Barnier said: ‘The amendments to the Capital Requirements Directive voted today by the European Parliament target the investments and practices that lie at the root of the recent crisis.
‘The requirements on pay and bonuses send a strong political message: there will be no return to business as usual. The EU is leading the way in curbing unsound remuneration practices in banks. Banks will need to change radically their practices and the mentality that have led in many cases to excessive risk-taking and contributed to the financial crisis.
‘The tougher capital requirements for banks’ trading books and their investments in securitisations – the kind of highly complex products that have caused huge losses for banks – will ensure that banks hold significantly more capital to cover their risks. This will make the sector as whole better able to resist stress.’
Capital Requirements Directive
The Capital Requirements Directive (CRD) primarily aims at giving effect at EU level to the Financial Stability Board (FSB) principles and standards on compensation agreed by G20 leaders. The directive will require credit institutions and investment firms to have remuneration policies that are consistent with effective risk management.
The Directive pursues three objectives:
- To impose a binding obligation on credit institutions and investment firms to have remuneration policies and practices that are consistent with and promote sound and effective risk management, accompanied by high-level principles on sound remuneration;
- To bring remuneration policies within the scope of the supervisory review under the CRD, so that supervisors would be able to require the firm to take measures to rectify any problems that they might identify;
- To ensure that supervisors may also impose financial or non-financial penalties (including fines) against firms that fail to comply with the obligation.
The new rules on remuneration can apply as early as 1 January 2011 with principles on remuneration applying to all variable remuneration payable on or after this date, including when it was awarded in 2010.
The Capital Requirements Directive will also strengthen banks’ capital position and increase market confidence through reform of the capital rules for the trading book and for securitisations. The new rules on trading book and securitisations can apply as early as 31 December 2011.
