1^91 Official]ournal of the European Communities ^oC102B19 
Opinion on the proposal for a Council Directive relating to the supervision of credit 
institutions onaconsolidated basis 
(91^C102B0^ 
The Council decided on 20Decemberl990, in accordance with Article 57(2) of the EEC 
Treaty,to ask the Economic and Social Committee for an Opinion on the abovementioned 
proposal 
The Section for Industry, Commerce, CraftsandServices, which wasresponsiblefor the 
preparatory work, adopted its Opinion on^Eebruary!99L Air pardon was rapporteur. 
At its 2^th plenary session (meeting of 27Eebruaryl991)the Economic and Social Committee 
adopted the following Opinion byamajority,withl^ votes against and^rabstentions. 
L Ceneral comments 
LL The aim of supervising credit institutions ona 
consolidated basisis to ensure that credit institutions 
which formpartofa^roup are monitored effectively. 
Such monitoring must take account not only of the 
risks to which the credit institution itself is exposed but 
also of the risks to which other members of the ^roup 
are exposed and which may affect the solvency of the 
credit institution 
L2. Does the present proposal achieve this aimB 
If the proposal is compared with Directive ^B^50BEEC, 
which it is intended to replace, definite improvements 
mustbenoted^ 
i) Compulsory supervision onaconsolidated basis of 
banking activities is extended to cases where the 
parent undertaking of the group isa^fmancialhokP 
ingcompany, i.e. an enterprise whose subsidiaries 
are exclusively or mainlycreditor financial insti 
tutions. 
ii)^hen the parent undertaking ofagroupisa^mi^ed^ 
activity holding company, such a company and 
its non^banking and nonfinancial subsidiaries are 
obliged to provide any information requested by the 
supervisory authorities of the credit institutions in 
the group. 
iii) The aims of supervision onaconsolidated basis are 
specified, i.e. to ensure solvency,to lay down limits 
for lar^escalerisks andto setoutlimits tonon 
financial holdingsheldbyacredit institution and 
its consolidated subsidiaries. 
iv)The forms of consolidation to be used (full consolP 
dation, proportional consolidation or the equity 
method) and their status (mandatoryor optional) 
are set out more clearly and in greater detail. L^. However,the Committee has one major reser 
vation regardingthe proposal in general itwould create 
distortions of competition between economic operators 
who should be treated in the same way. 
1.^.1. The proposal allows the competent authorities 
to exclude from consolidation specialist financial insti 
tutions whose activities expose them principally to mar 
ket risks (see Article ^), fourth indent, first part). 
This means, in plain language, that theproblem of 
consolidation does not arise forabank which deals in 
securities itself, and not throughasubsidiary^ its activP 
ties are governed by the prudential rules applicable 
to banks as supervised by the competent authority. 
Plowever, a bank which has set up a subsidiary for 
handling its security dealings could, with the agreement 
of the authorities, avoid the consolidated supervision, 
which would be the only means of enabling these two 
types of bank to be treated equally. 
1.^.2. Of course, the question arises of fair compe 
tition between banks operating under two different 
systems^ on the one hand, there is the continental Euro 
peansystemconsistingofuniversalbanks or security 
dealing houses whichare consolidated subsidiaries of 
banks and, on the other, there is the system of separate 
commercial banks and investment firms, where the 
latter may be subsidiaries of banks but are supervised 
separately and are therefore not consolidated with the 
parent company. 
1.^. It is clear that an optional consolidation 
scheme, which allows one of these systems the possi 
bility of exempting its investment firms fromaconsoli 
dated supervision system, createsadistortion of compe 
tition insofar as corresponding rules applicable to 
unconsolidated subsidiaries either do not e^ist—which 
is the case for credit operations carried out by invest 
ment firms (seebelow)—or areless stringent—which 
No C 102/20 Official Journal of the European Communities 18. 4. 91 
is also the case, since the proposed Directive on the 
capital adequacy of investment firms and credit insti­
tutions (CAD) provides for a less strict set of rules. 
In particular, as regards the definition of own funds 
required to cover market risks, that laid down by the 
CAD(1) is much less stringent than that set out in 
the Directive on the own funds of credit institutions 
(OFD) (2). For example: the CAD authorizes subordi­
nated loans as own funds, to the extent of 250% of 
core capital, compared with the figure of 50 % allowed 
by the OFD. 
1.3.4. In the end, the Commission has recognized 
that these arguments are well-founded and inserted in 
Article 3(3), fourth indent, second part, a clause which 
allows credit institutions, with the agreement of the 
competent authorities, to exclude the trading book from 
consolidation, provided that this is subject to special 
rules of supervision, in this case the CAD. In this way, 
the Commission believes it can re-establish the level 
playing field between the two banking systems referred 
to above. 
