Parliament adopted a significant step towards reducing risks in the banking system and establishing the Banking Union, on Tuesday.The rules approved by Parliament and already informally agreed with member states, concernprudential requirements to make banks more resilient. This should help to boost the EU economy by increasing lending capacity and creating more liquid capital markets, and a clear roadmap for banks to deal with losses without having to resort to taxpayer funded bailouts.ProportionalityTo ensure that banks are treated proportionately, according to their risk profiles and systemic importance, MEPs ensured that “small and non-complex institutions” will be subject to simplified requirements, in particular with regard to reporting and to putting fewer funds aside to cover possible losses. Systemically important banks, however, will have to have significantly more own funds to cover their losses in order to strengthen the principle of bail-in (losses imposed on banks' investors (e.g. bondholders) to avoid bankruptcy, instead of state-funded recapitalisation) in the EU.SME supporting factorAs small and medium enterprises (SMEs) carry a lower systemic risk than larger corporates, capital requirements for banks will be lower when they lend to SMEs. This should mean that lending to SMEs will increase.Peter Simon (S&D, DE) the rapporteur for the prudential requirements (CRD-V/CRR-II), said:“In the future, banks will be subject to stricter leverage and long-term liquidity rules. Sustainability is also important, as banks have to adapt their risk management to risks that stem from climate change and the energy transition.”Avoiding taxpayer bailoutsParliament has approved the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR), which means that international standards on loss absorption and recapitalisation will be incorporated into EU law.This new legislation on a clear roadmap for banks to deal with losses should ensure that they hold enough capital and bail-inable debt to not resort to taxpayer bailouts and define conditions for early remedial measures.MoratoriumThe new rules for applying a “moratorium power” will suspend payments by banks that are in difficulty . This power may be activated when it has been determined that the bank is failing or likely to fail and if there is no immediately available private sector measure to prevent the failure. It allows the resolution authority to establish whether it is in the public interest to put the bank into resolution rather than insolvency. The scope of the moratorium would be proportionate and tailored to a concrete case.If the resolution of a failing or likely to fail bank is not in the public interest, it should be wound up in an orderly manner according to national law.ProtectionFinally, Parliament secured provisions to protect small investors from holding bail-inable bank debt, such as bonds issued by a bank when it is not a suitable retail instrument for them. Financial contracts governed by third country law in the EU would need to have a clause acknowledging that it was subject to the resolution rules on bail-in and moratorium.Gunnar Hökmark (EPP, SE), the rapporteur for the BRRD/SRMR package, said: “This is a very important step in the completion of the Banking Union and in reducing risks in the financial system. The new law is balanced, as it sets requirements on banks but at the same time also ensures that banks can play an active role in financing investments and growth”.