"Hair-raising" CDS capital charge voted down

A "hair-raising" capital charge for credit default swaps (CDSs) in Europe that are not centrally cleared was voted down by a European Parliament committee yesterday.

The Economic and Monetary Affairs Committee was voting on potential changes to the EU's capital requirements directive (CRD).

Among them was a proposal made by French Socialist MEP Pervenche Berès, which would have limited any regulatory capital benefits of CDSs to those cleared via a central counterparty in the European Union (EU).

"There were some hair-raising figures as to how that was going to affect regulatory capital requirements," an industry source told Risk. Although it would be difficult to calculate the exact amount of extra capital banks would have been forced to hold, the figures would have been "in the billions", the source estimated.

Although the proposal was ultimately voted down, the committee also gave approval to a raft of other measures first mooted by the European Commission (EC) in October. This includes a specific call for regulation of CDSs and the setting up of a central clearer supervised by the EU. The committee wants legislative proposals for both to be in place by the end of 2009.

Elsewhere, the committee gave a green light to various changes to the CRD, which would be implemented by the EU's member states from the beginning of 2011.

Largely in line with EC proposals, the committee approved a proposal that securitisation originators should retain at least 5% of the total value of any exposures securitised. Alternatively, originators can give an "explicit and unconditional" warranty, amounting to confirmation of an economic interest in the securitisation.

The committee also approved to proposed limits on the amount of exposure financial institutions can have to a given client or group of clients. If the legislation comes into force, these exposures would have to be under €150 million or below 25% of their own funds. Under the proposals, institutions would have to report to supervisors on large exposures to other firms - a process the committee will try to formalise in co-operation with the Committee of European Banking Supervisors.

In response to a belief that national authorities may not be able to handle cross-border crises, the legislation would establish pan-European colleges of supervisors to deal with international financial institutions. However, the committee believes this should only be a "temporary step" until a stronger role for an EU supervisory system is established. This could take the form of a European system of banking supervisors, similar to the existing Eurosystem group of central banks, it said.

The committee added it supported efforts by the European Commission to ramp up efforts to deal with liquidity risk.

Whether the amendment becomes law now hinges on its approval by the European Parliament and the Council of Europe. The European Parliament is due to vote on the proposals during the week of April 20.

See also: EC moderates CRD revisions