^LLu^l Officialjournal of the European Communities ^oC^B^ 
Opinion on theproposalfor a Council Directive onMonitoringand ControllingLarge 
Exposures of Credit l^stitutior^s^ 
^IBC^^l^ 
Onl^Aiay 1^1,the Council, in accordance with Article Bo^^ofthelreatyestablishing 
the European Economic Community, decided to ask the Economic and Social Committee for 
an Opinion on the abovementioned proposal 
TheSectionfor Industry, Commerce, Crafts andServices, which was responsihlefor the 
preparatory work, adopted its Opinion on 10 ]ulyl^LThe Rapporteur was Air R^elletier. 
At its ^^th plenary session ^meeting of ^eo September 1^1^ the Economic and Social 
Committee adopted the following Opinion with^votes against and^abstentions. 
The internationalbankingcommunityhasfor several 
years been passing througha^one of turbulence whose 
origins included the debt crisis of the less developed 
countries ^LDC^, theimpactof therecommendations 
of thelnternational AionetaryEund ^lAiE^ onbanks^ 
balance sheets and the crises in the American banking 
and]apanesefinancialsystemsD TheEEC, which has 
remained relatively shelteredfrom ma^or disasters, is 
now suffering from the weaknesses of institutions which 
havee^tensive activities and commitments within its 
borders but which are controlled by nonEECcountries^ 
Under these circumstances it is understandable that the 
authorities responsible for supervising credit insti 
tutions should seek much more effective machinery 
for carrying out supervision and forgiving advance 
warning of disasters. 
Lhe Committee understands and approves the ComD 
mission^sdesiretohelp strengthen existing prudential 
rules by submitting a directive designed to prevent 
credit institutions from becoming exposed to the risks 
which arise when they commit a major partof their 
own funds. It congratulates the Commission on the 
quality of its work inacomple^ regulatory area. 
ldowever,becauseof thecomple^ityofthisfieldand 
the difficulties of understanding all the economic and 
financial implications of an approach which perforce is 
more concerned with regulatory rather than economic 
criteria, the Committee is obliged to make certain comD 
ments which, while very oftenof a technical nature, 
are, in its view, essential. 
These comments areintendedtobe constructive, but 
the Committee cannot forget that it must alsoreflect 
the concerns of the economic and social interest groups at the prospect of regulations which may haveamajor 
impact on the dynamism of the whole Community. 
1, Presentation of the Directive 
LI. A^o^^L^r^rAB^ 
The aim of the present proposal is to flesh out the 
Community prudential rules which have already been 
proposed or adopted^ these concerns solvency ratios, 
own funds, capital adequacy and consolidation, 
L^he proposal is designed to replace the Recommen 
dationof^Decemberl^^ on the same subject ^^ the 
need for harmonising the rules on risk spreading was 
specifically mentioned in the Commissions ^hite 
l^aper on completing the internal market in 1^, 
So,theproposalstwoaimsare^ 
— toamplify the prudential rules onthefreedomto 
provideservices by monitoringand limiting large 
exposures in order toencouragethespreadingof 
risks, for an overconcentration of risks onasingle 
counterparty could, in the event of the counter 
party^sbankruptcy,affectthesolvencyofacredit 
institutionand sometimes evenleadtoitsfailure, 
and 
— to prevent distortions of competition between insti 
tutions arising fromacompetitive advantage being 
enjoyed by institutions subjectto less stringent rules. 
1.^, T^^o^o^A^o^r^roA^o^^^ 
The proposal concerns credit institutions. 
^oi^DCt^^^mt^t,D.^, ^oi^oL^^,^m^^D,to 
No C 339/36 Official Journal of the European Communities 31. 12. 91 
1.3. The standards proposed 
The proposal seeks to prevent the excessive exposure 
of a credit institution to a single client or 'group of 
connected clients', so that the failure of one party will 
not lead to the failure of the institution. 
