COMMISSION OF THE EUROPEAN COMMUNITIES 
C0M(91) 68 final - SYN 333 
Brussels, 23 Apr i I 1991 
Proposal for a 
COUNCIL DIRECTIVE 
on monitoring and controlling large exposures 
of credit institutions 
(presented by the Commission) 
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EXPLANATORY MEMORANDUM 
A. General 
Risk spreading is a golden rule of financial activity in general. It is 
the prime responsibility of the supervisory authorities to ensure that this 
rule is closely observed by credit institutions. In the area of credit 
risks, too great a concentration of exposures to any one party could 
jeopardize the independence of the credit institution's management and, in 
the event of that party failing, could cause it such a loss as to threaten 
its stability. 
This is therefore a key rule of supervision which should be harmonized at 
Community level. Furthermore, specific mention of this was made in the 
Commission's White Paper on completing the internal market. However, there 
is a second reason for such harmonization, namely the need to prevent clear 
distortion of competition. As the rules governing the division of risks 
are primarily intended to limit the assistance which a credit institution 
may grant a given client, another institution would have a competitive 
advantage if it were subject to less stringent rules. 
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In line with the objectives set out in the White Paper, the Commission 
adopted, in 1986, a Recommendation on large exposures1 in order to prepare 
credit institutions and Member States gradually for the adoption of binding 
standards. A recital in that Recommendation specifically promised a later 
proposal for a Directive. The approaching internal market deadline and the 
agreement reached by the national supervisory authorities within the 
Banking Advisory Committee suggest that the time is ripe for a proposal for 
a Directive to be adopted. 
The attached proposal for a Directive submitted for the Commission's 
approval contains stricter standards than those set out in the 
Recommendation. Mentioning only the key rules, the absolute limit on 
exposures to a single client has been set at 25% of the lending credit 
institution's own funds (the corresponding percentage in the Recommendation 
was 40%), while the threshold at which an exposure is considered to be a 
large exposure has been reduced to 10% of the lending institution's own 
funds (from 15% in the Recommendation). 
This reinforcement of standards is in response to the earnestly expressed 
wishes of the Banking Advisory Committee and is also supported in a 
document on sound practices presented by the Basle Committee on banking 
supervision at the recent world conference of bank inspectors in Frankfurt. 
Stricter standards can only reinforce the solidity and stability of the 
Community's banking system. Furthermore, a limit of 25% of the lending 
institution's own funds can in no way be regarded as excessively low, 
Commission Recommendation of 22 December 1986 on monitoring and 
controlling large exposures of credit institutions, 0J No L 33, 
4.2.1987, p. 10. 
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since, if a client to which such a large exposure had been incurred were to 
fail, the credit institution could lose a quarter of its own funds, which 
is a considerable amount and should, ideally, be reduced still further. 
Moreover, this is a ceiling, and credit institutions should discipline 
themselves to reach or near that ceiling only In the case of exposures of 
impeccable qua Iity. 
Nevertheless, the significant reduction in the ceiling compared with that 
in the Recommendation may pose adjustment problems for some credit 
institutions or, in a more structural manner, for certain banking systems 
or parts of banking systems. Furthermore, assistance already granted in 
excess of 25% of own funds cannot always be reduced quickly by credit 
institutions which are contractually bound to the recipients of that 
assistance. Accordingly, the attached proposal contains a provision 
authorizing the competent authorities to grant credit institutions a 
maximum period of five years in which to bring existing exposures into line 
with the limits laid down; in addition, loans of longer maturity with 
contractually binding terms for the lending institution, may be held until 
maturity. 
B. Comments on the Articles 
Article 1; Definitions 
The definitions in this Article are drawn mainly from other Community 
Directives or proposals for Directives in the banking sphere and their 
retention is justified in the interests of consistency. 
However, two definitions are peculiar to this proposal and merit special 
comment. 
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The first of these is the definition of "exposures" (letter h) of the 
definitions). The above-mentioned Commission Recommendation defined 
exposures as any facility granted, whether drawn or undrawn, by a credit 
institution to a client or group of connected clients, on or off balance 
sheet, and includes those commitments and contingent items deemed to be 
relevant by the respective competent authorities when assessing the 
identifiable risks of that institution. A list of exposures was set out, 
for guidance, in the Appendix to the Recommendation. 
Since then, the solvency ratio Directive1 has been adopted, which contains 
a detailed nomenclature of risks. By referring to this nomenclature, it is 
possible to have both a more precise and a more binding definition of 
exposures. It should be emphasized, however, that this borrowing from the 
solvency ratio Directive covers only the risk nomenclature and not the 
weightings attributed to the risks in the Directive according to the party 
or degree of risk involved in the transaction. These weightings in 
Directive 89/647/EEC were not designed to measure exposure to an individual 
client but instead to set up a general solvency requirement to cover the 
credit risk of credit institutions. Given the fundamental aim underlying 
the rules on risk spreading (to limit an institution's maximum risk of loss 
with respect to a given client), a prudent approach must take account of 
exposures at their nominal value, without any weighting or degree of risk. 
Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio 
for credit institutions, OJ No L 386, 30.12.1989, p. 14. 
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It will be noted that the definition of exposures also includes 
underwriting commitments for the issue of securities. The amount taken 
into account is the institution's net commitment, subject to deduction of 
the shares transferred to other credit or financial institutions. 
The second definition peculiar to this proposal is that of a "group of 
connected clients" (letter m) in Article 1). This definition is very 
similar to that in the 1986 Recommendation. The first part of the 
definition refers to the existence of a power of control as defined in the 
eleventh indent in Article 1. The second part refers to a de facto 
interconnection resulting from certain links, examples of which are set out 
in the proposal for guidance. The competent authorities will be 
responsible for examining the combinations of exposures incurred by credit 
Institutions on the basis of the rules transposing this definition into 
national law and for assessing whether those combinations of exposures are 
in fact consistent with the letter and spirit of the Community definition. 
