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Avoiding Financial Crises – Stricter Capital Rules on Banks

Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management took force on 7 December 2009.

The Directive amendment applicable to capital requirements is primarily a response to shortcomings revealed by the financial crisis, one of them being the due functioning of the supervision over cross-border bank groups; the major changes thus do not involve only banks and other regulated parties, but the very regulators themselves. The other areas to which the amendment applies include exposure rules, liquidity risk management, application of hybrid capital instruments in capital management and the requirements for securitization transactions.

Supervision over Cross-Border Bank Groups

The new rules introduce conditions for improved cooperation between national supervisory authorities of individual affected Member States which are also required to consider the impact of their decisions on the stability of the financial systems in other states of the group. The consolidating regulator will have to establish the so-called college of supervisors to coordinate the procedures. In addition to national supervisory authorities of subsidiary banks, the college members may include national regulators of countries in which major branches are located. The amount of capital requirements for a bank group should be determined upon mutual agreement between national supervisory authorities.

Large Exposure Rules

The changes primarily apply to exposure toward another banking institution; the current limit of exposure in the amount 25% of the institution’s own funds toward a single non-banking counterparty remains unchanged. The exposure rules have been simplified. The scope of security which can be considered in terms of the limits has been extended.


The amendment to the Directive sets forth further rules for liquidity risk management. The system for the identification, management and monitoring of liquidity risks must be adequate to the line of business, scope, complexity as well as the level of risk involved and risk tolerance determined by the managing body. It must also reflect the significance of the bank in each Member State in which the bank operates. Pledged assets will have to be distinguished from those that are at all times available, especially in emergencies. A banking institution will be required to have an emergency plan to cover any liquidity crisis.

Stricter Procedures for Securitization Positions

Requirements for the transparency and due diligence are made stricter especially where the securitization transaction transformed an original loan risk. Any bank investing in securitization positions will be required to document that it has relevant information on the risks associated with such transaction and that it has procedures on how to monitor the quality thereof, including base assets; such banks are further required to carry out their own stress testing. Credit institutions which are the originators of the securitization must provide investors with easy access to all substantial data of the securitization exposure. They must also inform them of what significant interest in the underlying assets they retain; to harmonize the interest of both parties to securitization transactions; the amendment requires the originators to keep a certain minimum amount of exposure to the risk – the so-called material net economic interest. The minimum amount of the material net economic interest is 5% - e.g. 5% of the nominal value of each tranche sold. Failure to follow and comply with the requirements does not authorize the bank to exclude securitized exposures from capital requirements.

Member States will be obliged to comply with and perform the adopted measures to increase the stability of the banking sector effective 31 December 2010.

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