European Parliament adopts rules to reduce risk in financial system

European ParliamentEuropean Parliament approved a number of changes on Tuesday that are designed to reduce risk-taking by bank executives, increase banks’ capital levels and enhance supervision.

“The new set of rules is the furthest-reaching banking regulation in the EU to date,” Othmar Karas, a parliament member from Austria, said. “The new single rule book for all its 8,200 banks is the foundation on which the EU banking union must be built. The single supervisory mechanism will be the roof. We must now add the walls: the resolution framework for banks and deposit guarantee schemes. As legislators, we do not regulate salary levels. The rules on bankers’ bonuses will instill fairness and transparency and contribute to a change in banking culture.”

One of the changes includes a change to the salary-to-bonus ratio to 1:1, which may be increased to a maximum of 1:2 with the approval of at least 66 percent of shareholders owning half the shares or of 75 percent of votes.

EU banks are also required to set aside more capital under the changes. Banks must maintain a minimum of eight percent good-quality capital, just over half of which must be Tier 1, doubling the current Tier 1 capital requirement.

Additionally, banks also have to hold a “capital conservation buffer” to protect capital reserves and a “countercyclical capital buffer” to ensure that the institutions accumulate a sufficient capital base during times of economic growth, which would allow banks to continue stable lending during times of economic stress.

The new rules will also reduce the nominal risk banks must assign to small- and mid-sized business loans, thereby cutting back on the amount of capital the institutions must set aside to cover potentially bad loans.

Banks must also disclose profits made, taxes paid, turnover, number of employees and any subsidies received. Beginning next year, the data will be reported to the European Commission and will be made available to the public in 2015.

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