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Internal Market Commissioner Frits Bolkestein said: “This proposal will put the EU at the forefront of modern financial regulation. It will enable European financial institutions to do business efficiently, safely and competitively to the benefit of consumers, businesses and Europe’s economy. It is an excellent example of international and European processes working in parallel to produce positive results for all.”
The proposal sets out new rules on capital requirements – the amount of their own financial resources that banks and investment firms must have to cover their risks and protect depositors. The proposal reflects the flexible structure and the major components of the Basel II Accord, but has been tailored to the specific features of the EU market.
Instead of the current ‘one-size-fits-all’ approach, the proposed new framework would consist of three different approaches allowing financial institutions to choose the approach most suited to them: simple, intermediate and advanced. The simple and intermediate approaches would be available by end 2006 (but banks could still opt to apply the current rules until end 2007) and the most advanced approaches from end 2007.
The new framework has been developed over five years, with unprecedented levels of stakeholders’ consultation in the EU. The resulting framework will promote the safety and soundness of financial institutions while fully reflecting the differing situations of institutions and their customers.
Specifically designed rules on capital requirements for financing small- and medium-sized enterprises would mean lower capital requirements for lending to such institutions and preferential treatment for certain types of venture capital.
The new framework also recognises the lower risks associated with retail lending to individuals – both for general purposes and for house purchasing – by introducing lower capital requirements for these types of lending.
To reduce single market barriers arising from the responsibilities of separate national supervisory authorities, supervisors would be required to work more closely together, including in deciding on applications by financial institutions to use the more sophisticated methodologies. The recently established Committee of European Banking Supervisors will have an important role in promoting consistency of approach between different supervisors.
A report recently published by Price Waterhouse Coopers at the request of the European Council concludes that the new framework will be beneficial for the EU prudential structures and for the vast majority of SMEs, and could produce a small positive stimulus to the EU economy.
The full text of the proposed Directive is available at:
http://www.europa.eu.int/comm/internal_market/regcapital/index_en.htm