In order to give the competent authorities the necessary flexibility in an 
area which depends more on economic appraisal than on legal criteria, the 
proposal makes it clear that the combined exposure presumptions in the 
definition are relative presumptions which can be reversed if there is 
proof to the contrary. 
Article 2: Scope 
The Directive will apply to credit institutions which have obtained the 
authorization referred to In Article 3 of Directive 77/780/EEC of 
12 December 1977 (first coordination Directive),1 i.e. all the credit 
institutions in the Community. However, Member States will not have to 
apply the Directive to: 
1 OJ No L 322, 17.12.1977, p. 30. 
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institutions permanently excluded from the scope of the first 
coordination Directive (mainly central banks, post office giro 
institutions and certain particular institutions in each 
Member State); 
credit institutions permanently affiliated to a central body which 
supervises them and which is established in the same Member State, and 
provided that the conditions set out In Article 2(4)(a) of 
Directive 77/780/EEC are met. In that case, without prejudice to the 
application of the Directive to the central body, the 
whole - constituted by the central body and its affiliated 
institutions -must be the subject of global supervision with regard 
to large exposures. 
Article 3: Reporting of large exposures 
Effective supervision of large exposures clearly calls for such exposures 
to be notified regularly to the competent authorities. Such is the aim of 
Article 3. 
Paragraph 1 of Article 3 stipulates that large exposures must be reported 
to the competent authorities. At their discretion, Member States will 
provide for this reporting to be carried out by one of the following 
methods: 
notification of all large exposures at least once a year, backed up by 
communication during the year of any modifications to the annual 
notification; 
notification of all large exposures at least four times a year. 
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The first of these two methods, which did not appear in the Recommendation, 
was suggested to the Commission by the Banking Advisory Committee. 
As to the second method, the minimum frequency of notification has been 
increased to four times a year from the single report provided for in the 
Recommendation. Effective monitoring of large exposures presupposes that 
sufficiently frequent information reaches the supervisory authorities. 
Moreover, one of the recitals In the Recommendation suggested that the 
competent authorities should seek more frequent reporting. 
Member States will have the choice of transposing into national law either 
one of these methods only or both methods. In the latter case, they will be 
able to decide whether the choice of method should be left to the competent 
authorities or to the credit institution itself. 
Paragraph 2 of Article 3 stipulates that an exposure to a client or group 
of connected clients is to be considered a large exposure where its value 
is equal to or exceeds 10% of the lending institution's own funds. The 
corresponding percentage in the Recommendation was 15%. The reduction in 
this threshold is Justified by the general need to make the system of 
supervising large exposures more stringent in order to reinforce the 
stability of the Community's banking system. More specifically, once the 
ceiling on individual exposures has itself been cut (see Article 4(1) 
below), it is logical to reduce the reporting threshold. Some countries 
already employ a 10% threshold, and the Commission considers, in the light 
of their experience, that such a threshold cannot be regarded as imposing 
bureaucratic obligations. Since the proposal also provides for an 
aggregate limit on large exposures of 800% of own funds (see Article 4(3) 
below), the reporting exercise is limited to a theoretical maximum of 80 
exposures. Moreover, this reporting exercise can easily be computerized. 
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The reduction in the threshold to 10% will ease administrative obligations 
in a further respect. The Commission has not retained paragraphs 3 and 4 
of the corresponding Article in the Recommendation, which provided for a 
credit Institution's ten largest exposures to be reported, whether or not 
these were "large exposures". The Banking Advisory Committee agreed that 
such reporting would lose much of its value as a result of the widening of 
the concept of "large exposure". As to the supervision of institutions 
which do not have exposures in excess of 10% of their own funds, this is, 
by definition, not subject to legislation governing the spreading of large 
exposures. 
Article 4 
Paragraph 1 
This key provision in the draft Directive stipulates that credit 
institutions may not incur an exposure to a client or group of connected 
clients where its value exceeds 25% of own funds. This represents an 
appreciable reduction compared with the Recommendation, which provided for 
a 40% ceiling. Apart from the fact that the introduction of stricter 
standards more than four years after the adoption of the Recommendation, 
which was only an initial stage, is a logical step, this reinforcement of 
the standard was specifically called for by a significant majority of the 
Banking Advisory Committee, subject to a transitional period for existing 
exposures (see Article 6 below). Support for a 25% ceiling can also be 
found in a document presented by the Basle Committee on banking supervision 
at the world conference of bank inspectors held in Frankfurt in 
October 1990. 
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A 25% ceiling should not be regarded as excessively low since, while 
complying with that limit, a credit institution could still, under the 
worst hypothesis, lose a quarter of its own funds. This is a considerable 
amount and should, ideally, be reduced further. The point is that this is 
a maximum ceiling for exposures of impeccable quality, and credit 
institutions should discipline themselves to reach or approach that limit 
only In the case of exposures of such quality. 
Paragraph 2 
Bank supervisors know from experience that there is frequently an increased 
risk where a credit institution lends to enterprises linked to it. The 
Banking Advisory Committee specifically requested the Commission to provide 
for a lower limit for exposures to associated enterprises (parent 
undertaking of the credit institution and other subsidiaries of that parent 
undertaking). It had initially been planned to incorporate such a 
provision in the proposal for a Directive relating to the supervision of 
credit institutions on a consolidated basis.1 But, as indicated in the 
fourth recital of that proposal, it was considered preferable to settle 
this question in a more systematic manner within the framework of the 
future Directive on large exposures. 
The Commission has set this lower limit at 20% (compared with the normal 
25% limit laid down in paragraph 1). 
