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European Parliament approves new EU banking reform package

European Parliament has approved a new EU banking reform package to help banks cope better with crisis and stiffen supervision, spur growth and enable easy lending to small firms that drive the economy.

The package consists of Capital Requirements Directive (CRD 4), which requires limiting bankers’ bonuses and strengthening banks’ capital buffers capital, and a Capital Requirements Regulation (CRR).

Effective from 1 January 2014 and subject to approval from the Council of Ministers, the new rule will put cap on bonuses at 100% of a banker’s annual salary, or twice the annual salary if shareholders give their consent.

The new set of rules, which is at par with Basel Committee on Banking Supervision reforms – Basel III, have been designed to help the financial sector to deal with any crisis as one that emerged in 2008.

MEP Othmar Karas said the new single rule book for all its 8,200 banks is the foundation on which the EU banking union must be built.

"The rules on bankers’ bonuses will instill fairness and transparency and contribute to a change in banking culture", Karas added.

As per the proposed regulation, the EU banks will have to hold at least 8% good-quality capital, of which just over half must be Tier 1, the highest-quality, lowest-risk form capital that must be reasonably liquid.

Further, the lenders will also require holding a "capital conservation buffer" to absorb losses and protect their capital, and a "countercyclical capital buffer" to usher economic growth.

In a bid to bring greater transparency and counter recent legal scandals, the rule has mandated the banks to disclose accumulated profits, taxes paid and subsidies received country by country, as well as turnover and employees strength.

In collaboration with the European Banking Authority (EBA), the banks will be supervised by EU member states’ competent authorities, and from 2014, these details should be reported to the EU and from 2015, it will be made fully public.