To do this the proposal lays down that all exposures 
of 10% or more of the lending institution's own funds 
must be reported to the competent authorities and 
imposes a double limit on such large exposures: 
— an individual limit: a credit institution may not 
incur an exposure to a client or group of connected 
clients with a value exceeding 25 % of its own funds, 
and 
— an aggregate limit: a credit institution may not incur 
large exposures with an aggregate limit of more 
than 800 % of its own funds. 
Provision is made for transitional measures allowing 
authorities to give credit institutions a maximum of 
5 years to bring down existing exposures to the permit­
ted limits. However, loans with a longer maturity with 
binding contractual terms for the credit institution may 
be held until maturity. An additional exemption until 
the year 2000 is granted to institutions with a capital 
of less than ECU 5 million. 
2. General comments 
In accordance with the aims of the proposal, the Com­
mittee considers the following points to be essential: 
2.1. A text on this matter has been prepared by the 
Basle Committee. The text is a code of good practice, 
unlike that on the Cooke ratio. It therefore does not 
have to be applied by all the member countries of 
the Basle Committee; moreover, it does leave ample 
discretionary margins. 
So, by laying down specific and binding standards the 
Commission would be imposing additional constraints 
on EC credit institutions. 
The Committee must therefore draw the Commission's 
attention to the risks of competition between EC and 
non-EC credit institutions being distorted if the pro­
posed directive is adopted. The Commission proposal is inspired by the Basle Com­
mittee. But the latter's text, without saying so explicitly, 
is addressed to large credit institutions operating on an 
international scale. The Commission's proposal con­
cerns all credit institutions in the EC, irrespective of 
their size. It therefore takes no account of the specific 
nature of institutions which, although only limited in 
size or operating on a regional scale, play a vital role 
in financing their economic environment, especially 
small or medium-sized firms, by incurring exposures 
which are considerable in relation to their own funds. 
If the directive were applied, these institutions would 
be faced with such problems that their very existence 
could be jeopardised unless the supervisory authorities 
were allowed to grant exemptions and additional 
periods for adjustment. 
2.2. The present proposal is a logical continuation of 
other directives (on solvency ratios, own funds, capital 
adequacy and consolidation). 
But, for instance, it contains no mention of the solvency 
risk weightings. 
There must be some consistency between the various 
texts: 
— first, to ensure that the proposed prudential rules 
remain rational, and 
— second, to enable institutions and the authorities 
to set up homogenous and consistent supervisory 
machinery. 
2.3. The proposed directive only concerns credit 
institutions, even though some of the activities listed in 
the Second Banking Directive may also be carried out 
by investment firms. To us it seems essential that, in 
order to prevent any distortions of competition from 
occurring, there should be identical prudential stan­
dards and equivalent definitions of own funds applying 
to all establishments which may carry out the same 
activities. Such rules should be included in the capital 
adequacy directive for investment firms. 
2.4. The proposal clearly stresses that the lowering 
of the ceiling from that of the Recommendation is 
fairly significant and may pose some not inconsiderable 
problems of adjustment for some credit institutions; 
certain banking systems, or parts thereof, may be faced 
with problems of a more structural nature. 
ouELL^ C^fficialJournal of the European communities ^oCh^A^ 
In view of this the directive should retain the ^u^ 
ceilingcontained in theRecommendation of ^L^ec 
ember 1^^, for both external and group exposure. 
This maximum limit would provide the authorities with 
greater discretionary powers, enabling them to taloe 
account of the particular setups in each of the member 
^tatesD 
^Bo. As regards exposures incurred to a client or 
group of connected clients consisting of the parent 
undertaking of the credit institution andBor one or more 
subsidiaries of that parent undertaloing^Art.^^ of the 
proposal! there is noreason to reduce the percentage 
laid down in Article^l^ on the contrary, a single 
threshold should be adopted for the two types of 
exposure. 
^. specific comments 
The committee would like to draw the commissions 
attention to a number of points which ought to be 
clarified, or even amended. 