Provision is made for exceptions to this rule in paragraphs 5 and 6 (see 
below). 
J A. » 
1 C0M(90) 451, OJ No C 315, 14.12:1990, p. 15. 
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Paragraph 3 
The Commission has retained the aggregate limit on large exposures provided 
for in the Recommendation, i.e. 800% of own funds. However, as the concept 
of "large exposure" has been broadened (see Article 3(2) above), this limit 
has now become, indirectly, more strict. 
An aggregate limit is a valuable complement to the limitation of individual 
risks in legislation governing large exposures. While the limitation of 
individual risks ensures that no exposure exceeds the ceiling laid down, it 
does not affect the spread of risks throughout the portfolio. An aggregate 
limit of 800%, however, will mean that a credit institution can at most 
have 80 large exposures and a maximum of 32 exposures which reach the 
individual ceiling of 25% of own funds. 
Paragraph 4 
This paragraph provides that Member States may impose more stringent limits 
than those laid down in paragraphs 1, 2 and 3. 
Paragraph 5 
This paragraph requires the limits laid down in the first three paragraphs 
to be observed at all times. If those limits were to be exceeded - which 
could happen accidentally - the proposal stipulates that they may be 
exceeded only in exceptional and temporary circumstances and, in such 
cases, the competent authorities would have to fix a deadline within which 
the credit institution would be obliged to regularize its situation. 
Paragraph 6 
This paragraph permits Member States to exempt fully or partially from the 
need to observe the special 20% limit laid down in paragraph 2 exposures 
incurred by the credit institution to a financial holding company which is 
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its parent undertaking and to other subsidiaries of that financial holding 
company which are credit institutions, financial institutions or 
undertakings providing ancillary banking services. 
The presumption of increased risk underlying the special 20% limit 
applicable to exposures to associated undertakings is not necessarily 
relevant in the case of exposures to banking and financial entities in the 
group. In that event, however, the group should structure itself in such a 
way that those entities can be the subject of supervision on a consolidated 
basis exercised in accordance with the future Directive in this field (see 
the reference above to the proposal for a Directive presented by the 
Commission). 
Paragraph 7 
This paragraph permits Member States to exempt fully or partially from all 
the limits laid down in paragraphs 1, 2 and 3 (but not from the reporting 
obligations set out in Article 3) exposures incurred by the credit 
institution to: 
its parent undertaking, provided that that undertaking is itself a 
credit institution. It does not seem Justified to limit the flow of 
funds which a subsidiary can provide for its parent credit 
institution. Of course, the proviso here is again that the parent 
undertaking Is subject either to supervision on a consolidated basis 
exercised in accordance with the Community Directive in question or, 
if it is located in a third country, to equivalent supervision; 
subsidiaries, provided that those subsidiaries are credit 
institutions, financial institutions or undertakings providing 
ancillary banking services. Since these are activities which the 
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credit institution could carry out directly, there is no reason to 
limit the funding which It provides for its subsidiaries. Once again, 
the exemption is subject to the proviso that the subsidiaries in 
question are Included In the consolidated supervision of the parent 
undertaking. 
Paragraph 8 
This paragraph authorizes Member States to exempt a number of specific 
exposures fully or partially from the application of the limits laid down 
in paragraphs 1, 2 and 3. 
The first six indents (letters a) to f)) cover exposures incurred directly 
or indirectly to Zone A central governments and central banks and to the 
European Communities. No Member State imposes or seems prepared to impose 
limits on exposures incurred by its credit institutions to itself. Given 
the rule of non-discrimination within the Community, this lack of 
limitation should in any case apply to exposures incurred to other 
Member States. But, for reasons similar to those given in connection with 
the above-mentioned Directive 89/647/EEC or the proposal for a Directive on 
capital adequacy of investment firms and credit institutions,1 it seems 
pertinent to refer to a wider geographical area, namely Zone A as defined 
in Directive 89/647/EEC. 
Letters g) and h) cover cases where the risk can be considered to be small 
or even nil, i.e. where it is covered by a guarantee in the form of cash 
deposits or certificates of deposit lodged with the lending institution. 
Letter i) covers claims with a maturity of up to one year on other credit 
institutions. The aim here is to cover transactions on the interbank 
market. This is a market which operates between professionals who know 
each other and which requires some flexibility in order to function 
harmoniously. The Commission does not therefore consider it appropriate, 
1 COM(90) 141; OJ No C 152, 21.6.1990, p. 6. 
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at this stage, to establish a single harmonized limit at Community level 
for exposures incurred on this market. 
The same reasoning applies to letter j), which concerns commercial paper 
meeting certain conditions, and to letter k), which concerns the 
obligations defined in article 22 paragraph 4 of directive 85/611/EEC on 
UCITS1. 
Letter I) covers cooperative banks or savings banks belonging to a network 
and for which there is a centralized cash clearing operation. 
Paragraph 9 
Paragraph 9 refers to exposures incurred directly or indirectly to regional 
and local authorities in the Member States. In view of the fact that the 
degree of risk involved here is normally lower, the proposal permits a 20% 
weighting to be applied. This rate may be reduced to 0% subject to the 
conditions laid down in Article 7 of Directive 89/647/EEC. Given the wide 
differences which may exist between the rules governing regional and local 
authorities outside the Community, the Commission does not consider it 
appropriate to extend this arrangement to the whole of Zone A. 
Paragraph 10 
This paragraph states, as a general principle, that where an exposure to a 
client is guaranteed, to the satisfaction of the competent authorities, by 
a third party, the competent authorities may deem the exposure to have been 
incurred to that third party and not to the client. Thus, where, for 
example, a credit institution incurs an exposure of 50 to client A and one 
of 20 to client B, but with client B guaranteeing 10 of A's debt to the 
credit institution, the exposure to A and B may be deemed to be as follows: 
- A: 40 
- B: 30. 
