EN

|| COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 14.7.2004

COM(2004) 486 final

2004/0155 (COD) 2004/0159 (COD) Volume I

Proposal for

DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

(presented by the Commission) {SEC(2004) 921}

EXPLANATORY MEMORANDUM

1. GENERAL COMMENTS

A single financial market in the EU will be a key factor in promoting the competitiveness of the European economy and the lowering the capital cost to companies. The Financial Services Action Plan announces a directive on new capital adequacy rules for credit institutions and investment firms in 2004, in step with progress at G-10 level in the Basel Committee on Banking Supervision[1].

The agreement by the G-10 Basel Committee on Banking Supervision of the so-called Basel Accord in 1988 (Basel I) led to the adoption of minimum capital requirements across over 100 countries[2]. It was broadly contemporaneous to the adoption of key EU directives (Directive 89/299/EEC of 17.4.1989 on own funds, Directive 89/647/EEC of 18.12.1989 on a solvency ratio, consolidated in Directive 2000/12/EC of the European Parliament and of the Council of 20.3.2000 relating to the taking up and pursuit of the business of credit institutions).

These directives addressed credit institutions’ risks arising from credit-granting activities. Directive 93/6/EEC of 15.3.1993 on the capital adequacy of investment firms and credit institutions extended both the credit risk and market risk rules to investment firms.

1) The need for improved European requirements.

The existing rules have made a significant contribution to the single market and high prudential standards. However, various important shortcomings have been identified.

1. Crude estimates of credit risks result in an extremely crude measure of risk and is in danger of falling into disrepute.

2. Scope for capital arbitrage: innovations in markets have enabled financial institutions to effectively arbitrage the mismatch between institutions’ own allocation of capital to risks and minimum capital requirements.

3. Lack of recognition of effective risk mitigation: the present Directives do not provide appropriate levels of recognition for risk mitigation techniques.

4. Incompleteness of the risks covered under the existing directives, including operational risk, which are not subject to any capital charges.

5. Absence of requirement for supervisors to evaluate the actual risk profile of credit institutions to satisfy themselves that adequate capital is held having regard to that risk profile.

6. Absence of requirement for supervisory cooperation: in an increasingly cross-border market authorities must cooperate effectively with each other in the supervision of cross-border groups to reduce regulatory burdens.

7. Absence of proper market disclosures: the present Directives do not facilitate effective market discipline for reliable information for market participants to make well-founded assessments.

8. Lack of flexibility in the regulatory framework: the current EU system the lacks the flexibility to keep pace with rapid developments in financial markets and risk management practices, and with improvements in regulatory and supervisory tools.

What would happen under a “no policy change” scenario?

There is strong consensus that the present situation is unsustainable. Capital requirements and risks would continue to be misaligned resulting in limited effectiveness of the prudential rules and increased risks to consumers and financial stability. The full extent of the risks that some financial institutions are undertaking would still not be captured. In addition, the newest and most effective risk management techniques would not be actively encouraged or recognised and financial services groups operating in more than one Member State would continue to be subject to disproportionate burdens resulting from multiple layers of regulation and supervision. Finally, the EU would be unable to benefit appropriately from future developments, given the difficulty in speedily updating the current EU regulatory framework. In view of the proposed global implementation of the new Basel Accord the EU financial services sector would be significantly disadvantaged compared with its overseas competitors.

2) The approach of the Directive

The Commission’s 1998 Financial Services Action Plan stated that the EU needed accurate, internationally consistent, up to date prudential standards. They should also be proportionate recognising the reduction in risks arising from the context in which exposures are incurred, and in particular lending to consumers and to small- or medium-sized entities. Rules should apply to both credit institutions and investment firms (level playing field) but also need to be proportionate and take fully into account the ‘biodiversity’ of EU financial institutions.

2. Consultation and impact assessment

a) Consultation of stakeholders and interested parties

The Commission has been engaged in consultation with stakeholders and interested parties since November 1999. Three full consultation papers have been issued on 22.11.1999, 5.2.2001 and 1.7.2003. A full and structured dialogue with stakeholders was organised on 18.11.2002. Consultation papers on specific technical issues have been published (real estate and covered bonds on 7.4. 2003; ‘expected losses and unexpected losses´ on 26.11.2003; collective investment undertakings on 3.2.2004).

