COMMON POSITION (EC) No 20/98 adopted by the Council on 9 March 1998 with a view to adopting European Parliament and Council Directive 98/. . ./EC of . . ., amending, as regards in particular mortgages, Council Directive 89/647/EEC on a solvency ratio for credit institutions (98/C 135/01)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular the first and third sentences of Article 57(2) thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the Economic and Social Committee (2),

Acting in accordance with the procedure referred to in Article 189b of the Treaty (3),

(1) Whereas it is appropriate to treat mortgage-backed securities as loans referred to in Article 6(1)(c)(1) and Article 11(4) of Council Directive 89/647/EEC (4) if the competent authorities consider that they are equivalent in the light of the credit risk; whereas the market for securitisation is undergoing rapid development; whereas it is therefore desirable that the Commission should examine with the Member States the prudential treatment of asset-backed securities and put forward, within a year from the adoption of this Directive, proposals aimed at adapting existing legislation in order to define an appropriate prudential treatment for asset-backed securities;

(2) Whereas Article 11(4) of Directive 89/647/EEC provides for a derogation from Article 6(1)(c)(1), on certain conditions, for four Member States as regards the weighting to be applied to assets secured by mortgages on offices or on multipurpose commercial premises; whereas this derogation expired on 1 January 1996;

(3) Whereas when Directive 89/647/EEC was adopted, the Commission undertook to examine this derogation to determine whether, in the light of its findings and of international developments and in view of the need to avoid distortions of competition, there was a case for amending this provision and, if so, to put forward appropriate proposals; whereas the results of the study relating to this provision, although not absolutely conclusive, show that there is no significant difference between the rates of losses recorded in the Member States covered by the derogation and in those not covered; whereas, therefore, this derogation can be extended to all Member States which so wish until 31 December 2006;

(4) Whereas the property to which the mortgage relates must be subject to rigorous assessment criteria and regular revaluation to take account of the developments in the commercial property market; whereas the property must be either occupied or let by the owner; whereas loans for property development are excluded from this provision;

(5) Whereas this Directive is the most appropriate means for attaining the objectives sought and does not go beyond what is necessary to achieve these objectives,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Directive 89/647/EEC is amended as follows:

1. In Article 6(1)(c)(1) the following subparagraph shall be added:

'"mortgage-backed securities" which may be treated as loans referred to in the first subparagraph or in Article 11(4), if the competent authorities consider, having regard to the legal framework in force in each Member State, that they are equivalent in the light of the credit risk. Without prejudice to the types of securities which may be included in and are capable of fulfilling the conditions in this point 1, "mortgage-backed securities" may include instruments within the meaning of Section B(1)(a) and (b) of the Annex to Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (*). The competent authorities must in particular be satisfied that:

(i) such securities are fully and directly backed by a pool of mortgages which are of the same nature as those defined in the first subparagraph or in Article 11(4) and are fully performing when the mortgage-backed securities are created;

(ii) an acceptable high-priority charge on the underlying mortgage asset items is held either directly by investors in mortgage-backed securities or on their behalf by a trustee or mandated representative in the same proportion to the securities which they hold.

(*) OJ L 141, 11.6.1993, p. 27. Directive as last amended by Directive 95/26/EC (OJ L 168, 18.7.1995, p. 7)`.

2. Article 11(4) is replaced by the following:

'4. Until 31 December 2006, the competent authorities of the Member States may authorise their credit institutions to apply a 50 % risk weighting to loans fully and completely secured to their satisfaction by mortgages on offices or on multipurpose commercial premises situated within the territory of those Member States that allow the 50 % risk weighting, subject to the following conditions:

(i) the 50 % risk weighting applies to the part of the loan that does not exceed a limit calculated according to either (a) or (b):

(a) 50 % of the market value of the property in question.

The market value of the property must be calculated by two independent valuers making independent assessments at the time the loan is made. The loan must be based on the lower of the two valuations.

The property shall be revalued at least once a year by one valuer. For loans not exceeding ECU 1 million and 5 % of the own funds of the credit institution, the property shall be revalued at least every three years by one valuer;

(b) 50 % of the market value of the property or 60 % of the mortgage lending value, whichever is lower, in those Member States that have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions.

The mortgage lending value shall mean the value of the property as determined by a valuer making a prudent assessment of the future marketability of the property by taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements shall not be taken into account in the assessment of the mortgage lending value. The mortgage lending value shall be documented in a transparent and clear manner.

