European Commission president Jose Manuel Barroso has announced EC approval of a proposed revision of EU rules on capital requirements for banks in a move to ensure stability of the financial system, and he has called for a European and global response to the current crisis.

Barroso made the remarks on October 1, in parallel with the EC announcing that it had put forward a revision of EU rules on capital requirements for banks that is designed to reinforce the stability of the financial system, reduce risk exposure and improve supervision of banks that operate in more than one EU country.

Under the new rules, banks will be restricted in lending beyond a certain limit to any one party, while national supervisory authorities will have a better overview of the activities of cross-border banking groups. 

"The financial crisis is indeed a very serious situation. It requires a major effort on all sides. Europe is taking its responsibilities," Barroso said.

On September 30, Dexia became the latest European bank to be bailed out as the deepening credit crisis shook the banks sector. It was the second bank rescue in days by Belgium and its neighbours, the BBC reported. On September 28, Fortis bank was partly nationalised.

These moves by European governments to shore up Dexia came as global stock markets plunged after the US house of pepresentatives rejected the White House's planned $700 billion bail-out package.

Barroso said: "There is work to be done in the short term - and there is work to be done in the medium and long term", adding: "We must first of all address the urgencies and then make our structures future proof."

He said that supervision authorities, member states, central banks and especially the European Central Bank, the Presidency of the Council and the EC were all working together, and the appropriate interventions were taking place where companies are in difficulty.

"I would underline in particular that this is working well not only at the national level but also at cross-border level."

Barroso said that not only liquidity, but credibility needed to be injected into the markets, in terms of European and of global governance of the financial system.

"The work achieved since the beginning of the crisis, and more particularly in the last few days, shows that our system can cope. The European financial system has the ability to respond. We can have confidence in it," Barroso said.

But he said that it was essential to go beyond short term measures and to put into a place a structured, a truly European response.

"This is the only way to make sure that stability and confidence will return. A clear perspective is fundamental for markets to calm and to restore full confidence. We need very articulate answers by European governments together with EU institutions and the regulators and supervisors in Europe."

He said that for this reason, the implementation of the "Ecofin roadmap" agreed between the EC and member states was being accelerated.

The proposal for reform of the capital requirements of financial companies would be followed "very quickly" by a proposal for reform of the rules on rating agencies.

Detailing the reforms he saw as needed, Barroso said that there should be a further strengthening of supervision structures at the European level, a refinement of rules on the evaluation of complex assets, an improvement in the consistency of deposit guarantee schemes, and an increase in the transparency of executive pay, building on the EC's 2004 recommendation,

"I ask all those who are preparing measures to look at these recommendations, which have not been taken up as widely as they should have been," Barroso said.

He added: "At the same time, we need to reaffirm and strengthen our commitment to structural reforms for growth and jobs under the Lisbon strategy. This crisis will have an impact on the real economy and competitive pressure from others will not dissapear. The work of the past years has given us the means to confront today's crisis".

Beyond European solutions, there was also a need for global solutions, he said.

The EC supported the initiatives taken by the French Presidency of the Council to come up with a united response: the idea of an international conference in the autumn to consolidate the overall efforts of stabilisation of the financial markets, as well as its preparation at the European level, by means of a high level meeting in the coming days and the European Council on October 15 and 16. 

"I renew our call for a swift decision by the US legislators on the so-called Paulson plan," Barroso said. "The US must take responsibility. I trust that the US will show the statesmanship that is now required, for their sake and all our sake."

In a media statement, the EC said that under the new rules it had approved on October 1, banks would be restricted in lending beyond a certain limit to any one party, while national supervisory authorities will have a better overview of the activities of cross-border banking groups.

The proposal, which amends the existing Capital Requirements Directives, reflects "extensive consultation" with international partners, member states and industry. It now passes to the European Parliament and the Council of Ministers for consideration, the EC said.

Internal Market and Services Commissioner Charlie McCreevy said: "These new rules will fundamentally strengthen the regulatory framework for EU banks and the financial system. I believe that they are a sensible and proportionate response to the financial turmoil we are experiencing. Basic rigour, transparency and prudence are key to a healthy and stable banking system."

** In summary, the main changes are:

· Improving the management of large exposures: banks will be restricted in lending beyond a certain limit to any one party. As a result, in the inter-bank market, banks will not be able to lend or place money with other banks beyond a certain amount, while borrowing banks will effectively be restricted in how much and from whom they can borrow;
· Improving supervision of cross-border banking groups: 'colleges of supervisors' will be established for banking groups that operate in multiple EU countries. The rights and responsibilities of the respective national supervisory authorities will be made clearer and their co-operation ill become more effective. 
· Improving the quality of banks' capital: there will be clear EU-wide criteria for assessing whether 'hybrid' capital, i.e. including both equity and debt, is eligible to be counted as part of a bank's overall capital - the amount of which determines how much the bank can lend.
· Improving liquidity risk management: for banking groups that operate in multiple EU countries, their liquidity risk management - i.e. how they fund their operations on a day-to-day basis - will also be discussed and co-ordinated within 'colleges of supervisors'. These provisions reflect the on-going work at the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors.
· Improving risk management for securitised products: rules on securitised debt - the repayment of which depends on the performance of a dedicated pool of loans - will be tightened. Firms (known as 'originators') that re-package loans into tradable securities will be required to retain some risk exposure to these securities, while firms that invest in the securities will be allowed to make their decisions only after conducting comprehensive due diligence.   If they fail to do so, they will be subject to heavy capital penalties.