Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive amending Article 12 of Directive 77/780/EEC on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions, Articles 2, 6, 7, 8 and Annexes II and III of Directive 89/647/EEC on a solvency ratio for credit institutions and Article 2 and Annex II of Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions`() (97/C 30/04)

On 28 May 1996 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 17 July 1996. The Rapporteur was Mr Pelletier.

At its 338th Plenary Session held on 25 and 26 September 1996 (meeting of 25 September) the Economic and Social Committee adopted the following Opinion by 88 votes to 2 with 6 abstentions.

1. Introduction

1.1. The proposal for a Directive submitted to the ESC contains a series of technical amendments of variable scope to the basic Directives governing banking activity:

- Directive 77/780/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions;

- Directive 89/647/EEC on a solvency ratio for credit institutions;

- Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions.

1.2. There is no unifying theme behind the various proposed amendments.

1.3. The aim is to adapt some of the articles of the basic banking Directives in the light of experience in order to fill gaps, and more fundamentally to take account of the work of the Group of Ten in Basle on the prudential treatment of risks related to derivative instruments.

1.4. It seems appropriate therefore to analyze the proposals article by article.

2. Specific comments

2.1. Amendment of Directive 77/780/EEC on the taking up and pursuit of the business of credit institutions

2.1.1. Article 1: amendment to Article 12(3)

2.1.1.1. Article 12 of Directive 77/780/EEC, as amended by the second Directive of 15 December 1989, provides for exchanges of information between the competent banking authorities of the EEC subject to guarantees of professional secrecy.

These guarantees are also required from the competent banking authorities of third countries.

2.1.1.2. Article 12 does not allow Member States to conclude cooperation agreements providing for exchanges of information with the non-banking supervisory authorities of third countries.

2.1.1.3. In view of the close links between banking and other financial activities such as insurance, the Commission has good reason to extend cooperation with the various non-banking supervisory authorities of third countries, whilst requiring the same guarantees of professional secrecy.

2.1.1.4. The Committee approves the Commission's proposed amendment.

2.2. Amendment of Directive 89/647/EEC on a solvency ratio for credit institutions

2.2.1. Article 2: amendment to Article 2(2)

2.2.1.1. This measure is intended to relax the requirement for own funds used in calculating the solvency ratios of a specific type of borrower, i.e. churches and religious communities which have the right to raise taxes.

2.2.1.2. The Commission is right to argue that this type of credit risk is no greater than that of regional or local authorities having the same powers.

2.2.1.3. This provision concerns three EU Member States only: Germany, Sweden and Finland.

2.2.1.4. The Economic and Social Committee has no objection to this proposal.

2.2.2. Article 3: amendment to Article 6(1)(a)(8) and (c)(2)

2.2.2.1. The purpose of this article is to reduce to zero the weighting required by the solvency ratio Directive to be applied to asset items of a purely accounting nature.

2.2.2.2. These assets carry no risk and do not have a counterparty, and are simply the expression in accounting terms of a liability.

2.2.2.3. There are no objections to this measure.

2.2.3. Article 4: amendment to Article 6(2)

2.2.3.1. The purpose of this article is not to penalize in terms of risk weighting capital subscribed to the European Investment Fund but not yet paid up.

2.2.3.2. The newly established European Investment Fund is intended to contribute to the consolidation of the internal market and the promotion of economic recovery.

It would therefore be desirable not to penalize financial institutions, whose reserved share of the EIF's subscribed capital is 30 %, of which only 20 % will be paid up at the outset.

2.2.3.3. Participant financial institutions' unpaid commitments appear sufficiently sound to justify the Commission's proposal that a 20 % weighting be applied.

2.2.4. Article 5

2.2.4.1. The purpose of the proposed amendments (Articles 8 to 10) to the Directive on capital adequacy is to insert into Annex II the technical measures needed to establish stricter and more precise prudential treatment of off-balance-sheet derivative instruments, while broadening the scope of the instruments covered.

An analysis should however by made of the effects on SMEs of the weightings proposed for contracts relating to raw materials.

2.2.4.2. The methods described in Annex II apply to over-the-counter (OTC) off-balance-sheet derivative instruments. They do not apply to contracts concluded on an organized market, which are subject to daily margin requirements, nor to exchange-rate contracts (with the exception of gold contracts) with an original maturity of 14 calendar days or less.

2.2.4.3. In order to assess the credit risk of OTC derivative instruments, institutions are required to carry out the following calculation:

- the current replacement cost (obtained by marking to market) of all contracts with positive values;

- a figure for future potential credit exposure, calculated as a percentage of the notional principal amounts or values underlying an institution's aggregate books as a function of residual maturity and the nature of the contract (table I).

2.2.4.4. For banks using this current risk method, the credit risk arising from futures contracts which are included in a bilateral netting agreement shall be calculated as the sum of the following:

The net replacement cost at market prices, where value is positive, plus an additional amount calculated on the basis of the underlying nominal amount. The increase applicable to netting contracts (PCE red) shall be equal to the weighted average of the gross increase (PCE gross) and the gross increase corrected by the ratio of net current replacement cost: gross current replacement cost (NGR). The calculation can be summarized as follows:

PCE red = 0,4 × PCE gross + 0,6 × NGR × PCE gross.

2.2.4.5. The measure of risk stipulated by the Directive is in line with the Basle committee's recommendations. There is therefore no objection.

2.2.5. Article 6

2.2.5.1. Member States may apply a 50 % weighting to off-balance-sheet transactions which are sureties or guarantees having the character of credit substitutes which are fully guaranteed by mortgages.

2.2.5.2. The ESC has no objection to this Article.

2.2.5.3. It should be clarified in Article 6(1)b that a 20 % weighting is now applied to loans secured by collateral in the form of regional or local authority securities, subject to the provisions of Article 7 (in the event that the proposal concerning Article 8 remains unchanged).

3. Conclusion

The Committee endorses the Commission's proposals and hopes that they will be adopted as soon as possible, in order to prevent European Union credit institutions being affected by distorted competition on the part of their counterparts from elsewhere in the world.

Brussels, 25 September 1996.

The President of the Economic and Social Committee

Carlos FERRER

() OJ No C 208, 19. 7. 1996, p. 8.