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The Capital Requirements Directive now has a rather arbitrary ticklist for banks |
The European Commission has rushed out its amendments to the Capital Requirements Directive (CRD) without adequate industry consultation, and risked isolating European banks in the process.
"The new rules apply to EU credit institutions only, and that could be a disadvantage," said one capital markets partner in London, "globally there is not a level playing field".
The changes, which the European Parliament approved on November 4, force banks to retain 5% capital on every deal to support their operations. Institutions will also be subject to stronger supervisory arrangements, with detailed guidelines concerning due diligence on securities positions.
By instating these changes now, the EC is also storing up trouble for next year, when the Basel Committee is expected to come out with its own recommendations. It will then face the problem of how to integrate or adopt the committee's proposals into the existing EU-specific legislation.
"There is certainly a danger in legislating in isolation, and this is a fragmented approach to regulation," said the partner.
As well as the 5% capital retention for the originator, firms that choose to invest in securities will be subject to stringent due diligence regulations, with penalties for non-compliance. The capital penalties that the banks can incur are therefore not based on how much risk an institution will be exposed to, but only on how fully it has assessed these risks.
This rudimentary level of carve-out has created a lengthy checklist of due diligence requirements, but ignored the actual risks that such a full inspection could reveal.
Financial institutions were only given a three-week consultation period in which to assess the proposals, a much shorter turnaround than usual. Lawyers feel that this rushed timetable did not allow for a full assessment of the CRD's anticipated impact.
The approval of the European Parliament comes ahead of the financial summit of G20 leaders, where the CRD amendments are expected to form a basis for Europe's negotiating position at the global discussions on capital adequacy. EF