^.1BL f^irm commitment to underwrite 
an issue of securities ^Art. 1, 
paragraph ^ 
The major risk in any firm commitment to underwrite 
an issue of securities isashort^term market risk, rather 
thanacounterpartyrisk. 
^uch operations should therefore be covered only in the 
capital adequacy directive, which specifically deals with 
market risk, moreover, it should be noted thatafirm 
commitment to underwrite an issue of securities is 
explicitly mentioned and dealt with in this same direc 
tive. 
^o, any firm commitment to underwrite an issue of 
securities should be exempted from the proposed direct 
tiveuntilthedate when it is recorded in whole or in 
part inthebalancesheet.lf such anexemption were 
not allowed, the market in firm commitments might be 
endangered, ^uch an exemption is all the more justified 
because firm commitments obviously only represent 
provisional risks. 
^.L^. definition of the term ^connected 
clients^ 
a^ The expression ^group of connected clients^refers 
bothtoalegalcriterion,the existence of apowerof 
control, and an economic criterion,^^ro interdepend 
denceresulting fromcertain economiclinks. But the text makes itclear that thecombined exposure pre 
sumptionsinthedefinitionare relative presumptions 
which can be reversed if there is proof to the contrary. 
^hen the limit on large exposures was^^ this defi 
nition, although very broad,wastolerable.TheC^om 
mission is proposing that thislimitbebroughtdown 
to ^eo^. The committee proposes either to go back to 
the limit of ^O^or, if the threshold of ^eo^ is kept, 
to leave it up to the credit institution concerned to 
determine, in thelightof theinformation in itspos 
session,which parties should be considered asa^group 
of connected clients^, although this freedom of assess 
ment should be subject to the monitoring of the com 
petent authorities. 
b^ The concept of ^direct commercial interdepend 
dencewhichcannot be substituted in the short term^ 
covers far toomanycategories of economic relations. 
If the commission intends this definition to cover only 
the case ofasupplierdeliveringavery specific product 
which cannot be used by any other producer, then this 
indent shouldbe redrafted so as to avoid anyabusive 
interpretation. 
^. ^^o^^o^^^^^o^^^^r.^ 
The committee considers that the two possibilities 
proposedby thedraftdirective willinvolvefinancial 
costs for credit institutions. 
As regards the first possibility, it seems essential to 
specify thatonly increases—and, indeed, increases of 
somesi^e—must be reported. 
Idowever, the C^ommitteedoes feel thatthe best solution 
would be to leave the frequency of reporting to the 
discretion of the Aiember states. 
^. L^^o^^^^o^^^r.^ 
several questions of interpretation have to be made 
clear in the proposed directives 
— In practice it is desirable if risks can be assessed at 
their book value, which is not necessarily their 
nominal value.This is particularly true in the case 
of securities which are taken up by the institutions 
at their net value ^purchase price less provisions^. 
— Risks should be assessed on the basis of their 
residual term. 
No C 339/38 Official Journal of the European Communities 31. 12. 91 
3.3.1. For off balance sheet items the lines of credit 
or standby lines negotiated between credit institutions 
should be assessed on the basis of that part which could 
be used immediately, and not by their total amount, 
which means taking account of their use ceiling. So, if 
a line of credit has a six-monthly ceiling it will be 
considered as interbank at less than one year. 
As for lines of credit for more than one year, the present 
proposal should take over the 50 % weighting from the 
solvency ratio directive, so as to ensure consistency of 
treatment for the same risk in the two directives. 
3.3.2. For interest and/or exchange rate swaps, 
caps (*) and floors (2), one should simply take account of 
the net difference resulting from transactions concluded 
under a bilateral outline contract between a credit insti­
tution and its counterparty and recognised by the 
national supervisory authorities. It is this figure which 
really reflects the potential risk involved in such oper­
ations. 
3.3.3. Repurchase agreements and back-to-back 
loans of securities must be calculated in relation to the 
risks of the underlying party, using the weightings in 
the capital adequacy directive. 