Commentators have generally been very supportive of the major objectives of the project. Enhanced risk-sensitivity leading to greater financial stability is supported and there is now a pressing need for the rules to be updated, to respond to the significant advances in techniques for risk measurement and management in financial services, and to reflect increased regulatory and supervisory sophistication. There is strong support for the Commission’s approach that the EU capital framework should be revised consistent with the new international framework but differentiated where necessary for EU specificities.

Less complex institutions

There is broad and significant support for the application of the new rules in Europe – to all credit institutions and investment services providers whatever the legal nature and complexity of the institution, also to avoid ‘second class’ institutions that would be likely to result if some were excluded. This reflects the perception that the proposed new framework has been well designed for the purposes of broad application.

Flexibility of the new directive

There is continued wide and strong support for the approach proposed to ensure that the new framework is responsive to market and supervisory innovation to maintain an optimally efficient and competitive EU financial services sector. Stakeholders support the approach where enduring principles and objectives are set out in the articles and provide the mandate for the more detailed and technical provisions contained in the annexes. The procedure for amending the annexes must ensure full and effective consultation with interested parties.

Investment firms

Significant modifications have been introduced to address concerns expressed by some from the investment firm sector about being subject to capital requirements which they perceive to be more appropriate for credit institutions.

Complexity

Some respondents asked for simplification and less prescription. The Commission has increased the clarity and user-friendliness of the text. The design will be attractive to those institutions seeking simple rules to apply or wishing to progress gradually to more complex capital rules. The proposed new framework contains a range of options and approaches of different degrees of sophistication.

Since 1999 there have also been several consultations on detailed issues. The proposal has been taken account of very detailed and useful comments from interested parties, in particular the banking and investment firm industry.

b) Impact assessment

An extended impact assessment has been carried out to identify whether there is a need for action at EU level and, if so, the action required.

The Basel Committee published a quantitative impact study (QIS3) involving credit institutions across 40 countries to assess the impact of the new Basel proposals on banks' minimum capital requirements. The Commission assisted in extending this study to EU countries not represented in Basel. The key conclusions were that the new rules will in general reduce capital requirements for EU credit institutions by around 5% compared to present levels. Furthermore, the outcomes for the different approaches are in line with objectives – particularly combining capital neutrality with appropriate incentives for institutions to move towards more sophisticated approaches. Finally, smaller domestic credit institutions adopting the simple approach will face slightly reduced capital charges; larger internationally active credit institutions adopting the more advanced approach will face substantially unchanged capital charges; smaller but specialised and sophisticated EU credit institutions adopting the advanced approach might face substantially lower capital requirements than at present. Importantly, the main source of reduction in capital requirements is the ‘retail’ portfolio, which is mostly composed of loans to Small and Medium Enterprises (SMEs) below EUR 1 million and residential mortgage loans. The new operational risk capital charge is the main source of offset of this decrease in capital requirements for credit institutions.

In addition, at the request of the Barcelona European Council the Commission commissioned a study on the consequences of the draft proposed new capital requirements for credit institutions and investment firms in the EU[3]. The final report, prepared by PricewaterhouseCoopers, is positive about the impact (with only two areas of criticism – investment firms and venture capital - both of which have been addressed in the Commission’s proposals).[4] The key conclusions are that the new capital requirements framework should be positive for the EU, and for prudential regulation in the EU. EU credit institutions’ capital requirements should decrease by ± 5% (€ 90 billion) and translate into an annual increase in profits of ± € 10-12 billion. There is no disadvantage for smaller credit institutions and no indication that the new regime will force mergers or consolidation. The decision to cover all credit institutions in the directive will not put EU firms at a competitive disadvantage, nor is the US decision to apply only advanced approaches to some 20 big credit institutions a significant competitive factor. Implementation costs for EU credit institutions are not solely driven by Basel II and many of these investments (perhaps as high as 80%) would have happened anyway, although over a longer period. Importantly, there will be no negative impact on the availability and cost of finance for SMEs in most EU Member States (‘procyclicality’ effects are less - and less damaging - than the present rules). SME fears stem from insufficient information understanding of Basel II. The macro-economic effects of Basel II on the EU-economy are small - there could be a benign supply-side shock to the economy reducing the cost of capital to firms and generating an increase of 0.07% in EU GDP. In general the new capital framework will reduce the banking system’s vulnerability through greater awareness of risk, improved risk management, and a more efficient allocation of capital should have beneficial long-run consequences for the EU economy.

