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Tighter rules for banks - 01/10/2008

Graph of European stocks plunging and a broker reacting

New rules on the table to curb bank practices blamed for financial crisis.

Six EU governments have already had to step in to prop up financial institutions, dispelling hope the crisis would be contained in the United States. The rescue plans are being quickly reviewed by the EU to ensure they don’t violate rules on the financial support that governments may give to companies.

The bailouts have earned praise from the commission as an example of cross-border cooperation. Along with national governments, the European Central Bank was involved in the negotiations, which the commission followed closely. The ECB has also redoubled its efforts to loosen up credit, granting banks in the 15-nation euro zone €120bn for a 30-day period.

EU leaders plan to discuss the turmoil, which has sent markets plunging, at their meeting in mid-October. Initiatives are being prepared for a response involving structural change, not just short-term measures. Meanwhile, there have been growing calls for a world summit on the crisis, an idea supported by the EU.

The commission has also urged the US to accept responsibility for resolving the crisis, not just for their own sake but for the rest of the world too. US lawmakers have so far rejected a $700bn bailout of distressed banks and financial institutions.

The rules proposed concern financial products backed by a pool of mortgages with varying degrees of risk. Banks selling such products would have to hold onto a portion of them, meaning they would bear some of the risk. Institutional investors would have to make more effort to ensure the products they bought were sound. Failure to do so could lead to heavy penalties.

Supervisory bodies would be set up for banks operating in several countries, and banks would be limited in how much money they can lend or borrow from each other. Other proposals concern how to evaluate a bank’s capital and how banks that operate in more than one country fund their daily operations.

To take effect, the proposed rules must be approved by all 27 EU governments and the European parliament.

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