McCreevy plans to overhaul financial standards as turmoil continues
Charlie McCreevy, financial-services commissioner for the European Union, speaks during a news conference at EU headquarters in Brussels, Belgium, yesterday on the need for EU banks to hold more capital for asset-backed bonds as part of a regulatory overhaul proposed in response to the worst financial crisis since the Great Depression
Strict limits on the size of any individual risk taken on by European financial institutions, higher capitalisation and a switch to rules on fair-value accounting if other parts of the world do so, are among proposals made yesterday by EU Internal Market Commissioner Charlie McCreevy as part of a regulatory overhaul in response to the global financial crisis.
The new plan, which updates the law enacting the Basel II global standards in the EU and now goes to the European Parliament and the council of EU governments, also proposes higher capital standards for the securities built out of loans or other assets, referred to as structured finance, at the heart of the market turmoil. The measures will also seek tighter co-operation among regulators, with each multinational bank overseen by a college of authorities from every country in which it does business.
Solutions
"We in the European Commission can assist in providing some of the solutions," Mr McCreevy said. "There is no one single answer to the financial turmoil."
According to some market watchers, capital-requirement reductions for risk mitigation in the past haven't always reflected reality and regulators are to some extent catching up with that. "Making the capital requirements responsive to risk is right," said Derek Chambers, an analyst at Standard & Poor's Equity Research in London.
Jigsaw
"But I'm not sure that altering one little piece of the jigsaw is going to solve everything."
European governments have bailed out a number of lenders this week and credit markets seized up as US lawmakers struggled to pass the $700bn bank rescue package. The Government here is also moving to have its own two-year, guarantee plan for banks and deposits written into law.
European banks have written off $229bn out of a global total of €418bn in the turmoil triggered last year by the collapse of the US subprime mortgage market, according to figures from Bloomberg.
Banks will be subject to new requirements to monitor the performance of any structured-finance instruments they invest in, such as the mortgage-backed bonds that spread losses around the world from defaults by US home buyers.
Lenders would also have to receive assurances that the organisers of such deals do due diligence on the underlying loans or assets, and intend to retain at lease 5pc ownership. Mr McCreevy said the level could be increased if the parliament or national governments request it. (Additional reporting Bloomberg)
- Ailish O'Hora Business News Editor
