No C 135/4 Official Journal of the European Communities 25. 5. 88 
II 
(Preparatory Acts) 
COMMISSION 
Proposal for a Council Directive on a solvency ratio for credit institutions 
COM(88) 194 final 
(Submitted by the Commission to the Council on 27 April 1988) 
(88/C 135/04) 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European 
Economic Community, and in particular Article 57 (2), 
third sentence thereof, 
Having regard to the proposal from the Commission, 
In cooperation with the European Parliament, 
Having regard to the opinion of the Economic and 
Social Committee, 
Whereas the Directive is a development from the work 
undertaken by the Banking Advisory Committee which 
has, under Article 6 (4) of Council Directive 
77/780/EEC of 12 December 1977 on the coordination 
of laws, regulations and administrative provisions 
relating to the taking up and pursuit of the business of 
credit institutions ('), as amended by Directive 
86/524/EEC (2), responsibility for making 'suggestions 
to the Commission with a view to coordinating the coef­
ficients applicable in the Member States'; 
Whereas appropriate solvency ratios play a central role 
in the prudential supervision of credit institutions; 
Whereas ratios which weight assets and off-balance sheet 
transactions according to the degree of credit risk are 
particularly useful measures of solvency; 
Whereas the development of common standards of 
capital adequacy in relation to assets and off-balance 
sheet items at risk is accordingly, one of the essential 
areas of harmonization necessary for the achievement of 
mutual recognition and thus the completion of the 
internal market in banking services; 
Whereas in this respect the Directive is connected with 
other specific legislation also harmonizing the funda­mental techniques of prudential supervision: Council 
Directive .../.. ./EEC on own funds, the Commission 
recommendations 87/62/EEC (3) and 87/63/EEC (4) on 
large exposures and deposit protection schemes; 
Whereas the Directive should also be seen as directly 
complementary to the Second Coordination Directive 
which lays out the broader framework of which this 
Directive is an integral part; 
Whereas the minimum ratio contained in this Directive is 
provisional in nature; whereas it will be reviewed 
following a statistical survey; whereas the Commission 
will, if necessary, duly propose an amendment to the 
figure before the final adoption of the Directive; 
Whereas measurement of, and allowance for, interest 
and exchange rate risk, and other market risks, are also 
of great importance in prudential supervision; whereas, 
the Commission shall, accordingly, in cooperation with 
the competent authorities of Member States and others 
working towards similar ends, further study the available 
techniques; whereas it shall then make appropriate 
proposals for the further harmonization of prudential 
rules relating to these risks; 
Whereas technical modification to the detailed rules 
contained in this Directive may from time to time be 
necessary to respond to new developments in the 
banking sector; whereas the Commission shall 
accordingly make such modifications as are necessary, 
after consulting the Banking Advisory Committee, within 
the limits of the implementing powers delegated to the 
Commission by the provisions of the Treaty; whereas 
that Committee shall act as a 'Regulatory' Committee, 
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 procedures 
for the exercise of implementing powers conferred to the 
Commission (5), 
(') OJ No L 322, 17. 12. 1977, p. 30. 
(2) OJ No L 309, 4. 11. 1986, p. 15. O OJ No L 33, 4. 2. 1987, p. 10. 
(4) OJ No L 33, 4. 2. 1987, p. 16. 
(») OJ No L 197, 18. 7. 1987. p. 33. 
25. 5. 88 Official Journal of the European Communities No C 135/5 
HAS ADOPTED THIS DIRECTIVE: 
Scope and definitions 
Article 1 
1. This Directive shall apply to credit institutions 
within the meaning of the first indent of Article 1 of 
Directive 77/780/EEC. 
2. Notwithstanding indent 1 above, the Member 
States need not apply this Directive to credit institutions 
listed in Article 2 (2) of Directive 77/780/EEC. 