3. legal basis

The proposals are based on Article 47(2) of the Treaty, which is the legal basis to adopt Community measures aimed at achieving the Internal Market in financial services. The chosen instrument is a Directive as the most appropriate to achieve the objectives and it amends existing directives covering the same technical issues. Its provisions do not go beyond what it is necessary to achieve the objectives pursued.

4. Comments on the articles

The proposals apply the ‘re-casting technique’ (Interinstitutional Agreement 2002/C 77/01) enabling substantive amendments to existing legislation without a self-standing amending directive. This reduces complexity and makes EU legislation more accessible and comprehensible.

Amendments of a non-substantive nature are made to many provisions to improve the structure, drafting and readability of the directives.

A. Directive 2000/12/EC

Article 4: Definitions

Article 4 contains certain new definitions concerning essential concepts to clarify their meaning and contribute to a better understanding.

Article 22:

The existing wording has been amended to clarify and develop the obligation for credit institutions to have in place effective internal risk management systems. Given the diversity of credit institutions covered, these requirements will have to be met on a proportionate basis. Relevant technical provisions are in Annex V.

Articles 56-67:

A small number of amendments have been made. Although it is not intended to review the definition of ‘own funds’, as a consequence of the modified approach to expected loss in the Basel Committee (‘Madrid decision’), some limited amendments are necessary.

Articles 68-75:

Credit institutions must hold adequate own funds on an ongoing basis and state the minimum level of those own funds. The provisions specify how the requirements should be met if the credit institution is part of a group (the existing option for Member States’ authorities to waive certain requirements has been retained but with more precision). The calculation of the requirements has been clarified in the light of the introduction of Regulation (EC) no.1606/2002 on international accounting standards.

Articles 76-101:

These provisions replace the existing solvency ratio requirements for credit risk and introduce two methods to calculate risk weighted exposure amounts.

The Standardised Approach (Art. 78-83) is based on the existing framework, with risk weights determined by the allocation of assets and off-balance sheet items to a limited number of risk buckets. Risk sensitivity has been increased by the number of exposure classes and risk buckets (Art. 79). There are lower risk weights for non-mortgage retail items (75%) and residential mortgages (35%). A 150% risk weight for assets which are 90 days past due (100% for residential mortgages) is introduced. The use of credit rating agencies’ ratings to assign risk weights where these are available (‘external ratings’) is permitted (Art 81-83). Relevant technical provisions are in Annex VI.

The Internal Ratings Based (IRB) approach (Art 84-89), permits credit institutions to use their own estimates of the risk parameters inherent in their different credit risk exposures. These parameters form the inputs into a prescribed calculation designed to provide soundness to a 99.9% confidence level. The ‘Foundation’ Approach allows credit institutions to use their own estimates of probability of default, while using regulatory prescribed values for other risk components. Under the ‘Advanced’ Approach, credit institutions may use their own estimates for losses given default and their exposure at default. Credit institutions are allowed to use pooled data in the estimation of risk parameter values. This allows smaller credit institutions to apply a more risk sensitive approach to calculating capital requirements.

The proposed ‘roll-out’ rules (Art. 85) for the IRB approach provide flexibility for credit institutions to move different business lines and exposure classes to the Foundation or the Advanced IRB Approach during a reasonable timeframe. ‘Partial’ use is allowed for non-material exposure classes and business lines (capital requirements can be calculated under the Standardised Approach even if a credit institution uses the IRB Approach for other exposure classes). The proposed EU framework recognises that, for small credit institutions the requirement to develop a rating system for certain counterparties is potentially very burdensome. Permanent partial use for these exposure classes is proposed even in cases where credit institutions’ exposures to such counterparts are material (Art. 89).

Relevant technical provisions for the IRB approach are in Annex VI.

Articles 90-93:

The rules identify common issues for mitigation techniques and treat common underlying risks or economic effects consistently. These include the recognition of a wider range of collateral and guarantee/credit derivative providers than at present. The IRB Foundation Approach gives a prudentially appropriate level of recognition to financial receivables and physical collateral. Alternative methodologies are available for credit institutions to choose between methods of different levels of complexity (a Simple Method – based on an easy-to-use ‘risk weight substitution’ approach; or a Comprehensive Method – involving the application of volatility adjustments to the value of the collateral received). To calculate volatility adjustments more and less complex approaches are made available (a simple ‘Supervisory’ approach where the amounts of the benchmark volatility adjustments are set out in a table; or a more risk-sensitive ‘Own Estimates’ approach). Relevant technical provisions are in Annex VIII.