1.3.5. This option seems unrealistic and even, from 
a prudential point of view, unreasonable. Consolidation 
must enable an overall view to be gained of all the risks 
to which credit institutions and financial institutions 
belonging to the same group are exposed. Excluding 
such a large portion as the risks connected with the 
trading book would jeopardize the whole idea of super­
vision on a consolidated basis. For this reason it is to 
be expected that most national supervisory authorities 
will oblige credit institutions to consolidate their trad­
ing books. The option of excluding the trading book 
from consolidation would thus remain a dead letter 
in several countries. Compulsory consolidation for all 
Member States is therefore essential. 
1.3.6. In addition, the non-consolidation of an 
investment firm which is a subsidiary of a credit insti­
tution presumes that any bankruptcy of the subsidiary 
has no effect on the stability of the parent bank. But it 
is clear that the parent bank might not survive the 
demise of a subsidiary (certainly not one in which it 
held 100 % of the shares) to which it had refused to offer 
assistance. Therefore, there must be a consolidation of 
the risks, i.e. the credit and market risks, facing a parent 
bank and any of its subsidiaries which is an investment 
(!) OJ No C 152, 21. 6. 1990, p. 6. 
(2) Council Directive 89/299/EEC of 17 April 1989 concerning 
the Own Funds of Credit Institutions (OJ No L 124, 5. 5. 
1989, p. 16). firm. This is also the view of the Basle Committee, 
which noted in a recent report: 
'It is, for example, necessary for positions in separ­
ately regulated securities firms owned by banks to 
be consolidated with those of the parent, to avoid 
the possibility of a bank easing its regulatory burden 
by subsidiarising its securities business.' 
1.3.7. Against these arguments the Commission 
raises considerations which are basically of a practical 
nature. In view of the complexity of the problems 
connected with the consolidation of market risks, no 
international agreement exists at present. Among these 
problems, the Commission singles out the offsetting 
of opposite open positions held by a parent firm and 
its subsidiary, and the question of the different time 
zones in which the members of a group may operate. 
1.3.8. But these considerations, which are certainly 
valid, are not conclusive. Within the Basle Committee 
moves are being made to develop solutions concerning 
the consolidation of market risks. Moreover, this same 
committee has already admitted that open positions 
held by members of the same financial group are, in 
principle, interchangeable. 
1.3.9. The Committee feels that the compulsory con­
solidation of investment firms in a banking group is 
necessary for two reasons in addition to those already 
mentioned: 
— The distinction between credit institutions and 
investment firms is becoming less and less clear-
cut. The boundary between the two types of 
firm is becoming blurred, with each carrying 
out transactions which formerly were almost the 
exclusive province of the other. One should there­
fore abandon the 'institutional' approach of legis­
lating according to the type of institution and 
instead adopt a 'transactional' approach of legislat­
ing according to the type of transaction performed. 
The same transaction is always subject to the 
degree of risk, irrespective of the firm which 
performs it, and so it should have to comply with 
the same prudential regulations. Otherwise, there 
would be no guarantee of fair competition between 
the two types of institutions. The approach adopt­
ed in the CAD is not a fully 'transactional' one. 
Moreover, the CAD has not yet been adopted; 
changes which place banks at a further disadvan­
tage cannot be ruled out. Consolidation, therefore, 
is the only way to avoid a distortion of compe­
tition between banks dealing in securities them­
selves and those operating through a subsidiary. 
18. 4. 91 Official Journal of the European Communities No C 102/21 
— Consolidation allows credit transactions relating to 
dealings in securities (e.g. lombard loans, advances 
on securities, margin financing) to be subject to the 
Solvency Ratio Directive (SRD) (1). The volume of 
such credit transactions carried out by investment 
firms is considerable. If such loans are not deducted 
from own funds as an illiquid asset, they must be 
treated in the same way as is the case for banks. 
Banks are generally subject to an own funds require­
ment of 8 % under the SRD. 
2. Specific comments 
2.1. Article 1 — Definitions 
2.1.1. Financial institution 
A financial institution is defined as 'an undertaking 
other than a credit institution whose principal activity 
is to acquire and hold participations or to exercise one 
or more of the operations included in numers 2 to 12 
of the Annex to Directive 89/646/EEC. The definition 
should indicate clearly that the participations referred 
to are participations in firms which carry out the oper­
ations listed in the abovementioned Annex. 
2.1.2. Financial holding company 
Only the participations of financial holding companies 
in credit institutions or financial institutions are subject 
to consolidated supervision. Neither non-financial par­
ticipations nor individual holding companies are subject 
to it. 
2.1.3. Participation 
Council Directive 83/350/EEC of 13 June 1983 on the 
supervision of credit institutions on a consolidated 
basis (2) referred to a direct or indirect holding of 25% 
ore more of the capital of another credit or financial 
institution (Article 1, fourth indent). The proposed 
Directive being examined here, which is consistent with 
Article 33 of the Seventh Council Directive of 13 June 
1983 on consolidated accounts (3) and with Article 42 
of Council Directive 86/635/EEC of 8 December 1986 
on the annual accounts and consolidated accounts of 
(*) Council Directive 89/647/EEC of 18 December 1989 regarding 
a solvency ratio for credit institutions (OJ No L 386, 30. 12. 