3. Credit institutions which, as defined in Article 2 (4) 
(a) of Directive 77/780/EEC are affiliated to a central 
body in the same Member State, may be exempted from 
the provisions of this Directive, provided that the totality 
of those affiliated credit institutions and the central body 
are included in consolidated solvency ratios in 
accordance with this Directive. 
Article 2 
For the purposes of this Directive: 
— 'competent authorities' shall be defined in accordance 
with the fifth indent of Article 1 of Council Directive 
83/350/EEC of 13 June 1983 on the supervision of 
credit institutions on a consolidated basis ('), 
— 'domestic credit institutions' shall comprise all credit 
institutions authorized in the Member States, in 
accordance with Article 3 of Directive 77/780/EEC, 
and branches of those institutions established outside 
the European Communities, 
— foreign credit institutions' in this Directive shall 
comprise all private and public undertakings licensed 
outside the Member States which satisfy the defi­
nition in the first indent of Article 1 of Directive 
77/780/EEC, and their branches, 
— in the case of central governments and central banks, 
regional governments and local authorities, and the 
non-bank sector as defined below, 'domestic' shall 
mean of the Member States; 'foreign' shall mean of 
other countries, 
— 'non-bank sector' shall be defined as all borrowers 
other than credit institutions as defined in the second 
and third indents above, central governments and 
central banks, regional governments and local auth­
orities, the European Communities and the European Investment Bank (EIB), and the Bank for Inter­
national Settlements (BIS), the International Bank for 
Reconstruction and Development (IBRD), and the 
International Monetary Fund (IMF), 
— full risk', 'medium risk', 'medium/low risk' and 'low 
risk'off-balance sheet items are described in Annex 1 
and listed in Annex 2, 
— 'participation' shall be defined in accordance with the 
third indent of Article 1 of Directive 83/350/EEC. 
Article 3 
General principles 
1. For the purposes of measuring the solvency of 
credit institutions as defined in Article 1, the competent 
authorities of Member States shall ensure that ratios are 
calculated for each credit institution which express its 
own funds, as defined in Article 4, as a proportion of its 
total risk-adjusted assets and off-balance sheet items, as 
defined in Article 5. 
2. Ratios shall be calculated on a consolidated basis in 
accordance with Directive 83/350/EEC and Council 
Directive 86/635/EEC of 8 December 1986 on the 
annual accounts and consolidated accounts of banks and 
other financial institutions (2). Notwithstanding the 
above requirement, unconsolidated ratios shall also be 
calculated for all credit institutions. However, the 
competent authorities shall have the discretion to require 
subconsolidated rather than unconsolidated ratios for 
credit institution subsidiaries. 
3. Without prejudice to the compliance obligations of 
credit institutions established in Article 9 (2), (3) and (4), 
the competent authorities shall ensure that the ratios are 
controlled not less than twice each year. 
4. Valuation of assets and off-balance sheet items 
shall be undertaken in accordance with Directive 
86/635/EEC. 
Article 4 
Own funds: the numerator 
Own funds, as defined in Directive .../.. ./EEC of . .. 
1988 on the own funds of credit institutions, shall form 
the numerator of the solvency ratio. 
(*) OJ No L 193, 18. 7. 1983, p. 18. O OJ No L 372, 31. 12. 1986, p. 1. 
No C 135/6 Official Journal of the European Communities 25. 5. 88 
Article 5 
Risk-adjusted assets and off-balance sheet transactions: 
the denominator 
1. Degrees of credit risk, expressed as percentage 
weights, shall be assigned to the asset items in 
accordance with the provisions of Article 6. The balance 
sheet value of each asset shall then be multiplied by the 
relevant weight to arrive at a risk-adjusted value. 
2. In the case of the off-balance sheet items included 
in categories (a) to (e) of Article 6, a two-stage calcu­
lation, in accordance with rules presented in Annex 1, 
shall be used to arrive at risk weights. Risk-adjusted 
values shall be obtained by multiplying the value of each 
off-balance sheet item by the relevant risk weight. 