1 0J No L 375, 31.12.1985, p. 3. 
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Article 5: Supervision on a consolidated or non-consolidated basis 
This Article includes provisions already adopted as part of 
Directive 89/647/EEC on a solvency ratio, and in particular Article 3(2) to 
(6) of that Directive. 
Paragraph 1 covers the case of a credit institution which is neither a 
parent undertaking nor a subsidiary. 
Paragraph 2 establishes the principle of applying the rules set out in 
Articles 3 and 4 on a consolidated basis. 
Paragraph 3 lays down the arrangements for the non-consolidated supervision 
of a parent credit institution and its subsidiaries established in the same 
Member State. 
Paragraph 4 concerns the supervision, on a non-consolidated basis, of 
subsidiaries established in other Member States. 
Paragraph 5 provides for possible bilateral agreements under which the 
competent authorities in the Member State in which a subsidiary is situated 
could delegate their responsibility for supervision to the competent 
authorities in the Member State in which the parent credit undertaking is 
established. 
Article 6: Transitional provisions relating to exposures in excess of the 
limits 
Article 6 concerns exposures existing at the time the Directive is 
published in the Official Journal of the European Communities which exceed 
the limits laid down by the Directive. It would seem Justified to make 
transitional arrangements for this type of exposure, in order to allow 
credit Institutions the time to find a solution which would not overturn 
their commercial relationship with their clients. In any event, credit 
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institutions may be bound - with regard to the parties to whom those 
exposures have been incurred - by contractual arrangements which do not 
necessarily permit them to reduce such exposures quickly. 
Paragraph 1 specifies that risks entered into force before the date of 
publication of the directive in the Official Journal of the European 
Community shall be eligible for the grandfathering provisions. The choice 
of this cut-off point is Justified by the consideration that from the 
moment when the directive is published, credit institutions should not be 
able to take exposures exceeding the limits that will apply subsequently. 
This paragraph also stipulates that the competent authorities must require 
the credit institution in question to take the steps necessary to have the 
excess exposure or exposures brought into line with the provisions of the 
Direct ive. 
Paragraph 2 provides for the process of reducing the excess exposures to be 
implemented and completed within the period deemed by the competent 
authorities to be consistent with the principle of sound administration and 
fair competition. The competent authorities are required to inform the 
Commission and the Banking Advisory Committee of the schedule for the 
general process adopted. 
In accordance with paragraph 4, however, the period in question may not 
exceed five years from the date stipulated in Article 8(1), i.e. 
1 January 1993. However loans with a longer maturity with binding 
contractual terms for the credit institution may be held until maturity. 
Paragraph 3 stipulates that, credit institution may only take advantage of 
the period specified in paragraph 2 to the extent that it does not take any 
measure which would cause the exposures to exceed the level existing at the 
date of publication of the directive in the Official Journal. The emphasis 
is therefore on the deliberate action of the credit institution. 
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Finally, paragraph 5 contains a specific provision which Member States may 
apply to the particular categories of credit institution referred to in 
Article 4(2) of Directive 89/646/EEC. This provision is justified by the 
fact that, as the own funds of such institutions are limited, immediate 
application of the 25% rule would reduce their lending activity too 
abruptly. The arrangements set out in paragraph 5 can be summarized as 
fol lows: 
from 1 January 1993 to 31 December 1997, the institutions in question 
may be subjected to a limit of 40% instead of the 25% limit laid down 
in Article 4(1); in that event, all new exposures incurred by such 
institutions are to be subject to that 40% limit; 
exposures existing on the date the Directive is published in the 
Official Journal may be maintained, whatever their level, until 
31 December 1997, subject to the sole proviso that they may not be 
increased beyond the level reached on the date of publication; 
as from 1 January 1998, the 25% limit will come into force and will 
apply to all new exposures; 
however, exposures between 25% and 40% of own funds existing at the 
end of the maximum period of five years (i.e. in principle on 
31 December 1997) may be maintained for a maximum period of 
three years (i.e. until 31 December 2000), subject to the same 
condition that they may not be increased; 
as from 1 January 1998, therefore, no exposure in excess of 40% of own 
funds may be maintained, and, as from 1 January 2001, no exposure in 
excess of 25% of own funds may be maintained; 
paragraph 4 provides, however, that loans with a longer maturity than 
the dates referred to above and with binding contractual terms for the 
lending credit institution may in all cases be maintained until 
maturity. 
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Article 7: Subsequent amendments 
Paragraph 1 specifies the fields in which the procedure for making 
technical amendments to the Directive are to apply. The first three 
indents concern the adaptation of definitions or terminology. The fourth 
relates to the frequency of large exposure reporting ((Article 3(1)). The 
fifth indent concerns the clarification or extension of the exemptions 
provided for in Article 4(5) to (9). The sixth indent, finally, refers to 
the maximum period for reducing the excess exposures outstanding at the 
time of the publication of the Directive in the Official Journal of the 
European Communities. This maximum period laid down in Article 6(4) is 
five years. 
The procedure laid down in paragraph 2 is Procedure III, Variant (a), in 
Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for 
the exercise of implementing powers conferred on the Commission. 
Article 8: Final provisions 
The first subparagraph of paragraph 1 requires Member States to comply with 
the Directive by 1 January 1993. 
The second subparagraph stipulates that, when Member States adopt the 
necessary provisions of national law, these must contain a reference to 
this Directive or must be accompanied by such reference when they are 
official I y pub Iished. 
Paragraph 2 deals with the transmission to the Commission of the main 
provisions of national law adopted by the Member States. 
Article 9 
This Article contains the usual wording to the effect that the Directive^ is 
addressed to all Member States. 
