European finance and economy ministers yesterday agreed on new stricter capital requirements for banks and investment firms that will help them better cope with financial shocks.
“It’s a really good deal,” the economy minister, Margrethe Vestager, said in a press release. “The new capital requirements are a central part of the answer to how we avoid future financial crises because they place higher demands for capital and liquidity on banks in the EU. This means banks will better be able to carry losses and handle future crises without jeopardising the stability of the rest of society.”
The so-called ‘CRD 4’ package brings the EU into line with Basel 3 international baking regulations that were approved by the G20 in November 2010 and which set minimum capital and liquidity demands.
These demands increase the amount of capital and liquidity that banks must have in order to buffer them from losses and market crashes. The capital also has to be of a high enough quality if it is to be included as part of a bank’s buffer.
During the negotiations there was concern that banks could not include Danish mortgages as assets because of questions over their liquidity. This would have had grave consequences for the mortgage market, though the Economy Ministry stated in a press release that this issue had now been resolved.
The new regulations will also identify and safeguard vital financial institutions, increase sanctions for institutions breaking regulations and create a whistle blower system to allow employees to anonymously report violations.
The leadership of financial institutions has also been targeted. Individuals will have to be sufficiently qualified in order to be accepted as board members and they will be limited from joining the boards of too many different institutions.
Executives will also have their annual bonuses capped at the value of their annual salary.
If the European Parliament passes the new regulations, member states must adopt them as laws. They can also choose to enact tougher versions of some of the regulations.
The rules are expected to take effect in January 2014.