FACTBOX-EU, Basel to tighten bank capital charges

July 13 (Reuters) - The European Union's executive proposed higher capital charges on banks operating in the bloc in a bid to apply lessons from the credit crunch.

Separately, the Basel Committee on Banking Supervision, a global body, published the final version of its tougher trading book rules that the EU proposal will put into law in the 27-nation bloc.

The European Commission will require banks to hold more capital against risky assets on their trading books and gives supervisors powers to impose higher capital charges or fines on banks that have pay policies that encourage too much risk-taking. [ID:nLD650047]

The draft law is in line with pledges made by the G20 group of industrialised and emerging market countries in April and with work under way at the Basel Committee on Banking Supervision which is toughening up its globally-applied Basel II bank capital rules.

The following are the main elements of the draft law that will need approval from the European Parliament and EU governments to come into force and could be subject to changes.

The draft law is expected to take effect sometime from the end of 2010 but will be delayed if there is no sustained economic recovery:

TRADING BOOK

Capital requirements on assets held on a trading book are currently calculated using a bank's own model for potential future losses. This resulted in too little capital being held as the credit crunch unfolded.

Under the new rules, banks would have to estimate potential losses over much longer periods of possible stress and from events such as a credit rating downgrade.

There will also be a separate standard capital charge to cover risks on a trading book.

Disclosure requirements on assets held on a trading book will be beefed up to increase market confidence.

RE-SECURITISATION

This applies to products such as collateralised debt obligations (CDOs) squared which have securitised products as their underlying assets, making them complex and less transparent.

The draft law proposes a capital charge roughly three times higher than on securitised products such as mortgage-backed securities, which have a simpler underlying asset.