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EU to Finalize Bank Reform Deal by End of 2018, Addresses AML

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On Tuesday, Finance ministers finally agreed upon a set of policies directed toward strengthening the EU banking sector. The agreement came after almost two years of discussion on the so-called "banking package" that was proposed by the European Commission in November 2016.

The agreed upon measures are expected to ensure financial stability by addressing issues that previously was ignored. Also, banks' lending capacity is likely to improve and thus better support the EU economy.

Commission Vice-President ValdisDombrovskis expressed his delight at the parliament and council reaching an agreement on the banking package, after months of “very complex and technical discussions”.He further added, “This very important risk-reducing package complements the progress that has already been achieved over the past years, and lays the basis for further progress on strengthening the Banking Union."

While some matters are yet to be decided upon, the Commission expects to finalize the political agreement by the end of the year.

Key Highlights of the Meeting

Riskier European banks will be subject to higher capital requirements and they will require to adopt methodologies that are able to reflect more accurately the actual risks to which the institutions are exposed.

Pre-determined leverage ratio would be implemented on the banks to keep them from excessive leverage along with a fixed net stable funding ratio to control the dependence on short-term wholesale funding and to reduce long-term funding risk.

Notably, Global Systemically Important Institutions such as Deutsche Bank (DB - Free Report) or Societe General (SCGLY - Free Report) are required to hold minimum levels of capital and other instruments, which bear losses in resolution. This requirement — Total Loss-Absorbing Capacity — is expected to increase the resilience of institutions and enhance financial stability.

Further, measures that target to bolster lending capacity of banks are directed toward relaxing requirements for smaller and less complex banks. Rules regarding CRD/CRR and those relating to deferral and remuneration using instruments, such as shares are to be made proportionate to institutions structure. Also, reporting and disclosure requirements are to be relaxed for small banks.

Take on Actions to Tackle Money Laundering

Addressing the prior instances of alleged money laundering activities in the region, such as Danske Bank (DNKEY - Free Report) scandal that refers to almost $230 billion in transactions that were processed by its Estonian branch during 2007-2015, the council has adopted a number of short-term non-legislative actions. These will enhance the supervision of anti-money laundering (AML) activities.

A 'post-mortem' review of the recent alleged money laundering cases involving EU banks is to be conducted to acknowledge the factor that enabled or led to them. Also, the key areas that need closer scrutiny by prudential supervisors in relation to money laundering or terrorist financing risks are to be identified.

The action plan has a key objective of improving supervision and exchange of information between the relevant authorities. This will be done by monitoring implementation of the ESAs' risk-based supervision joint guidelines and expand them to include guidance on best practices for the imposition of administrative sanctions in cases of breach of AML rules.

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