European Union states have approved new rules that will force banks to retain 5 percent of securitised products they originate and sell in a bid to make markets safer for investors, an EU diplomat said on Wednesday.
The reform is an attempt to apply lessons learnt from the financial market crisis by ensuring banks set aside enough capital to cover different risks on their books.
EU member state ambassadors gave the nod to a reform of the capital requirements directive, but some lawmakers in the European Parliament, which has joint say and votes next week, has been pushing for a higher retention rate on securitised products.
The text endorsed by EU states on Wednesday was the outcome of a joint deal with representatives of parliament but after that deal was struck, a group of lawmakers tabled amendments to increase retention to between 10 and 15 percent.
An official in parliament close to the talks said the joint deal includes a provision added this week calling on the European Commission to consider by year-end the need raise the retention figure and make proposals accordingly.
The hope is the pledge will soften the opposition enough to allow parliament to adopt the measure into law next week.
Securitised products, such as mortgage-backed securities, are at the heart of the credit crunch.
Despite being highly rated, they quickly became untradable as underlying home loans defaulted, forcing banks to make huge writedowns and triggering a series of government rescues.
Banks have warned the securitisation market is moribund and that a high mandatory retention requirement would stop its revival, but say privately they can live with 5 percent.
The capital requirements reform also caps how much a bank can lend to another bank in order to stop the wider financial system from being hurt if loans turn sour.
It will also set up colleges of supervisors for all big cross-border banks, so that all the national regulators that oversee operations across the EU meet regularly to share information and spot any problems early.
The reform is set to take effect in 2010 but another round of reform to the rules is already being planned.
EU Internal Market Commissioner Charlie McCreevy will propose in June giving supervisors powers to require a bank to top up its capital if its remuneration policy is encouraging very risky activities.
The Basel Committee, which drafts high-level principles on bank capital, will propose changes later this year to its Basel II rules which the EU's capital requirements directive has put into law.
The changes are set to include the requirement for banks to stick to a simple leverage ratio and this will be introduced into the EU through a future reform of the capital requirements directive.