1989, p. 14). 
(2) OJ No L 193, 18. 7. 1983, p. 18. 
(3) OJ No L 193, 18. 7. 1983, p. 1. banks and other financial institutions (4), which refers 
to this Article 33, reduces the percentage to 20%, and 
this percentage refers not only to the holding of capital 
but also to the holding of voting rights. This means 
that any shareholder or partner holding less than 20% 
of the capital will still be subject to consolidated super­
vision when he holds 20% or more of the voting rights 
of the institution concerned. 
2.2. Article 3 — Supervision on a consolidated basis 
of credit institutions and financial holding com­
panies 
2.2.1. Article 3(3), fourth indent 
See under general comments. 
2.2.2. Article 3(7) 
This paragraph allows Member States the possibility 
of supervising parent firms on an individual basis even if 
they are already subject to supervision on a consolidated 
basis and their subsidiaries are supervised on an individ­
ual basis. This possibility should be deleted: the Mem­
ber States should be obliged to forego individual super­
vision of the parent firm if there is consolidated super­
vision of the group and individual supervision of the 
subsidiaries, as in such cases individual supervision 
of the parent firm does not provide the supervisory 
authority with any new information. 
2.2.3. Article 3(8) and (9) 
According to the principle of home country control 
recognized by the Second Banking Directive (5), super­
vision on a consolidated basis should only be carried 
out once in the European Community. Of course the 
principles of the Second Directive only apply to branch­
es and not to subsidiaries of Community credit insti­
tutions. But consolidation quite justifiably disregards 
this legal distinction. If supervision on a consolidated 
basis is carried out by the supervisory authorities of 
one Member State, additional consolidated supervision 
in another EC Member State seems superfluous. 
National supervisory authorities must accept the con­
cept of the Single Market with all its consequences, i.e. 
the equivalence of prudential supervision within the 
European Community from 1993 onwards. But if the 
proposal's provisions were transposed to a national 
level it would mean, in the case of Germany, for exam­
ple, that the Bavarian supervisory authorities would 
have to carry out additional supervision on a consoli­
dated basis in Bavaria. This is unacceptable both as a 
concept and as a practice to be followed. Supervision 
(4) OJ No L 372, 31. 12. 1985, p. 1. 
(5) Council Directive 89/646/EEC of 15 December 1989, OJ No 
L 386, 30. 12. 1989, p. 1. 
No C 102/22 Official Journal of the European Communities 18. 4. 91 
on a consolidated basis should be carried out only by 
the competent authorities in the Member State where 
the ultimate parent firm is incorporated. However, an 
exception could be made in the case of a financial 
holding company which was registered in an EC coun­
try but did not itself carry out any banking activities 
and whose subsidiaries carrying out banking activities 
were concentrated in another EC country. (In fact this 
exception is provided for in Article 4(2) of the proposal). 
2.3. Article 5 — Form and extent of consolidation 
2.3.1. Article 5(1), (2) and (3) 
2.3.1.1. The intention of the proposed directive 
seems to be as follows: 
i) Full consolidation is compulsory when a firm holds 
more than 50% of the voting rights or capital of 
another firm or when it has effective control (Article 
5(1), first paragraph) 
Exception: 
If, in the above case, the parent firm can show that, 
despite its majority holding in the subsidiary, its 
liability is limited in proportion to the part of the 
capital which it holds (e.g. because the minority 
shareholder has pledged its liability pro rata in 
accordance with its holding), then pro-rata consoli­
dation may be prescribed (Article 5(1), second para­
graph). 
ii) In the case of minority holdings, the competent 
authorities are free to determine whether and how 
consolidation is to be carried out; in particular, they 
may permit the equity method to be used [Article 
5(3)]. 
Done at Brussels, 27 February 1991. Exception: 
However, if, in cases of minority holdings, the 
shareholders or partners manage the associated firm 
jointly, so that the minory shareholder or partner 
has a direct influence on what happens to the firm 
in which it has a holding, then proportional consoli­
dation of participations is required [Article 5(2)]. 
2.3.1.2. If this is the intention of the proposed EC 
legislation, it should be stated more clearly. 
As regards content, the Committee believes that, in 
order to maintain fair competition between the firms 
involved, the proposed Directive should not leave it up 
to the Member States to choose which method should 
be used when incorporating a holding into the balance 
sheet of the parent company, whether full consoli­
dation, pro-rata consolidation or the equity method; 
this should be specified by the Directive itself, so as the 
prevent different methods being used in the different 
Member States. 
2.3.2. Article 5(3) 
This paragraph deals with participations 'other than 
those in paragraphs 1 and 2'. It should be stipulated 
that only participations in credit and financial insti­
tutions are meant. 
2.4. Article 6 — Information to be supplied by mixed-
activity holding companies and their subsidiaries 
For mixed-activity holding companies no provision is 
made for supervision on a consolidated basis either of 
the company as a whole or of the individual firms 
which form part of it. 
The Chairman 
of the Economic and Social Committee 
Francois STAEDELIN