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EU assembly toughens bank rules

THE European Parliament adopted tougher bank capital rules yesterday as a first step toward restoring confidence in markets shaken by the worst financial crisis in decades.

The parliament voted by 454 in favor, 106 against with 25 abstentions on updating rules that European Union banks will have to comply with from 2010.

"This is obviously just a first step, a response to the financial crisis but it won't be enough," said Othmar Karas, the Austrian law maker who steered the measure through parliament.

To make markets safer for investors, banks will be required to retain 5 percent of the securitized products they originate and sell. The reform also caps how much banks can lend each other and sets up so-called colleges of supervisors for each cross-border bank so that regulators can work more closely.

"It creates more faith when people are losing trust. It's a clear signal to the market that people should be more careful, more transparent and have better controls," Karas said.

Banks will be required to retain 5 percent of securitized products they originate and sell - and top up capital against it - to try to ensure they have properly assessed risks in the products.

The percentage will be reviewed later this year to see if a higher rate is needed.

The EU's internal market commissioner, Charlie McCreevy, who drafted the law, welcomed the moves to resist industry attempts to scrap the retention provision.

"A retention rule has a merit of something that is not nonsense but plain common sense. Banks are not risk free. This is a crucial lesson of the financial crisis," McCreevy said.

"I am pleased the commission has been given a second chance to tighten up the text in the course of 2009," McCreevy said.

The EU is the first major body to mandate retention of securitized products, a step that the International Organization of Securities Commissions, a global regulatory grouping, recommended on Tuesday.

The reform is an attempt to apply lessons learnt from the financial market crisis by ensuring banks set aside enough capital and do not need bailing out when markets fall.

Securitized 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 large writedowns.


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