3.3.4. Mortgage guarantees must be given the treat­
ment provided for in the solvency ratio directive; this 
took into account the particularly high level of security 
of mortgage credit in Europe. According to this direc­
tive, loans which are fully guaranteed to the satisfaction 
of the competent authorities concerned by mortgages 
on a dwelling which is or will be occupied or let by the 
borrower are given a weighting of 50%. This 50% 
weighting should also be applied to property leasing 
for the same reasons as those set out above for mortgage 
credits. 
The Committee wishes to draw attention to the poten­
tial effect of the directive on borrowers. For example, 
figures supplied by the German Mortgage Banks Feder­
ation show that for the financing of a complex made 
up of several typical family dwellings worth, on aver-
(!) Contract whereby a bank, in return for payment of a pre­
mium, guarantees a maximum agreed interest rate for a 
specified loan and for a specified period in the future. This 
guarantee is obtained by the payment of any interest differen­
tial if the rate observed at the start of the reference period is 
higher than that guaranteed. 
(2) Contract whereby a bank, in return for payment of a pre­
mium, guarantees a minimum agreed interest rate for a speci­
fied deposit and for a specified period in the future. This 
guarantee is obtained by the payment of any interest differen­
tial if the rate observed at the start of the reference period is 
lower than that guaranteed. age, DM 420 000 and requiring a credit of DM 300 000, 
and representing a large exposure for the lending insti­
tution, the direct effect of the directive on the borrower 
would be to increase his repayments from DM 500 to 
DM 750 a year, or from around DM 40 to DM 60 a 
month. 
3.4. Taking account of the interbank factor 
The Commission authorises partial or total exemption 
from the limits for interbank claims of less than one 
year. Claims of more than one year are weighted at 
100%. 
The Commission has thus considered that the risks 
taken by credit institutions on the interbank market are 
of a specific nature: 
— the market is made up exclusively of professionals 
and is subject to particular supervision by the moni­
toring authorities, 
— categories of claims are treated differently 
depending on their duration. 
These two criteria should be amplified with respect to 
large exposures in two ways: 
— prudential treatment of interbank claims, and 
— definition of interbank claims. 
3.4.1. Prudential treatment of interbank 
claims 
One should apply the claims weighting adopted by the 
proposal (0 %) for claims defined below and leave it up 
to the authorities to implement a beefed-up supervisory 
system, with other claims being subject to the solvency 
ratio (20%). 
3.4.2. Definition of interbank claims 
For applying the 0% weighting the present proposal 
should consider interbank claims as: 
— claims at less than one year on credit institutions, 
and 
— claims at more than one year on credit institutions 
represented by securities issued by a credit insti­
tution and actually negotiable on a market regulated 
by a national authority. 
31. 12. 91 Official Journal of the European Communities No C 339/39 
3.5. Application of the transitional provisions to off 
balance sheet instruments (Article 6) 
The present proposal authorises a credit institution to 
continue until their maturity long-term loans contracted 
before the date of publication of the directive. 
This transitional provision does not therefore concern 
off balance sheet instruments with maturity dates fixed 
by contract. 
But there is no reason to draw a distinction between 
balance sheet and off balance sheet items, and the 
present proposal offers no justification for such a dis­
tinction. 
3.6. Date of application 
3.6.1. The present proposal for a directive is due to 
come into force on 1 January 1993. But as soon as the 
directive is published credit institutions will have five 
years after that date to bring excessive exposures into 
line with the provisions of the directive, except in the 
case of longer-term loans, where the lending institution 
has to abide by the terms of the loan. In addition, 
after the publication date of the directive, the credit 
institution involved will lose the benefit of the grace 
period allowed for bringing any increase in exposure 
within the limits laid down. 
