The proposals include EU-wide criteria for assessing the eligibility of hybrid capital to be counted as part of a firm’s overall capital.
The proposals specify the features that hybrid capital must have regarding permanence, flexibility of payments and loss absorbency to be considered eligible as tier one capital.
The FSA’s proposals also strengthen the capital requirements for trading books to ensure a firm’s assessment of the risks connected with its trading book better reflects the potential losses from adverse market movements in stressed conditions.
The FSA is looking to restrict firms’ lending beyond a certain limit to any one party and include a requirement that firms do not invest in a securitisation unless the originator retains an economic interest.
The FSA is also proposing higher capital requirements for re-securitisations to make sure that firms take proper account of the risks of investing in complex financial products and upgrades to disclosure standards to increase market confidence.
The consultation period closes on March 10, 2010 and the final rules will come into effect on January 1, 2011.