The European Commission proposed tighter risk assessment and higher capital reserve requirements for European banks. The new proposed rules restrict banks' investments in highly complex re-securitisations without fully understanding the risk associated with them. They also strengthen rules on banks' pay structures and disclosures of risk exposure. "New rules on re-securitisations – the highly complex financial products that caused huge losses for banks – will require banks to hold significantly more capital to cover their risks when investing in these products, while the additional disclosure rules will help to create a climate of market confidence," said Internal Market and Services commissioner Charlie McCreevy in a statement on the proposal. The Commission said a proper disclosure of the risk exposures faced by a bank regarding securitisations will spark greater market confidence and will encourage banks to continue lending. Changing the way banks assess risks connected with their trading books should create more transparency and ensure the books reflect all potential losses under adverse market conditions. The proposed new rules also tackle "perverse pay incentives" by banning compensatory policies that encourage or reward excessive risk-taking practices. The Commission's proposal is only the latest in a recent series of policy actions designed to strengthen the European financial system. A significant policy, the UK Banking Act 2009, has been raising eyebrows among market players that say the Act gives UK authorities broad discretion to modify or terminate trust arrangements, potentially to the detriment of investors exposed to securitizations and covered bonds. Moody’s Investors Service this week put to rest some fears about the Act and the rating impact it poses to the structured finance portfolios of those institutions licensed to conduct securitization business in the country. Write to Diana Golobay.