3. In the case of the interest rate and foreign 
exchange rate related to off-balance sheet items in 
Article 6 (2), the potential costs of replacing cash flows 
in the event of counterparty default shall be assessed by 
the application of either of the two methods presented in 
Annex 3. These costs shall be multiplied by the relevant 
counterparty weights in Article 6 (1) to give risk-
adjusted values. 
4. The total of the risk-adjusted values of assets and 
off-balance sheet items described above shall be the 
denominator of the solvency ratio. 
Article 6 
Risk weights 
1. The following weights shall be applied to the asset 
and off-balance sheet items shown below, although the 
competent authorities may establish higher weights as 
they see fit: 
(a) Nil weight 
— cash in hand and equivalent items, 
— asset items representing claims on 'domestic' 
central governments and central banks, 
— asset items representing claims carrying the 
explicit guarantee of 'domestic' central 
governments and central banks, 
— asset items representing claims on the European 
Communities and the EIB, 
— asset items carrying the explicit guarantee of the 
European Communities and the EIB, 
— asset items representing claims on the BIS, IBRD 
and IMF, — asset items carrying the explicit guarantee of the 
BIS, IBRD and IMF, 
— all off-balance sheet items incurred on behalf of 
'domestic' central governments and central 
banks, 
— all off-balance sheet items carrying the explicit 
guarantee of 'domestic' central governments and 
central banks, 
— all off-balance sheet items incurred on behalf of 
the European Communities and the EIB, 
— all off-balance sheet items carrying the explicit 
guarantee of the European Communities and the 
EIB, 
— all off-balance sheet items incurred on behalf of 
the BIS, IBRD and IMF, 
— all off-balance sheet items carrying the explicit 
guarantee of the BIS, IBRD and IMF, 
— loans and off-balance sheet items, fully and 
completely secured to the satisfaction of the 
relevant competent authorities, by any of the 
asset items shown above and by deposits and 
certificates of deposit with the lending 
institutions, 
— all off-balance sheet items having low risk, 
regardless of counterparty, 
(b) 10 % weight 
— off-balance sheet items, having medium risk, 
incurred on behalf of 'domestic' credit 
institutions, 
— off-balance sheet items, having medium risk 
carrying the explicit guarantee of 'domestic' 
credit institutions, 
— off-balance sheet items, having medium risk and 
an original maturity of up to and including one 
year, incurred on behalf of 'foreign' credit 
institutions, 
— off-balance sheet items, having medium risk and 
an original maturity of up to and including one 
year, carrying the explicit guarantee of 'foreign' 
credit institutions; 
25. 5. 88 Official Journal of the European Communities No C 135/7 
(c) 20 % weight 
— asset items representing claims on 'domestic' 
credit institutions, 
— asset items representing claims, with an original 
maturity of up to and including one year, on 
'foreign' credit institutions, 
— asset items carrying the explicit guarantee of 
'domestic' credit institutions, 
— asset items representing claims, with an original 
maturity of up to and including one year, 
carrying the explicit guarantee of 'foreign' credit 
institutions, 
— off-balance sheet items, having full risk, incurred 
on behalf of 'domestic' credit institutions, central banks and the 'domestic' and 'foreign' 
non-bank sectors; 
off-balance sheet items, having medium risk and 
an original maturity of more than one year, 
incurred on behalf of 'foreign' credit institutions, 
off-balance sheet items, having medium risk and 
an original maturity of more than one year, 
carrying the explicit guarantee of 'foreign' credit 
institutions, 
loans to individuals for the purchase of 
residential property in the Community for their 
own occupation, fully and completely secured to 
the satisfaction of the relevant competent auth­
orities, by mortgages on the property in question; 
(e) 100 % weight 
off-balance sheet items, having full risk, carrying 
the explicit guarantee of 'domestic' credit 
institutions, — asset items representing claims on 'foreign' 
central and regional governments, local auth­