Articles 94-101:

These articles introduce for the first time a harmonised set of rules for capital requirements for securitisation activities and investments. This provides a significantly improved capital requirements framework – allowing credit institutions to take advantage of the funding, balance-sheet management and other advantages that such transactions can deliver. It will also reduce the extent to which securitisation has been seen as an instrument of capital arbitrage. Relevant technical provisions are in Annex IX.

Articles 102-105:

These provisions introduce requirements to meet the operational risk faced by credit institutions. Three different methodologies are available. A simple approach (Art. 103) based on a single income indicator (Basic Indicator Approach - BIA). This approach provides a capital buffer against operational risk, without requiring credit institutions to develop sophisticated and costly information systems about their risk exposure. A more precise approach based on business lines (Standardised Approach - STA) (Art. 104) is more risk-sensitive as the capital requirement for operational risk is differentiated to reflect the relative risks of different business lines. This approach is likely to be attractive to a large number of smaller / less complex credit institutions. More sophisticated methodologies (Advanced Measurement Approaches - AMAs) (Art. 105) generate their own measures of operational risk, subject to more demanding risk management standards. AMAs are expected to be gradually adopted mainly by large internationally active credit institutions and smaller specialised credit institutions which have developed advanced risk monitoring systems for their main activities. Relevant technical provisions are in Annex X.

Articles 106-119:

A small number of amendments bring consistency between capital requirements and the large exposures rules, in particular to reflect the expanded recognition of credit risk mitigation techniques.

Article 123-124:

These Articles reflect the second ‘pillar’ of the Basel Committee’s capital accord. Art. 51A requires credit institutions to have in place internal processes to measure and manage their risk and the amount of ‘internal’ capital they themselves deem adequate to support those risks. Competent authorities are required (Art. 124) to review compliance by credit institutions with the various legal obligations for organisation and risk control, and to evaluate the risks taken by credit institutions. This assessment will be used by supervisors to determine whether weaknesses exist in controls and capital held. Relevant technical provisions are in Annex XIII.

Articles 125-143:

There is an increasing degree of EU cross-border business and a trend towards centralisation of risk management within cross-border groups. This requires improved coordination and cooperation amongst national supervisory authorities in the EU. The existing and well established role of the consolidating supervisor has thus been developed further. Under Art. 136 supervisors will be provided with a minimum harmonised range of powers to require credit institutions to address any inadequacies in the requirements of the Directive.

Article 144:

A minimum set of disclosure requirements exists for Member States’ authorities to enhance convergence of implementation and introduce transparency.

Articles 145-149:

These provisions reflect the ‘third’ pillar of the Basel Committee’s new capital accord. The disclosure of information by credit institutions to market participants contributes to greater financial soundness and stability, maintains a level playing field and respects the sensitivity of certain information. Art. 147 requires disclosure on a minimum annual basis for most credit institutions - more frequent disclosure may be necessary in the light of specific criteria. Relevant technical provisions are in Annex XII.

Article 150:

The Directive needs to keep pace with market developments. The necessary degree of flexibility is provided by making a distinction between core and technical rules (particularly in the annexes to the directive) that may need adaptations in the short to medium term. Art. 150 adds new technical areas to those in Directive 2000/12/EC (introduced in 1989) and proposes that the new technical Annexes should be able to be modified following the same rapid procedure.

B. Directive 93/6/EEC on the Capital Adequacy of Investments Firms and Credit Institutions

Article 2: Scope

Article 2 specifies how the requirements apply to individual investment firms, groups of investment firms, and mixed groups.

Article 3: Definitions

There are certain new and amended definitions on essential concepts to clarify their meaning and contribute to a better understanding.

Article 11: Trading book capital treatment

There is an enhanced definition of the ‘trading book’ to increase certainty as to the capital requirements that apply and to restrict possible arbitrage between the ‘banking book’ / ‘trading book’ boundary. Relevant technical provisions are set out in Annex VII.

Articles 18 and 20:

Article 18 prescribes, for credit institutions and investment firms, the minimum capital requirements for market risk. The treatment of positions in collective investment undertakings and credit derivatives and a number of other modifications for increased risk-sensitivity are new. Relevant technical provisions are in Annexes I to VII. Article 20 extends the rules on capital requirements for credit risk and operational risk in Directive 2000/12 to investment firms, as at present. New credit risk elements include the provision of a treatment for credit derivatives and an amended measure of exposure for repurchase transactions and securities/commodities financing transactions. For operational risk there are significant modifications to take account of the specific features of the investment firm sector, with an option to continue the ‘Expenditure Based Requirement’ for investment firms falling into the low-, medium- and medium/high-risk categories.

