EU Proposes Sweeping Reforms to Capital Requirements and Governance of Banks
The European Commission has proposed far-reaching amendments to the Capital Requirements Directive (CRD) IV and the Capital Requirements Regulation (CRR), aimed at strengthening financial stability and preventing future crises.
Current System
Under the current system, banks are required to submit regular reports and undergo inspections by the Financial Supervisory Authority of Norway (FSAN). If a bank becomes undercapitalized, the CEO and board of directors must notify the FSAN, which will work with the bank to identify necessary measures to address the issue. In the event of insolvency, the FSAN will notify the Central Bank and the Banks’ Guarantee Fund.
Proposed Reforms
The proposed reforms introduce a resolution authority, with powers to initiate early intervention measures, including:
- Orders to implement recovery plans
- Calls for general meetings of shareholders
- Preparation of restructuring plans for debt
If a bank’s financial situation continues to deteriorate despite these measures, the FSAN may require further steps, such as:
- A change in management
- The appointment of a temporary administrator
Governance and Remuneration Practices
The proposal aims to address concerns over governance and remuneration practices at banks by introducing new rules on executive compensation and corporate governance.
- Restrictions on foreign ownership of banks: no additional regulatory restrictions apart from general rules outlined in the section.
- Legal implications for entities that control banks: owners of a “qualified interest” (more than 10% of capital or voting rights) responsible for complying with terms of approval given by the Ministry of Finance. The Ministry may revoke approval at any time if terms are no longer met.
Independence of Banks
The proposal has raised questions over the independence of banks, with some arguing that the current system does not do enough to prevent private banker activities. Under special circumstances, exceptions to the 25% limit on individual shareholdings may be granted, but a recent judgment by the EFTA Court has challenged these limits, citing an infringement on the internal market’s freedom of establishment.
Implications
The implications of this proposal are far-reaching and will likely have significant consequences for the banking sector in Norway and beyond. As the debate continues, one thing is clear: the EU Commission’s proposed reforms aim to create a more stable and resilient financial system, with greater emphasis on corporate governance and risk management.
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