orities and central banks, 
off-balance sheet items, having full risk and an 
original maturity of up to and including one 
year, incurred on behalf of 'foreign' credit 
institutions, 
off-balance sheet items, having full risk and an 
original maturity of up to and including one 
year, carrying the explicit guarantee of 'foreign' 
credit institutions, 
loans and full and medium risk off-balance sheet 
items, fully and completely secured to the satis­
faction of the relevant competent authorities, by 
any of the asset items shown above in the 20 % 
weight category, 
off-balance sheet items having medium/low risk 
incurred on behalf of the 'domestic' and 'foreign' 
non-bank sectors, 
asset items representing local currency claims of 
'foreign' branches of domestic credit institutions 
on 'foreign' central governments, funded by local 
currency deposits, 
cash items in process of collection, where the 
corresponding prior payments have already been 
made; asset items representing claims, with an original 
maturity of more than one year, on 'foreign' 
credit institutions, 
asset items representing claims on the 'domestic' 
and 'foreign' non-bank sectors, 
off-balance sheet items, having full risk, incurred 
on behalf of 'foreign' central and regional 
governments, local authorities and central banks 
and the 'domestic' and 'foreign' non-bank 
sectors, 
off-balance sheet items, having full risk and an 
original maturity of more than one year, incurred 
on behalf of 'foreign' credit institutions, 
tangible assets in accordance with assets heading 
C.II of Article 9 of Council Directive 
78/660/EEC of 25 July 1978 on the annual 
accounts of certain types of companies ('), 
participations where not deducted from own 
funds, 
all other assets except where deducted from own 
funds. 
(d) 50 °/o weight 
— off-balance sheet items, having medium risk, 
incurred on behalf of 'foreign' central and 
regional governments, local authorities and 2. The methods laid out in Annex 3 shall be applied to 
interest rate and foreign exchange rate related to off-
balance sheet instruments. 
(') OJ No L 222, 14. 8. 1978, p. 11. 
No C 135/8 Official Journal of the European Communities 25. 5. 88 
Article 7 
1. Member States shall fix weights of either 0 %, 
20 % or 50 % in the case of asset items representing 
claims on their own regional governments and local 
authorities, and full risk off-balance sheet items incurred 
on behalf of their own regional governments and local 
authorities. Medium risk off-balance sheet items incurred 
on behalf of their own regional governments and local 
authorities shall correspondingly be weighted at 0 %, 
10 % or 20 %. Loans and off-balance sheet items 
carrying the explicit guarantee of a regional or local 
authority shall have the same weight as loans to, or off-
balance sheet items incurred on behalf of, the same 
regional government or local authority. 
2. Member States shall notify the Commission of their 
weights, the Commission shall disseminate that infor­
mation and Member States shall mutually respect the 
weights chosen by each other. They shall have the 
discretion to apply weights of either 0 %, 20 % or 50 % 
in the case of those foreign countries determined in 
accordance with Article 8 (2), with medium risk off-
balance sheet items weighted correspondingly at 0 %, 
10 % or 20 %. 
Article 8 
1. Technical modifications in the areas of this 
Directive shown below may be made in accordance with 
the procedure set out in paragraph 3: 
— the minimum ratio established in Article 9, 
— the weights and asset items in Article 6, 
— the list and classification of off-balance sheet items in 
Annexes 2 and 4 and their treatment in the calcu­
lation of the ratio as described in Article 5 and 
Annexes 1 and 3. 
2. The Commission may also, according to the 
procedure set out in paragraph 3, extend to foreign 
countries the same weights applied to domestic central 
governments, central banks and credit institutions, where 
the risks are considered equivalent, notably in the case of 
credit institutions, because of arrangements made in an 
international context and similarly to extend the 50 % 
weight for mortgage-backed loans for the purchase of 
property in foreign countries. 
