New Rules Planned For Banks

EU plans new rules for banks

European rules requiring banks build up more capital when economic conditions are buoyant, so that they can better weather the hard times, moved a step closer on Friday as European Union officials prepared for a new tranche of bank legislation.

Brussels is asking for views on a fourth round of revisions to the so-called Capital Requirements Directive, which sets out rules for the amount of capital banks have to hold.

This time, seven further issues are being considered, including “countercyclical measures”, which officials believe would help create a more stable banking environment. The consultation document discusses two possible approaches – namely, “through-the-cycle” provisioning for expected credit losses, which has been used in Spain, and additional capital buffers.

But the former idea is controversial and would take regulators into largely unchartered territory. As the consultation paper notes, an earlier consultation on through-the-cycle provisioning called for “a cautious approach” and most respondents suggested that this should be postponed until other accounting-related changes, dealing with loan loss provisioning, were resolved.

Other issues which form part of the consultation include liquidity standards, leverage ratios, and how to handle large, “systemically important” financial institutions.

The consultation is expected to pave the way for draft legislation from the European Commission in the second half of 2010. The new EU internal market commissioner Michel Barnier said on Friday (26th February) that new rules were “vital…in order to be better prepared for the crises of tomorrow”.

But he added that he wanted to consult widely first. Officials say that not all the issues consulted on will necessarily form part of the legislative package, but appear fairly enthusiastic about including some counter cyclicality measures.

Ft.com, February 2010