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Proposal for a 
COUNCIL DIRECTIVE 
on monitoring and controlling large exposures 
of credit institutions 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic Community, 
and in particular the first and third sentences of Article 57(2) thereof, 
Having regard to the proposal from the Commission1, 
In cooperation with the European Parliament2, 
Having regard to the opinion of the Economic and Social Committee3, 
Whereas this Directive is consistent with the aims set out in the 
Commission's White Paper on completing the internal market4; 
Whereas the suitable approach is to achieve harmonization of essential 
supervisory rules; whereas Member States should have the option of adopting 
more stringent provisions than those provided for by this Directive; 
Whereas this Directive has been the subject of consultation with the 
Banking Advisory Committee, which is responsible, under Article 6(4) of 
Council Directive 77/780/EEC of 12 December 1977 on the coordination of 
1 
2 
3 
4 C0M(85)310. 
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laws, regulations and administrative provisions relating to the taking-up 
and pursuit of the business of credit institutions1, as last amended by 
Directive 89/646/EEC2, for making suggestions to the Commission with a 
view to coordinating the coefficients applicable in the Member States; 
Whereas monitoring and controlling the exposures of a credit institution is 
an integral part of prudential supervision; whereas excessive concentration 
of exposures to a single client or group of connected clients may result in 
an unacceptable risk; whereas such a situation may be deemed to be 
prejudicial to the solvency of a credit institution; 
Whereas common guidelines for monitoring and controlling exposures of 
credit institutions were introduced initially by Commission Recommendation 
87/62/EEC3; whereas that instrument was chosen since it permitted existing 
systems to be adjusted gradually and new systems to be established without 
causing dislocation to the banking system of the Community; whereas, with 
that first phase now over, it is necessary for a binding instrument to be 
adopted, applicable to all Community credit institutions; 
Whereas credit institutions in a unified banking market engage in direct 
competition with each other and the prudential supervision requirements 
throughout the Community should, therefore, be equivalent; whereas, to that 
end, the criteria applied for determining the concentration of exposures 
should be the subject of legally binding rules at Community level and 
cannot be left entirely to the discretion of the Member States; whereas the 
adoption of common rules will therefore best serve the interests of the 
Community, since it will prevent differences in competitive conditions, 
while at the same time strengthening the Community's banking system; 
1 OJ No L 322, 17.12.1977, p. 30. 
2 OJ No L 386, 30.12.1989, p. 1. 
3 OJ No L 33, 4. 2.1987, p. 10. 
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Whereas as regards the precise accounting technique to be used for 
assessing exposures, reference is made to the provisions of Council 
Directive 86/635/EEC of 8 December 1986 on the annual accounts and 
consolidated accounts of banks and other financial institutions1; 
Whereas Council Directive 89/647/EEC of 18 December 1989 on a solvency 
ratio for credit institutions2 contains a list of credit risks which may 
be incurred by credit institutions; whereas it is therefore justified to 
refer to that list in the definition of exposure for the purpose of this 
Directive; whereas it is not, however, appropriate to refer to the 
weightings or degrees of risk set out by Directive 89/647/EEC; whereas 
these weightings and degrees of risk have been devised in order to set up a 
general solvency requirement to cover the credit risk of credit 
institutions; whereas in the framework of regulating large exposures, the 
purpose is to limit the maximum potential loss that a credit institution 
may incur through a single client or a group of related clients; whereas it 
is therefore appropriate to adopt a prudent approach consisting of taking 
account of the nominal value of exposures, without application of any 
weightings or degree of risk; 
Whereas when a credit institution has an exposure to its own parent 
undertaking, or to other subsidiaries of its parent undertaking, particular 
prudence is Justified; whereas the management of exposures incurred by 
credit institutions must be carried out in a fully autonomous manner, with 
respect to the principles of sound banking management, without regard to 
any other considerations beyond these principles; whereas the provisions of 
the Second Council Directive 89/646/EEC of 15 December 1989, on the 
coordination of laws, regulations and administrative provisions relating to 
the taking up and pursuit of the business of credit institutions and 
amending Directive 77/780/EEC, require that where the influence exercised 
by persons holding a qualifying participation in a credit institution 
directly or indirectly is likely to operate to the detriment of 
1 OJ No L 372, 31.12.1986, p. 1. 
2 OJ No L 386, 30.12.1989, p. 14. 
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the prudent and sound management of the institution, the competent 
authorities shall take appropriate measures to put an end to that 
situation; whereas in the large exposures field, it is justified to insert 
specific rules with respect to an exposure held by a credit institution on 
its own group, and in such cases more stringent limitations are justified 
for such exposures than for other exposures; whereas this more stringent 
limitation must however not be applied when the parent undertaking is a 
financial holding company or a credit institution, and the other 
subsidiaries which are either credit or financial institutions, or 
undertaking offering ancillary banking services, to the extent that all 
these undertakings are included in the supervision on a consolidated basis 
of the credit institution; whereas in that case, the supervision on a 
consolidated basis of the group allows sufficiently efficient supervision, 
without the imposition of more stringent limits on exposure being needed; 
whereas under this approach, banking groups will also be encouraged to 
organize their structure in such a way as to make consolidated supervision 
possible, which is a desirable result because it allows more comprehensive 
supervision to be carried out; 
Whereas it is necessary to provide for a two-stage application of the limit 
of 25% of own funds in the case of the particular categories of credit 
institution referred to in Article 4(2) of Directive 89/646/EEC; whereas, 
the own funds of such institutions being limited, a single-stage 
application of the 25% rule would reduce their lending activity too 
abruptly; 
Whereas implementing powers of the same nature as those which the Council 
reserved for itself in Directive 89/299/EEC of 17 April 1989 on the own 
funds of credit institutions1 were granted to the Commission in Directive 
89/646/EEC; 