At least every three years or if the market falls by more than 10 %, the mortgage lending value and in particular the underlying assumptions concerning the development of the relevant market, shall be reassessed.

In both (a) and (b) "market value" shall mean the price at which the property could be sold under private contract between a willing seller and an arm's length buyer on the date of valuation, it being assumed that the property is publicly exposed to the market, that market conditions permit orderly disposal and that a normal period, having regard to the nature of the property, is available for the negotiation of the sale;

(ii) the 100 % risk weighting applies to the part of the loan that exceeds the limits set out in (i);

(iii) the property must be either used or let by the owner.

The first subparagraph shall not prevent the competent authorities of a Member State, which applies a higher risk weighting in its territory, from allowing, under the conditions defined above, the 50 % risk weighting to apply for this type of lending in the territories of those Member States that allow the 50 % risk weighting.

The competent authorities of the Member States may allow their credit institutions to apply a 50 % risk weighting to the loans outstanding on . . . (*) provided that the conditions listed in this paragraph are fulfilled. In this case the property shall be valued according to the assessment criteria laid down above not later than . . . (**).

For loans granted before 31 December 2006, the 50 % risk weighting remains applicable until their maturity, if the credit institution is bound to observe the contractual terms.

Until 31 December 2006, the competent authorities of the Member State may also authorise their credit institutions to apply a 50 % risk weighting to the part of the loans fully and completely secured to their satisfaction by shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation, provided that the conditions laid down in this paragraph are fulfilled.

Member States shall inform the Commission of the use they make of this paragraph.

(*) Two years from the date of the entry into force of this Directive.

(**) Five years from the date of the entry into force of this Directive`.

3. Article 11(5) shall be replaced by the following:

'5. Member States may apply a 50 % risk weighting to property leasing transactions concluded before 31 December 2006 and concerning assets for business use situated in the country of the head office and governed by statutory provisions whereby the lessor retains full ownership of the rented asset until the tenant exercises his option to purchase. Member States shall inform the Commission of the use they make of this paragraph`.

Article 2

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive not later than 24 months after its entry into force. They shall forthwith inform the Commission thereof.

When Member States adopt these measures, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.

2. Member States shall communicate to the Commission the text of the main provisions of domestic law which they adopt in the filed governed by this Directive.

Article 3

This Directive shall enter into force on the day of its publication in the Official Journal of the European Communities.

Article 4

This Directive is addressed to the Member States.

Done at . . .

For the European Parliament

The President

For the Council

The President

(1) OJ C 114, 19.4.1996, p. 9.

(2) OJ C 30, 30.1.1997, p. 99.

(3) Opinion of the European Parliament of 17 September 1996 (OJ C 320, 28.10.1996, p. 26), Council Common Position of 9 March 1998 and Decision of the European Parliament . . .(not yet published in the Official Journal).

(4) OJ L 386, 30.12.1989, p. 14. Directive as last amended by Directive 96/10/EC (OJ L 85, 3.4.1996, p. 17).

STATEMENT OF THE COUNCIL'S REASONS

I. INTRODUCTION

1. On 28 February 1996 the Commission forwarded to the Council a proposal for a Directive amending Council Directive 89/647/EEC on a solvency ratio for credit institutions, based on Article 57(2) of the EC Treaty.

The Economic and Social Committee and the European Parliament delivered their opinions on 26 September 1996 and 17 September 1996 respectively. The European Monetary Institute gave its opinion on 25 September 1996.

2. On 9 March 1998, the Council adopted its common position pursuant to Article 189b of the Treaty.

II. OBJECTIVE

The Directive amends some provisions of the basic Directive with regard to risk weighting of certain categories of assets when calculating the solvency ratio of a credit institution. The Directive allows mortgage-backed securities to be treated as the underlying loans, if the competent authorities consider that they are equivalent in the light of the credit risk. It further introduces some optional provisions which, until 31 December 2006,

- extend to all Member States the possibility of weighting mortgages on commercial property at 50 %, subject to certain conditions,

- allow the competent authorities of the Member States to authorise their credit institutions to apply a 50 % risk weighting to the portion of loans to commercial properties secured by shares in Finnish housing companies,

- allow Member States to continue the derogation permitting a 50 % weighting on certain property leasing transactions.

