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European Union: Proposal of Revised Rules on Bank Capital and Remuneration in Response to Global Financial Crisis

(July 20, 2009) On July 13, 2009, the European Commission proposed amendments to the existing European Union rules on bank capitalization, that is, the Directive on Capital Requirements for Banks, in two critical areas: securitization and remuneration. Financial experts have long considered both issues as significant causes of the current global financial crisis. Securitization refers to pooling and repackaging of financial assets that produce cash-flow into “securities” that are subsequently sold to investors. The remuneration issue may entice bank managers to pursue short-term profits in highly risky areas, such as securities. (Brussels Puts Forward Stricter Rules for Banks, EU OBSERVER, July 14, 2009, available at

The proposed rules are designed to ensure that banks have enough capital to deal with any risks assumed and that the national supervisory authorities have the authority to evaluate the remuneration policies of banks and impose sanctions if such policies do not meet the new criteria. Charlie McCreevy, the EU Internal Market and Services Commissioner, stated:

These new rules target some of the investments and practices that lie at the root of the financial crisis. New rules on re-securitisations – the highly complex financial products that caused huge losses for banks – will require banks to hold significantly more capital to cover their risks when investing in these products, while the additional disclosure rules will help to create a climate of market confidence. The requirements on pay and bonuses are designed to put an end to the culture of excessive risk-taking for short-term success at the expense of long-term profitability and sound risk management. This package of amendments will strengthen the risk management, transparency and sound investment practices that are key to a healthy and stable banking system.

(Press Release IP/09/1120, Rapid, Commission Proposes Further Revision of Banking Regulation to Strengthen Rules on Bank Capital and on Remuneration in the Banking Sector (July 13, 2009), available at