1 OJ No L 124, 5.5.1989, p. 16. 
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Whereas, taking account of the specific characteristics of the sector in 
question, it is appropriate to give the committee provided for in Article 
22 of Directive 89/646/EEC the role of assisting the Commission in carrying 
out the responsibilities granted to it according to the rules of procedure 
laid down in Article 2, Procedure III, Variant (a) of Council 
Decision 87/373/EEC of 13 July 1987 laying down the procedures for the 
exercise of implementing powers conferred on the Commission1, 
HAS ADOPTED THIS DIRECTIVE: 
1 OJ NO L 197, 18.7.1987, p. 33. 
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Artlçlo 1 
Definitions 
For the purpose of this Directive: 
(a) "credit institution" means a credit institution as defined in the 
first indent of Article 1 of Directive 77/780/EEC and includes 
branches of such institutions in third countries and all private or 
public undertakings, including their branches, which satisfy the 
definition given in the first indent of Article 1 of 
Directive 77/780/EEC and which have been authorized in a third 
country; 
(b) "competent authorities" means the competent authorities as defined in 
the ninth indent of Article 1 of Directive ... (supervision on a 
consolidated basis); 
(c) "parent undertaking" means a parent undertaking as defined in 
Articles 1 and 2 of Council Directive 83/349/EEC1; 
(d) "subsidiary undertaking" means a subsidiary undertaking as defined in 
Articles 1 and 2 of Directive 83/349/EEC; any subsidiary undertaking 
of a subsidiary undertaking shall be deemed to be a subsidiary of the 
parent undertaking which is at the head of those undertakings; 
(e) "financial holding company" means a financial holding company as 
defined in the third indent of Article 1 of Directive ... (supervision 
on a consolidated basis); 
1 OJ No L 193, 18.7.1983, p. 1. 
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(f) "financial institution" means a financial institution as defined in 
the sixth indent of Article 1 of Directive 89/646/EEC; 
(g) "ancillary banking services undertaking": an undertaking as defined in 
Article 1, fifth indent, of Directive (supervision on a 
consolidated basis); 
(h) "exposures" means: the assets and off-balance-sheet items listed in 
Article 6 of Directive 89/647/EEC and in Annexes I and III thereto, 
without application of the weightings or degrees of risk set out in 
those provisions; the risks mentioned in Annex III must be calculated 
in accordance with the method set out in Annex II to that Directive, 
without application of the weightings for counterparty risk; the 
underwriting commitments for the issue of securities are included, 
subject to deduction of the shares transferred to other credit or 
financial institutions; 
(i) "Zone A" means the zone defined in the second indent of Article 2 of 
Directive 89/647/EEC; 
(J) "Zone B" means the zone defined in the third indent of Article 2 of 
Directive 89/647/EEC; 
(k) "own funds" means the own funds of a credit institution within the 
meaning of Directive 89/299/EEC; 
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(I) "power of control" means the relationship between a parent undertaking 
and a subsidiary, as defined in Articles 1 and 2 of Directive 
83/349/EEC, or a similar relationship between any natural or legal 
person and an undertaking; 
(m) "group of connected clients" means two or more persons, whether 
natural or legal, who, until proven otherwise, constitute a single 
risk because: 
(i) either one of them holds, directly or indirectly, power of 
control over the other or others, or 
(II) they are so interconnected that, if one of them were to 
experience financial problems, the other or all of them would be 
likely to encounter repayment difficulties. Such 
interconnections to be taken into consideration include in 
particular: 
common ownership; 
common directors; 
cross guarantees; 
direct commercial interdependence which cannot be 
substituted in the short term. 
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Artie»* Z 
Scope 
Subject to paragraph 2, this Directive shall apply to credit institutions 
which have obtained the authorization referred to in Article 3 of 
Directive 77/780/EEC. 
However, Member States need not apply this Directive to: 
(a) credit institutions listed in Article 2(2) of Directive 77/780/EEC; 
(b) institutions in the same Member State which, as defined in 
Article 2(4)(a) of Directive 77/780/EEC, are affiliated to a central 
body in that Member State. In that case, without prejudice to the 
application of this Directive to the central body, the whole -
constituted by the central body and its affiliated institutions - must 
be the subject of global supervision with regard to large exposures. 
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Article ? 
Reporting of large exposures 
1. A report of every large exposure within the meaning of paragraph 2 
shall be made by the credit institution to the competent authorities. 
Member States shall provide that this reporting is carried out at 
their discretion, in accordance with one of the following two methods: 
notification of all large exposures at least once a year, backed 
up by communication during the year of any modifications to the 
annual notification; 
notification of all large exposures at least four times a year. 
2. An exposure of a credit institution to a client or group of connected 
clients Is considered to be a "large exposure" where its value is 
equal to or exceeds 10% of own funds. 
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Article 4 
Limits on large exposures 
1. Credit institutions may not incur an exposure to a client or group of 
connected clients where its value exceeds 25% of own funds. 
2. Where that client or group of connected clients is the parent 
undertaking of the credit institution and/or one or more subsidiaries 
of that parent undertaking, the percentage provided for in paragraph 1 
shall be reduced to 20%. 
3. Credit institutions may not incur large exposures which, in the 
aggregate, exceed 800% of own funds. 
4. Member States may impose more stringent rules than those laid down in 
paragraphs 1, 2 and 3. 
5. The limits referred to in paragraphs 1, 2 and 3 shall be observed at 
all times by the credit institution. They may be exceeded only in 
exceptional circumstances and, in such cases, the competent 
authorities shall fix a deadline within which the credit institution 
must regularize its situation. 
