OPINION OF THE EUROPEAN MONETARY INSTITUTE
on a consultation from the Council of the Europ ean Union under Article 109f (6) of the Treaty
establishing the European Community (the “Tr eaty”) and Article 5.3 of the Statute of the EMI;
on a Commission proposal for a European Par liament and Council Directive amending:
Article 12 of Council Directive 77/780/EEC on th e co-ordination of laws, regulations and
administrative provisions relating to the taking up and pursuit of the business of creditinstitutions;
Articles 2, 6, 7 and 8 and Annexes II and III of C ouncil Directive 89/647/EEC on a solvency
ratio for credit institutions; and,
Article 2 and Annex II of Council Directive 93/ 6/EEC on the capital adequacy of investment
firms and credit institutions.
CON/96/08
1. The present consultation was initiated by means of a letter sent on behalf of the Secretary
General of the Council of the European Union, addressed to the President of the EMI and
received on 15th July 1996, and relates to the pr oposal for a directive, prepared by the
Commission (reference COM (96) 183 final/2) and communicated to the Council of the
European Union by means of a letter dated 30th April 1996.
References in this opinion to the text of th e proposal refer to document reference COM (96)
183 final/2.
2. The purposes of the proposal are to introduce a number of amendments to Council Directives
77/780/EEC, 89/647/EEC and 93/ 6/EEC, either to take account of recent developments or to
remedy perceived shortcomings to those Dir ectives, and to reflect refinements of the
supervisory treatment of over-the-counter deriva tive instruments already contemplated by the
Basle Committee on Banking Supervision.
3. The EMI considers that it is competent to give  an opinion in relation to the proposal.  Article
109f (6) of the Treaty and Article 5.3 of the EMI Statute provide for consultation of the EMI by
the Council on any proposed Commun ity act within the field of competence of the EMI.  The
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present proposal relates to the field of compet ence of the EMI: it concerns the supervision of
credit institutions, being an area which falls w ithin the competence of a number of national
central banks, and it will have a potential impact  upon the stability of financial institutions and
the financial markets (Article 4.1, f ourth indent of the EMI Statute).
4. The EMI welcomes, in broad terms, the package of proposals contained in this draft directive.
There follow a number of comments on specific pr ovisions in the proposal.  No comments will
be offered on Articles 2, 3, 7, or 10 to 14 as these are either very technical in nature or only
relate to very minor changes in relevant provisions of the Directives to be amended.
5. The EMI welcomes Article 1 of the proposal, representing an amendment to Article 12(3) of
Directive 77/780/EEC.  This amendment will allow Member States to conclude agreements for
the exchange of information with non-banking supervisory authorities of third countries.  As
currently drafted, Article 12(3) only allows for su ch agreements to be concluded with banking
supervisory authorities of third countries.
The EMI considers that effective lines of communication between competent authorities on an
international level are highly desirable and that  an extension of the scope of Article 12(3) to
cover co-operation agreements with non-banking supervisory authorities is a further welcomedevelopment in this area.  Additionally, the EMI notes that a number of parallel articles exist in
other directives which also deal with the topi c of arrangements with supervisory authorities in
third countries (e.g. Article 25 (3) of Council Directive 93/22/EEC on investment services in
the securities field, Article 16 (3) of Council Directive 92/29/EEC (third non-life insurance
Directive), Article 15 (3) of Council Directive 92/96/EEC (third life assurance Directive) and
Article 50 (4) of Council Directive 85/611/EEC re lating to UCITS) and assumes that care is
taken to ensure consistency and clarity of appr oach when new provisions are adopted in this
area, noting that this is likely to prove helpfu l, particularly in the field of supervision of
financial conglomerates, in relation to which, several of these provisions may be relevant.
6. The EMI notes that Article 4 of the draft directive allows for the weighting of the unpaid
portion of capital subscribed to the European Investment Fund at 20%.  The EMI assumes that
this allowance is considered appropriate on th e basis of the unique ch aracter and structure of
the European Investment Fund.
7. The provisions in Articles 5 and 9 relating to determining the scope of the credit risk treatment
for off-balance sheet contracts are welcomed by the EMI.  The new Annex III to the SRD,which is proposed by Article 9, would allow fo r a wider range of derivative contracts to be
included within the treatment set out in A nnex II of Council Directive 89/647/EEC.  The EMI
in particular notes with approval that, by allowi ng for the inclusion of contracts which relate to
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additional reference items (e.g. equities and comm odities), rather than, as hitherto, limiting the
scope of these provisions to an exclusive lists  of types of contracts the proposed amendment
would allow for a more flexible approach, in particular allowing for account to be taken of
innovation through new derivative products.
8. With reference to Article 6 of the proposal, th e EMI notes that the Article of Council Directive
89/647/EEC to be amended (Article 6) is also to  be amended by Article 1 of the proposal for an
amendment of Council Directive 89/647/EEC re lating to mortgage backed lending and
securities (reference COM (95) 709 final - s ee EMI CON/96/07).  For the avoidance of doubt
the reference in the proposed amendment to Article 6 (4) of Council Directive 89/647/EEC to
Article 6 (1) (c) (1) of the same directive shoul d clarify whether reference is only being made to
loans covered by mortgage or to both these loans and to mortgage backed assets, as includedwithin the other proposal for ame ndment to Council Directive 89/647/EEC.
9. The amendments to Annex II of Council Direc tive 89/647/EEC, as contempl ated by Article 8 of
the proposal, are welcomed by the EMI.  The EMI notes that, following these amendments, EU
legislation will reflect amendments to the Basl e Accord which have already been adopted by
the Basle Committee on Banking Supervision and which became effective by the end of 1995.The EMI considers that the measures introduced through Article 8 represent a positive effort to
improve the supervisory treatment of over the counter derivatives and, in particular, the EMI
welcomes the following features of the proposals for amendment of Annex II:
- the expansion of the table of multiplication fact ors (table 1) and also the tightening of the
provisions whereby those contracts not falling w ithin one of the specified categories would be
accorded the most rigid calculation factors;
- the obligation for larger institutions to use method 1, the so-called current exposure method;
- the fact that the proposal aims at according to  credit institutions which have their head office
and registered office in the EU an equally fa vourable treatment with respect to the risk
reduction effects of netting on the calculation of the potential future exposure in comparison to
third country institutions covered by the Basle Accord.
10. The EMI agrees that this opinion may be made public by the consulting authority.
24th September 1996