EU Lawmakers Place Stricter Liquidity Rules on Investment Firms

Legislators in Brussels say some investment firms constitute a risk akin to that posed by banks

European lawmakers have reached an agreement on new rules that will see greater scrutiny placed upon the financial services industry in the UK and investment firms in the European Union (EU).

Confirming an agreement that was put in place in January, the new EU laws are aimed at imposing greater supervision on investment firms, such as proprietary trading institutions and underwriters, that are based outside of the political block but operate inside of it.

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The new rules will also see greater scrutiny placed on some investment firms based in the EU. Those will include greater supervision over liquidity, capital and other areas of risk management.

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According to EU lawmakers, the reason for the new legislation is that investment firms, which carry out “bank-like” activities, can pose risks akin to those that real banks bring to the market.

EU – Investment firms on par with banks

Thus, in the view of the political bloc’s financial authorities, those financial institutions need to be treated in the same way that banks are. That means lots of fun compliance and risk management procedures that will look probably look something like the net stable funding ratio and liquidity coverage ratio rules which banks must adhere to already.

“This agreement is an important step in our strategy to build strong capital markets in the EU,” said Jyrki Katainen, a Vice President at the European Commission. “It levels the playing field between the largest investment firms and the largest banks; they will follow the same rules. This is a major achievement which will deliver a suitable rulebook for investment firms and for the provision of services to EU clients by firms which are outside the Union.”

Although the new rules may sound like they are all-encompassing, there is some nuance to them. A small investment firm, even if it provides “bank-like” services, will be subject to a new rulebook, provided it is not too risky, which, the EU says, should better allow it to carry out its activities.

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