3.6.2. These rules, especially the linkage to the publi­
cation date of the directive, which the credit institutions 
do not know in advance: 
— will seriously affect business relations with cus­
tomers because the penalty laid down (i.e. the loss 
of the period of grace) will discourage institutions 
from negotiating new transactions that may increase 
their exposure beyond the 25 % limit after the publi­
cation date, 
— will therefore lead to the standards being applied in 
advance to the vast majority of individual risks, 
— will particularly penalise institutions granting large 
volumes of short-term credit renewable annually to 
clients whose needs are of a cyclical nature (e.g. 
financing of stocks in the agrofood industry), for 
the following two reasons: 
(i) either exposures to some major customers will 
be at a low point in the economic cycle on the 
date when the directive is published, (ii) or, from 1 January 1993, their renewable credits 
cannot, whatever happens, exceed the yardstick 
of 25 %. One imagines the problems that such 
a tight deadline might involve for the credit 
institutions concerned, which have to redeploy 
their activities, and their customers, who have 
to diversify their financing, 
— the same would apply to institutions offering long-
term loans; they would have to freeze their dealings 
with customers with whom their risk exposure 
would exceed 25% on the date the directive was 
published. 
3.6.3. For these reasons, if the 25 % figure is retained, 
despite the proposal contained in point 2.4 of this 
Opinion, there should no longer be any reference to the 
date of the directive's publication; a general deadline 
for compliance of five years from 1 January 1993 should 
be laid down, with the possibility of exemptions for 
loans maturing after this date. 
3.6.4. Institutions would have to reduce their excess 
exposures gradually under the authorities' supervision, 
without the application of the intended 'ratchet' (i.e. 
the publication date), in order to maintain the flexibility 
necessary to their business relations. 
4. Conclusion 
4.1. The experiences of the last few years have shown 
that the western world's credit institutions could turn 
out to be more vulnerable than one imagines. The 
serious difficulties of entire networks in the USA have 
led the banking supervisory authorities to formulate a 
harmonised framework of new prudential rules. 
The Committee does not wish to criticise a step which 
has been inspired by a concern to safeguard the solidity 
and stability of the EC banking system and, hence, 
savers' assets. 
4.2. However, it is difficult to underestimate, from 
a purely economic point of view, the dampening effect 
on the initiative, indeed the dynamism, of a profession 
whose vocation is, by definition, to finance economic 
development and business investment by taking risks. 
It is feared that the banking sector will be subject to 
such constraints that its dynamism at European level 
will be seriously affected. The sectors which play a 
decisive role in the progress of our society often involve 
No C 339/40 Official Journal of the European Communities 31. 12. 91 
risks. But it is these vital sectors which might be 
deprived of the financing which they need. 
If all credit institutions are made subject to rigid stan­
dards this may lead to them shouldering less responsi­
bility and to less competition. The cumulative effect of 
all the new prudential rules may in fact be a creeping 
cartelization of the banking industry. 
One may also wonder about the question of 'large 
exposures', for experience has shown—especially in 
the USA—that the really large exposures are those 
involving a whole sector suffering from recession—such 
as the building industry—rather than a massive com­
mitment to one or a few borrowers. 
Instead of regulatory constraints there could be strict 
obligations concerning information; these would have 
Done at Brussels, 25 September 1991. the same effect of protecting savers but would leave 
credit institutions greater management freedom. 
In any event, the above considerations fully justify our 
call for the 40 % ceiling to be retained. 
4.3. The Committee would like to see consultations 
with the Commission directorates responsible for econ­
omic and financial affairs, particularly DG II, which 
assesses the economic impact of Community policies. 
The purpose of these consultations would be to use 
simulations based on a sample of EC credit institutions 
to measure the impact on banking activities of all the 
prudential directives submitted to the Economic and 
Social Committee, including, of course, those which are 
the subject of this Opinion. 
If the Commission did not think it could carry out this 
study with the means at its disposal, the Committee 
suggests that this mission be entrusted to an indepen­
dent bureau, which would be given the means to con­
duct the investigations necessary. 
The Chairman 
of the Economic and Social Committee 
Fran?ois STAEDELIN