BRUSSELS (Reuters) - All financial institutions in the European Union would have to set aside capital to cover risky activities under a report to be adopted by a panel of EU lawmakers later on Wednesday.
However, initial demands for tough new rules have been watered down in a cross-party compromise.
“We have a compromise and this compromise I see as a good starter for ensuring better regulation for all financial actors, including hedge funds and private equity,” the report’s author, Danish socialist Poul Nyrup Rasmussen, told Reuters.
“All financial institutions should comply with capital requirements,” Rasmussen said.
The European Commission has sole right of initiative in EU financial services rules but the special legal basis of parliament’s report — which needs an absolute majority in full parliament — means the bloc’s executive must consider the call for legislation.
The report is set to go before the parliament’s Economic Affairs committee on Wednesday.
Rasmussen’s initial report called for tough measures for specific parts of the industry such as lightly-regulated hedge funds and private equity, seen by labour unions and politicians on the left as “locusts” feasting on companies stripping their assets and laying of staff.
But since the credit crunch began over a year ago, the focus has shifted onto banks, already highly regulated, and their $500 billion of losses and writedowns which still unsettle investors and markets.
The cross-party compromise has radically tilted the report to seven principles for overseeing the overall financial market, such as transparency, capital requirements and the need for better oversight of credit rating agencies.
“With these principles we have here for the first time a legislative report which is universal, covering all the actors,” Rasmussen said.
Kurt Lauk, a German centre-right lawmaker who helped thrash out the compromise, said the report will also point out the stabilising effects of hedge funds and private equity in the current financial crisis.
“The private equity and hedge fund industry needs to have no concern but we do need to think about a new framework for the financial system as a whole and have identified seven points,” Lauk told Reuters.
The EU Internal Market Commissioner, Charlie McCreevy, is already working on proposals to tighten capital requirement rules for banks, greater oversight of credit rating agencies and more transparency in financial markets.
He has rejected calls for regulation on hedge funds and private equity groups many times, saying they play a useful role in keeping company management on their toes.
Rasmussen said the Commission will need to propose other legislation as well as filling gaps in existing EU rules.
Editing by Paul Bolding