Revised Capital Requirements Directive - A step towards recovery

4.43.00pm BST (GMT +0100) Wed 6th May 2009

Sharon Bowles MEP, Liberal Democrat economic affairs spokesman, welcomed the first reading agreement on the Capital Requirements Directive, saying that the package should help to build confidence.

The revision tightens the definitions of core capital, limits the amount of short term exposure that banks can have to one another, introduces colleges for supervision of groups and puts in place controls on the securitisation process.

Sharon said:

"The most controversial part of the CRD was the provision to make securitisation safer. This included banks retaining 5% of all securitisations. Also included were measures to ensure that appropriate checking, or due diligence, is done on the underlying loans in order to avoid a repeat of the 'toxic loans' problem.

"These checks are important, but I ensured that these penalties were proportionate to the severity of any lapse. Now the measures are fit for purpose and should build confidence in a new kind of 'quality assured' European securitisation.

"European problems with 'toxic' securitisation came on the buy side, from the US. However, the fear that created has also caused our own securitisations to dry up. Our banks thus lost the main instrument that enabled them to sell on their loans - an important instrument because it freed up capital for further lending and was a major driver for growth.

"For example, in 2006-7 European securitisations totalled €800 billion, €526 billion supporting European mortgages, tens of billions each on car purchases, credit card spending and SME loans - including something like €40 billion of German SME loans. It is no coincidence that these are the very areas where the credit crunch is biting hardest.

"There were amendments suggesting an increase to 10% or more retention. I am glad these were defeated as they would have inhibited restoration of lending. The retained portion attracts a capital charge, so it reduces the capital that can be freed up, in turn restricting lending. A 10% hit, now, during times of capital stress would hurt borrowers and businesses. That's why other forums, also having started with proposals for higher retention, are tending to settle on 5% too.

"We do have a failsafe provision which means the Commission is required to report back by the end of the year on the retention percentage in the light of international circumstances."

Sharon's speech to Parliament is available to read at http://tinyurl.com/smbcaptialreqs .