The European Parliament has adopted tougher bank capital rules as a first step towards restoring confidence in financial markets.
MEPs voted by 454-106 in favour of updating rules that EU banks will have to comply with from 2010.
To make markets safer for investors, banks will be required to retain 5% of the securitised products they originate and sell. The reform also caps how much banks can lend to each other and sets up so-called colleges of supervisors for each cross-border bank so that regulators can work more closely.
The 5% rule for securitised products is to try to ensure the banks have properly assessed risks in the products. The percentage will be reviewed later this year to see if a higher rate is needed.
The EU's internal market commissioner, Charlie McCreevy, who drafted the law, welcomed the moves to resist industry attempts to scrap the retention provision. 'A retention rule has a merit of something that is not nonsense but plain common sense. Banks are not risk free. This is a crucial lesson of the financial crisis,' Mr McCreevy said.
The EU is the first major body to mandate retention of securitised products, a step that the International Organisation of Securities Commissions, a global regulatory grouping, recommended earlier this week.
The reform is an attempt to apply lessons learnt from the financial market crisis by ensuring banks set aside enough capital and do not need bailing out when markets fall.
Securitised products, such as mortgage-backed securities, are at the heart of the credit crunch. Despite being highly rated, they quickly became untradeable as the underlying home loans defaulted, forcing banks to make large writedowns and triggering a series of government rescues.
Banks have said the securitisation market is moribund and that a high mandatory retention requirement would stop its revival, but they say privately they can live with 5%.
The reform also limits to 25% how much of a bank's own funds can be exposed to a single client or group of clients. The aim is to avoid destabilising the financial market if a loan turns sour.