6. Member States may fully or partially exempt from the application of 
paragraph 2 exposures incurred by the credit institution to a 
financial holding company which is its parent undertaking and to other 
subsidiaries of that financial holding company, provided that: 
a) the financial holding company is included in the supervision on a 
consolidated basis of the credit institution exercised in 
accordance with Directive .... (supervision on a consolidated 
basis); 
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b) those other subsidiaries are credit institutions, financial 
institutions or undertakings providing ancillary banking services 
and are included in the consolidated supervision of the credit 
institution exercised in accordance with Directive 
(supervision on a consolidated basis). 
7. Member States may fully or partially exempt from the application of 
paragraphs 1, 2 and 3 exposures incurred by the credit institution to: 
a) its parent undertaking, provided that the parent undertaking is a 
credit institution subject to supervision on a consolidated basis 
exercised in accordance with Directive .... (supervision on a 
consolidated basis) or to equivalent standards in force in a 
third country; 
b) subsidiaries, provided that those subsidiaries are credit 
institutions, financial institutions or undertakings providing 
ancillary banking services and are included in the consolidated 
supervision of the credit institution exercised in accordance 
with Directive .... (supervision on a consolidated basis). 
8. Member States may fully or partially exempt the following exposures 
from the application of paragraphs 1, 2 and 3: 
a) asset items constituting claims on Zone A central governments and 
central banks; 
b) asset items constituting claims on the European Communities; 
c) asset items constituting claims carrying the explicit guarantees 
of Zone A central governments and central banks or of the 
European Commun 11 i es ; 
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d) other exposures attributable to, or guaranteed by, Zone A central 
governments and central banks or the European Communities; 
e) asset items which constitute claims on Zone B central governments 
and central banks, and which are denominated and funded in the 
national currencies of the borrowers-, 
f) asset items secured, to the satisfaction of the competent 
authorities, by collateral in the form of Zone A central 
government or central bank securities or securities issued by the 
European Commun i t i es ; 
g) asset items secured, to the satisfaction of the competent 
authorities, by collateral in the form of cash deposits placed 
with the lending institution or with a credit institution which 
is the parent undertaking of the lending institution-, 
h) asset items secured, to the satisfaction of the competent 
authorities, by collateral in the form of certificates of 
deposits Issued by and lodged with the lending institution; 
i) asset items constituting claims and other exposures on credit 
institutions, with a maturity of one year or less, but not 
constituting such institutions' own funds as defined in 
Directive 89/299/EEC; 
J) bills of trade and other bills, with a maturity of one year or 
less, bearing the signature of another credit institution and 
accepted for refinancing by a central bank-, 
k) bonds defined in Article 22(4) of Council Directive 85/611/EEC1; 
1 OJ No L 375, 31.12.1985, p. 3. 
- 32 -
I) asset items constituting claims on regional or central credit 
institutions with which the lending institution is associated as 
part of a network by virtue of legal or statutory provisions and 
which are responsible, in accordance with those provisions, for 
cash clearing operations within the network. 
9. Member States may, for the purposes of paragraphs 1, 2 and 3, apply a 
weighting of 20% to asset items constituting claims on regional and 
local authorities in the Member States and to other exposures to such 
authorities or guaranteed by them; however, subject to the conditions 
laid down in Article 7 of Directive 89/647/EEC, Member States may 
reduce this rate to 0% . 
10. Where an exposure to a client is guaranteed, to the satisfaction of 
the competent authorities, by a third party, Member States may deem 
the exposure to have been incurred to that third party and not to the 
cllent. 
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Article g 
Supervision on a consolidated or unconsolidated basis 
1. If the credit institution is neither a parent undertaking nor a 
subsidiary, compliance with the obligations set out in Articles 3 and 
4 shall be supervised on an unconsolidated basis. 
2. If the credit institution is a parent undertaking, compliance with the 
obligations set out in Articles 3 and 4 shall be supervised on a 
consolidated basis in accordance with Directive (supervision on 
a consolidated basis). 
3. The competent authorities responsible for authorizing and supervising 
a credit institution which is a parent undertaking may also require 
the credit institution, together with any of its subsidiaries subject 
to authorization and supervision by them, to comply with the 
obligations set out in Articles 3 and 4 on a subconsol idated or 
unconsolidated basis. Where such monitoring of the satisfactory 
allocation of risks within a banking group is not carried out, other 
measures shall be taken to that end. 
4. Where the subsidiary of a parent undertaking which is a credit 
institution has been authorized in another Member State, the competent 
authorities which granted that authorization shall require compliance 
with the obligations set out in Articles 3 and 4 on an unconsolidated 
basis or, if appropriate, subconsolidated. 
- 34 -
5. Notwithstanding paragraph 4, the competent authorities responsible for 
authorizing the subsidiary of a parent undertaking situated in another 
Member State may, by way of a bilateral agreement, delegate 
responsibility for supervising compliance with the obi I gat ions set out 
In Articles 3 and 4 to the competent authorities which have authorized 
and which supervise the parent undertaking. The Commission and the 
Banking Advisory Committee shall be kept informed of the content of 
such agreements. 
- 35 -
Article S 
Transitional provisions relating to exposures 
in excess of the limits 
1. Where, at the time of the publication of this Directive in the 
Official Journal of the European Communities, a credit institution has 
already incurred an exposure or exposures exceeding either the large 
exposure limit or the aggregate large exposure limits, as referred to 
In Article 4, the competent authorities shall require the credit 
institution to take steps to have the exposure or exposures of the 
credit institutions concerned brought into line with the provisions of 
this Directive. 
2. The process of having the exposure or exposures brought into line 
shall be devised, adopted, implemented and completed within the period 
deemed by the competent authorities to be consistent with the 
principle of sound administration and fair competition. The competent 
authorities shall inform the Commission and the Banking Advisory 
Committee of the schedule for the general process adopted. 
