Basel II Gets EU Backing

Stephen Harris

29 September 2005

The European Parliament said it has approved new banking rules designed to standardise minimum capital requirements for banking institutions. This will clear the way for European Union member states' final go-ahead before the end of the year. The deal makes it virtually certain that the law, generally known as the Capital Requirements Directive but technically comprising two directives, will pass the EU legislative process on a single reading, EU sources said. It is expected to be law by the beginning of 2006, according to EU officials. Formal approval by the Council of Ministers from the 25 EU member states, Parliament’s co-lawmaking body, is expected within weeks. The CRD transposes the complex, risk-focused Basel II capital adequacy framework designed by the Basel Committee on Banking Supervision into legal form. The law will apply to all EU banks and investment firms in two stages, starting in January 2007. Members of the European Parliament and officials from both the Council of Ministers and the Commission, the EU’s executive arm that is responsible for initiating financial regulation, agreed to a two-year “sunset” clause relating to the Commission’s powers. The compromise means “comitology” powers can be used by the Commission to implement and update the CRD for a maximum of two years until April 1, 2008. After that date the powers can only be renewed with the agreement of the three institutions. In the meantime, the bodies will review the system used for such implementing provisions.