3. The Commission shall be assisted by a Committee 
composed of representatives from the Member States 
and chaired by a representative of the Commission. The representative of the Commission shall submit to the 
Committee a plan of measures to take. The Committee 
shall give its opinion on the plan within a time limit to be 
fixed by the Chairman in accordance with the urgency of 
the matter. The opinion shall be given on a qualified 
majority basis according to Article 148 (2) of the Treaty 
in the case of decisions which the Council is called Upon 
to take following a proposal of the Commission. In the 
Committee the votes of the representatives shall be 
weighted according to the abovementioned article. The 
Chairman shall not vote. 
The Commission shall implement the envisaged measures 
when they are in conformity with the opinion of the 
Committee. 
When the envisaged measures do not conform with the 
opinion of the Committee, or in the absence of an 
opinion, the Commission shall without delay submit to 
the Council a proposal relating to the measures to take. 
The Council shall act according to qualified majority 
voting. 
If at the end of the period which will be set in the case 
of each decision to be taken by the Council as a result of 
this paragraph, a period which must not exceed three 
months from the day on which the Council was 
informed, the Council has not acted, the Commission 
shall implement the proposed measures. 
Article 9 
1. Member States shall adopt the measures necessary 
to comply with the provisions of this Directive by 
1 January 1990. 
2. Until 31 December 1992, credit institutions whose 
ratios are below 8 °/o (') shall not allow their ratios to fall 
unless such falls are associated with the issue of new 
capital and occur in the period immediately following 
such issuance. The competent authorities shall ensure 
that corrective measures are taken if falls occur for any 
reason other than that referred to above. 
3. With effect from 1 January 1993, credit institutions 
shall not allow their ratios, as defined in Articles 3 (1) 
and (2), to fall below 8 % ('). In the event of such an 
occurrence, the competent authorities shall ensure that 
appropriate measures to restore the ratio to the agreed 
minimum are taken as quickly as possible by the credit 
institution in question. 
4. Notwithstanding paragraph 3, the competent auth­
orities may establish ratios above 8 % (*) as they 
consider appropriate. 
(') This figure is provisional. A definitive figure will be 
proposed after study of the results of a statistical exercise to 
be undertaken in the first half of 1988. 
25. 5. 88 Official Journal of the European Communities No C 135/9 
5. Member States shall communicate to the Article 10 
Commission the texts of the main laws, regulations and 
administrative provisions which they adopt in the field 
covered by this Directive. This Directive is addressed to the Member States. 
ANNEX 1 
THE TREATMENT OF OFF-BALANCE SHEET ITEMS IN THE SOLVENCY RATIO 
The items shall first be grouped according to the perceived credit risk attaching to the instrument in 
question (see Annex 2). 'Full risk' off-balance sheet items shall be deemed to carry a credit risk equal to 
balance sheet items, and thus their full value taken into account; 'medium risk' items shall be considered to 
carry less risk and only one-half of their value taken into account; medium/low risk items shall be deemed 
to carry lower risk than the medium category and one-fifth of their value taken into account; 'low risk' 
items shall be considered to carry negligible risk and their value accordingly set at zero. The second stage 
shall be to multiply the off-balance sheet values, adjusted as described above, by the weights attributable to 
the relevant counterparties, in accordance with the treatment afforded to asset items. In the case of asset 
sale and repurchase agreements and outright forward purchases, the weights shall be those attaching to the 
assets in question and not to the counterparties to the transactions. Article 6 combines the two-stage 
process used for off-balance sheet items into a single percentage weight. 
Where off-balance sheet items carry explicit guarantees, they shall be weighted as if they were incurred on 
behalf of the guarantor rather than the counterparty. Where potential exposure arising from off-balance 
sheet business is fully and completely secured, to the satisfaction of the relevant competent authorities, by 
any assets having a 0 % or 20 % weight, the weight applicable to the collateral and not to the counterparty 
shall be used. 