3. Credit institutions may only take advantage of the period specified in 
paragraph 2 to the extent that it does not take any measure which 
would cause the exposures to exceed the level existing at the date of 
the publication of the Directive in the Official Journal of the 
European Communities. 
4. The period applicable under paragraph 2 may not exceed five years as 
from 1 January 1993. However, loans with a longer maturity for which 
the lending credit institution is bound to respect the contractual 
terms, may be continued until their maturity. 
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5. For a period not exceeding five years starting from 1 January 1993, 
Member States may increase the limit laid down in Article 4(1) to 40% 
in the case of credit institutions belonging to the particular 
categories referred to in Article 4(2) of Directive 89/646/EEC. In 
such cases, the period referred to in paragraph 4 shall be reduced to 
three years and shall commence on expiry of the period referred to in 
this paragraph. The Member States concerned shall notify the 
Commission and the Banking Advisory Committee of the reasons which 
have led them to make use of this option and of the steps they have 
taken to bring the excess exposures into line with the limits laid 
down. 
- 37 -
Article 7 
Subsequent amendments 
1. Technical amendments to the following points shall be adopted in 
accordance with the procedure set out in paragraph 2: 
adaptation of definitions to take account of developments on 
financial markets; 
clarification of definitions to ensure uniform application of 
this Directive; 
alignment of the terminology and of the wording of the 
definitions on those contained in subsequent instruments 
concerning credit institutions and related matters; 
the frequency referred to in Article 3(1); 
clarification or extension of the exemptions provided for in 
Article 4(5) to (9); 
the period referred to in Article 6(4). 
2. The Commission shall be assisted by the committee provided for in the 
first subparagraph of Article 22(2) of Directive 89/646/EEC. 
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The representative of the Commission shall submit to the committee a draft 
of the measures to be taken. The committee shall deliver its opinion on 
the draft within a time limit which the chairman may lay down according to 
the urgency of the matter. The opinion shall be delivered by the majority 
laid down in Article 148(2) of the Treaty in the case of decisions which 
the Council is required to adopt on a proposal from the Commission. The 
votes of the representatives of the Member States within the committee 
shall be weighted In the mannner set out in that Article. The chairman 
shalI not vote. 
The Commission shall adopt the measures envisaged if they are in accordance 
with the opinion of the committee. 
If the measures envisaged are not in accordance with the opinion of the 
committee, or if no opinion is delivered, the Commission shall, without 
delay, submit to the Council a proposal relating to the measures to be 
taken. The Council shall act by a qualified majority. 
If, on the expiry of three months from the date of referral to the Council, 
the Council has not acted, the proposed measures sha11 be adopted by the 
Commission. 
- 39 -
Article 9 
Final provisions 
1. Member States shall bring into force the laws, regulations and 
administrative provisions necessary to comply with the provisions of 
this Directive on 1 January 1993. They shall forthwith inform the 
Commission thereof. 
When Member States adopt these provisions, these shall contain a 
reference to this Directive or shall be accompanied by such reference 
at the time of their official publication. The procedure for such 
reference shall be adopted by Member States. 
2. Member States shall communicate to the Commission the texts of the 
main provisions of national law which they adopt in the field governed 
by this Directive. 
- 40 -
Article 9 
This Directive is addressed to the Member States 
Done at Brussels, For the Council 
The President 
- 41 -
FINANCIAL STATEMENT 
The proposal will not entail any costs for the European Communities' 
budget. 
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COMPETITIVENESS AND EMPLOYMENT IMPACT STATEMENT 
I. What is the main reason for Introducing the measure? 
The main reason for introducing the measure is to improve and reinforce the 
supervision of credit institutions in the Community as regards risk 
concentration. 
II. Features of the businesses In Question 
The proposal concerns credit institutions, i.e. a regulated category of 
enterprises. 
Given the minimum initial capital and own funds amounts laid down in 
Articles 4 and 10 of Directive 89/646/EEC, it is doubtful whether there are 
many SMEs among the credit institutions concerned. 
There is no regional concentration. 
III. What direct obligations does this measure impose on businesses? 
The proposal imposes on the enterprises concerned, namely credit 
institutions, the obligation to report their large exposures to the 
competent authorities and to limit those large exposures to a given 
proportion of their own funds (25% for an individual exposure, 800% for 
their aggregate large exposures). 
IV. What indirect obligations are local authorities likely to Impose on 
businesses? 
No obligations are likely to be imposed by local authorities on the 
businesses concerned. 
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V. Are there any special measures in respect of SMEs? 
The proposal seeks to improve the supervision of a regulated category of 
enterprise (credit institutions); it does not therefore involve SMEs in 
any way. Furthermore, as the proposal is designed to limit the large 
exposures of credit institutions, it is unlikely that it will have the 
effect of limiting the exposures incurred by credit institutions to SMEs. 
VI. What Is the likely effect on: 
(a) the competitiveness of businesses? 
(b) employment? 
(a) As the proposal is designed to introduce fuller supervision of the 
activities of credit institutions, the danger of such institutions 
failing should be reduced, which can have only a beneficial impact on 
their performance and on the stability of economic and financial 
activity in general. 
(b) No effect on employment is anticipated. 
VII. Have employers' and employees' representatives been consulted? What 
are their views? 
Employees' representatives were informed of the Commission's intention to 
draw up this proposal, which will have no impact on their situation. 
As far as the business sector is concerned, informal consultations have 
been held with the Banking Federation of the European Community, the 
Savings Banks Group of the European Economic Community, the Association of 
Cooperative Banks of the EC and the European Community Mortgage Federation. 
These trade associations generally accept the principle of legislation 
governing large exposures. 



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