III. ANALYSIS OF THE COMMON POSITION

A. General remarks

As a result of its first reading the European Parliament delivered a favourable opinion on the Commission proposal without proposing any amendments. The common position follows the objectives and spirit of the Commission proposal. The amendments introduced by the Council primarily aim at increasing the level of security by introducing rigorous assessment and revaluation criteria for commercial mortgages in order to allow them to be weighted at 50 %.

By introducing a transitional period lasting until 31 December 2006 for the optional provisions in the Directive, the common position aims at making it possible to allow credit institutions in Member States which make use of these provisions to operate for a reasonable period of time with certainty regarding the applicable legislation.

B. Mortgage-backed securities (Article 1(1) amending Article 6(1)(c)(1))

Compared to the Commission proposal, the common position makes it clear that transferable securities and units in collective investment undertakings (referred to in Section B(1)(a) and (b) of the Annex to Directive 93/22/EEC) can be considered instruments covered by this provision. The drafting of (ii) has been made slightly more flexible by referring to an acceptable high charge, rather than a first charge, and certain minor changes have been introduced to make the text clearer without changing the substance.

C. Credit weighting of commercial mortgages (Article 1(2) amending Article 11(4))

The common position follows the substance of the Commission proposal which aims at extending to all Member States the option to weight certain commercial mortgage loans at 50 %, which up until 1 January 1996 applied only to four Member States (Denmark, Germany, Greece and Austria).

Compared to the Commission proposal the common position introduces, however, rigorous assessment and revaluation criteria for commercial mortgages in order to allow a portion of the loans to be weighted at 50 %, when calculating the solvency ratio.

The common position introduces two alternative methods to determine the portion of the loan which can be weighed at 50 %, one based on the market value of the property and one based on a combination of the market value and the mortgage lending value.

According to the first method the 50 % weighting applies to 50 % of the market value of the property. The market value must be calculated by two independent valuers before the loan is made, and the market value of the property must be based on the lower of the two valuations. For large loans (over ECU 1 million) the property must be revalued at least once a year by one valuer, for smaller loans at least every three years.

The second method applies only to Member States which have laid down rigorous criteria for the assessment of the mortgage lending value in statutory or regulatory provisions. According to this method the 50 % weighting applies to either 50 % of the market value of the property or 60 % of the mortgage lending value, whichever is lower.

In both cases the remaining portion of the loan must be weighted at 100 %.

The common position stipulates in a precise manner how the mortgage lending value and the market value are determined. It further lays down provisions concerning loans outstanding at the time of implementation of the Directive as well as loans granted before the expiry of the option.

In order to ensure consistency with the Act of Accession of Finland to the European Union, the common position includes an option for Member States to allow their credit institutions to apply a 50 % weighting to the portion of loans for commercial properties which is fully and completely secured by shares in Finnish housing companies operating in accordance with the Finnish Housing Company Act of 1991.

For the reason set out above the expiry date of the option has been set at 31 December 2006 rather than 1 January 2001 as proposed by the Commission.

In order to ensure that the Commission has sufficient information on which to base its decision on future legislation in this sector, Member States must inform the Commission of the use they make of this option.

D. Property leasing transactions (Article 1(3) amending Article 11(5))

In order to ensure consistency between the options laid down in the Directive, the common position extends until 31 December 2006 the option set out in Article 11(5), originally lasting until 1 January 2001, which allows the Member States to apply a 50 % risk weighting to certain property leasing transactions.

E. Implementation (Article 2)

As compared with the Commission proposal, Article 2 of the common position sets the date of implementation by reference to the date of entry into force of the Directive as 24 months after that date.

F. The recitals

The recitals have been adapted following the changes made to the Commission proposal.

It is stressed in recital 1 that there is a need for the Commission to examine the prudential treatment of asset-backed securities and to put forward, within a year of the adoption of the Directive, proposals to define an appropriate treatment. This is included in order to emphasise the need for consistency in the treatment of mortgage-backed securities and other asset-backed securities.

The last two recitals of the Commission proposal have been deleted as unnecessary from a legal point of view.

G. Conclusion

The Council considers that all amendments to the Commission proposal are in accordance with the aims of the Directive, namely to take account of recent market developments and to prevent undue distortion of competition between the credit institutions of Member States. The changes to the text aim primarily at ensuring the prudent valuation of commercial properties in order to justify the lower weighting in calculating the solvency ration of a credit institution and do not change the essential thrust of the Commission proposal.