Busted: Bankers and The Global Economy

July 26, 2008

EU Wants Tighter Controls on Securitized Loans

The European Union has looked long and hard at the mortgage debacle in the United States and is planning to take regulatory action at home. Bankers have proved that they cannot be entirely trusted where profits and internal banking instruments are concerned. The European Commission is on top of the matter to avoid a management crisis by EU banking bodies. Naturally, bankers are concerned with their profit margins more than safety or the possibility of fraud.

The EU wants to allow banks to buy so-called securitized loans, loans repackaged as securities, if the selling institution holds back 10 percent in reserves, says a European Union Commission draft for new banking rules. The intent is to implement the rules in the autumn. EU governments and the European Parliament have not approved the plan.

The plan has alarmed the financial industry. The industry claims that the ruling could restrict lending in Europe by driving up the price of loans for companies, home buyers and consumers. Banks think that Europe’s banking and financial market is at risk of becoming overregulated. Clearly, the EU knows that commercial bankers have their brains in their wallets.

Banks are also worried about EU plans to limit the size of loans for interbank lending. The draft plan requires banks to commit no more than a quarter of equity capital for interbank loans. Bankers fear that such a move would lead to new liquidity shortages in interbank dealings.

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