ANNEX 2 
CLASSIFICATION OF OFF-BALANCE SHEET ITEMS 
Full risk 
— Guarantees having the character of credit substitutes, 
— Acceptances, 
— Endorsements on bills not carrying the name of other credit institutions, 
— Transactions with recourse, 
— Irrevocable standby letters of credit having the character of credit substitutes, 
— Asset sale and repurchase agreements as defined in Article 12 (1) and (2) of Directive 86/635/EEC, if 
these agreements are treated as off-balance sheet items pending full compliance with Directive 
86/635/EEC, 
— Assets purchased under outright forward purchase agreements, 
— The unpaid portion of partly-paid shares and securities, 
— Other items also carrying full risk. 
No C 135/10 Official Journal of the European Communities 25. 5. 88 
Medium risk 
— Documentary credits issued and confirmed (see also medium/low risk), 
— Warranties and indemnities (including tender, performance, customs and tax bonds) and guarantees not 
having the character of credit substitutes, 
— Asset sale and repurchase agreements as defined in Article 12 (3) and (5) of Directive 86/635/EEC, 
— Irrevocable standby letters of credit not having the character of credit substitutes, 
— Undrawn credit facilities (agreements to lend purchase securities, provide guarantees, acceptance 
facilities) with an original maturity of more than one year; 
— Other items also carrying medium risk. 
Medium/low risk 
— Documentary credits in which underlying shipment acts as collateral and other self-liquidating 
transactions, 
— Other items also carrying medium/low risk. 
Low risk 
— Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees, acceptance 
facilities) with an original maturity of up to and including one year, 
— Other items also carrying low risk. 
ANNEX 3 
THE TREATMENT OF INTEREST RATE AND FOREIGN EXCHANGE RATE RELATED OFF-
BALANCE SHEET ITEMS 
Subject to the consent of their supervisory authorities, credit institutions shall choose one of the methods 
presented below to measure the risks associated with the transactions listed in Annex 4. Interest and 
exchange rate contracts traded on recognized exchanges, and exchange rate contracts with an original 
maturity of seven days or less shall be excluded. 
Method 1: the 'marking to market' approach 
Step (a): on the basis of attaching current market values to contracts (marking to market) the current 
replacement cost of all contracts with a positive value shall be obtained. 
Step (b): to obtain a figure for potential future credit exposure the notional principal amounts or 
values underlying the institutions' aggregate books shall be multiplied by the following 
percentages ('): 
residual maturity exchange rate contracts 
less than one year 
one year and over 1% 
5% 
Step (c): the sum of current replacement cost and potential future credit exposure shall be multiplied 
by the risk weight attached to the relevant counterparties in Article 6. 
(') These percentages are provisional and subject to revision. 
25. 5. 88 Official Journal of the European Communities NoC 135/11 
Method 2: the 'original exposure' approach 
Step (a): the notional principal amounts of each instrument shall be multiplied by the percentages 
given below (*): 
original maturity 
less than one year 
one year and less than two years 
additional allowance for 
each subsequent year interest rate contracts 
0,5 % 
1% 
1 % exchange rate contracts 
2% 
6% 
4% 
Step (b): the original exposures thus obtained shall be multiplied by the counterparty weights given in 
Article 6. 
(') These percentages are provisional and subject to revision. 
ANNEX 4 
TYPES OF INTEREST AND FOREIGN EXCHANGE RATE RELATED OFF-BALANCE SHEET 
ITEMS 
Interest rate contracts 
— Single-currency interest rate swaps 
— Basis swaps 
— Forward rate agreements 
— Interest rate futures 
— Interest rate options purchased 
— Other contracts of similar nature 
Exchange rate contracts 
— Cross-currency interest rate swaps 
— Forward foreign exchange contracts 
— Currency futures 
— Currency options purchased 
— Other contracts of similar nature.