Banking overhaul
July 13, 2009
Analysts say the meltdown of the financial system, which has led to the worst recession in over 60 years, was due in part to banks' inability to assess the risk level of some of their investments.
If the proposal becomes law - which requires the approval from the EU Parliament and the 27 EU governments - banks would have to demonstrate that they fully understood the risks involved when making an investment, especially in the case of highly-complex "re-securitization" investments. Banks that encouraged staff to take too much risk by offering bonuses could face sanctions.
In addition, the proposal calls for banks to keep more money and assets on hand to cover any potential losses if the value of an investment were to significantly deflate.
"The proposal aims to ensure that banks hold enough capital to reflect the true risks they are taking," European Commission chief Jose Manuel Barroso said in a statement.
He added that the plan would "legally oblige banks and investment firms to have remuneration policies consistent with effective risk management."
The European Banking Federation said that the banks had anticipated the changes and were not surprised by Monday's announcement.
"What we don't want is a supervisory authority to determine the level or form of remuneration," an EBF spokeswoman said. "We also insist that the new rules in terms of remuneration are international. We want a level playing field."
The new rules are not likely to take effect until the end of 2011, and therefore, are not meant to address the current financial crisis. However, the EU said the proposal could "strengthen market confidence and banks' financial health."
vj/dpa/AP/Reuters/AFP
Editor: Neil King