommends a minimum threshold of 5% of debt securities to be retained by banks on their balance sheets while, at the same time, authorising an alternative solution to the requirement to retain debt securities. This would require originators to provide an “explicit and unconditional warranty” that they had shown due diligence. On other important elements of the text, such as setting up colleges of supervisors to monitor cross-border financial institutions or limiting exposure to major risk, the text adopted by the MEPs is close to the general approach agreed by the Council at the end of November 2008 (see EUROPE 9787). It may be reasonably hoped, then, that there will be first reading agreement in April, and certainly before the end of this European Parliament term of office. The Commission has announced a further review of the own funds directive (2006/48/EC) (see EUROPE 9837).
Securitisation. The European Commission's initial proposal suggested making banks liable by requiring them to retain in their balance sheet at least 5% of the debts they issue and then sell on as securities on the financial markets. This financial innovation, considered by some to be useful because it dilutes and spreads risk among financial players, has also, according to other observers, helped spread toxic assets, such as securitised products linked to US subprime loans without these loans appearing on their holders' balance sheets. The MEPs feel that banks should retain within their financial statements a significant and, in any event, not less than 5% of the debt securities they issue, or hold equivalent interest to the performance of these debts. This equivalent interest could be the explicit and unconditional warranty given by the debt securities originator that due diligence requirements have been adhered to. Socialist MEPs opposed this alternative. They even put down an amendment - ultimately rejected by the committee - which would have required at least 15% of the securitised assets to be retained.
Colleges. MEPs backed the systematic creation of colleges of national regulators responsible for supervising financial institutions that operate across borders, and to ensure appropriate cooperation with the competent authorities of third countries where groups operate. Made up of the supervisory authority of the member state where the group has its head office (home supervisor) and those of the countries where the group has subsidiaries (host supervisors), these colleges, working on a collegial basis, will take decisions within a three month timescale on own fund requirements at group level. In the event of disagreement among supervisors, the CEBS would be brought in. Its opinion will have to be taken into consideration, the competent authority having to explain why it does not follow this opinion. Ultimately the home supervisor will be able to decide on the level of own funds needed at group level, while the host supervisor will be able to take the same decision at the level of the subsidiary/ies it monitors.
While a positive development, the creation of colleges is only a stage in the process of improving the European system of financial supervision, MEPs say. They call on the Commission to report before the end of the year and to bring forward legislative proposals which would give a greater European role in the system of financial supervision, by referring to the recent report by the de Larosière group. Concrete results are expected before the end of 2011 (see EUROPE 9848).
Major risks. The financial crisis has also revealed the vulnerability of financial institutions largely exposed to single counterparty risks. The Commission proposed, therefore, that a credit institution could not lend to the same bank sums exceeding 25% of its capital, small banks being allowed to go beyond this threshold if the sum lend did not exceed €150 million. Like the Council, the Parliamentary committee agreed with this arrangement. Biannual statements on exposure to major risk which banks will submit to the competent authorities will have to use common forms from 2013, with the Committee of European Banking Supervisors (CEBS) being called on to put out guidelines on this form before the end of 2011.
CDS. On credit default swaps (CDS), the Parliamentary committee called on the Commission to prepare a report before the end of the year along with appropriate legislative proposals on the measures that would improve the transparency of non-regulated markets on which this type of contract is exchanged, including calling for the creation of a central compensation chamber. (M.B./transl.rt)