Article 28: Large exposures

The current situation is continued where credit institutions and investment firms are subject to the same rules, subject to modifications to large exposures for trading book transactions. A new element is an amended measure of exposure for repurchase transactions and securities/commodities financing transactions. Relevant technical provisions are in Annex VI.

Article 33: Valuation of positions for reporting

Enhanced requirements for the valuation of trading book positions are prescribed for prudential soundness in the context of rules designed for trading book positions to be priced on a daily basis. Relevant technical provisions are in Annex VII.

Article 22: Consolidated requirements

The existing option for competent authorities to waive the application of consolidated requirements for groups consisting of investment firms is continued subject to more prudentially sound conditions.

Article 34: Risk management and capital assessment

Article 34 incorporates the obligation for credit institutions (Article 17 of Directive 2000/12), for investment firms to have in place effective internal risk management systems. Given the diversity of the institutions covered, these requirements will have to be met on a proportionate basis. It also applies the requirement in Article 51A of Directive 2000/12 to investment firms to have internal processes to measure and manage the risk they are exposed to and the amount of capital (‘internal’ capital) they deem adequate to support those risks. It adds to the existing risk management requirements for investment firms in Directive 2004/39/EC.

Article 37: Supervision

This Article applies the rules in Directive 2000/12 mutatis mutandis to investment firms.

Article 42

As for Directive 2000/12, Directive 93/6 need to keep pace with market developments. The necessary flexibility is brought by distinguishing between core and technical rules (particularly in the annexes) that will need adaptations in the short to medium run. The technical Annexes should be able to be modified following a rapid procedure. To reflect expected further important developments in regulatory practice in the coming years, a review clause is included for the treatment of counterparty risk.

ê 2000/12/EC

2004/0155 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

relating to the taking up and pursuit of the business of credit institutions (recast)

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(Text with EEA relevance)

ê 2000/12/EC (adapted)

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 47(2) thereof,

Having regard to the proposal from the Commission,

Having regard to the opinion of the Economic and Social Committee[5],

Acting in accordance with the procedure laid down in Article 251 of the Treaty[6],

Whereas:

ê 2000/12/EC Recital 1 (adapted)

(1) Council Directive 73/183/EEC of 28 June 1973 on the abolition of restrictions on freedom of establishment and freedom to provide services in respect of self-employed activities of banks and other financial institutions[7], first 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[8], Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions[9], 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[10], Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions[11], Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis[12], and Council Directive 92/121/EEC of 21 December 1992 on the monitoring and control of large exposures of credit institutions[13] have been frequently and substantially amended. For reasons of clarity and rationality, the said Directives therefore, should be codified and combined in a single text. Ö Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions[14] has been substantially amended several times. Since further amendments are to be made, it should be recast in the interest of clarity. Õ

ê 2000/12/EC Recital 2 (adapted)

Pursuant to the Treaty, any discriminatory treatment with regard to establishment and to the provision of services, based either on nationality or on the fact that an undertaking is not established in the Member State where the services are provided, is prohibited.

ê 2000/12/EC Recital 3

(2) In order to make it easier to take up and pursue the business of credit institutions, it is necessary to eliminate the most obstructive differences between the laws of the Member States as regards the rules to which these institutions are subject.

ê 2000/12/EC Recital 4 (adapted)

(3) This Directive constitutes the essential instrument for the achievement of the internal market, a course determined by the Single European Act and set out in timetable form in the Commission's White Paper, from the point of view of both the freedom of establishment and the freedom to provide financial services, in the field of credit institutions.

ê 2000/12/EC Recital 5 (adapted)

(4) Measures to coordinate credit institutions must, both in order to protect savings and to create equal conditions of competition between these institutions, apply to all of them. Due regard must Ö should however Õ be had, where applicable, to the objective differences in their statutes and their proper aims as laid down by national laws.

ê 2000/12/EC Recital 6 (adapted)

(5) The scope of those measures should therefore be as broad as possible, covering all institutions whose business is to receive repayable funds from the public, whether in the form of deposits or in other forms such as the continuing issue of bonds and other comparable securities and to grant credits for their own account. Exceptions must Ö should Õ be provided for in the case of certain credit institutions to which this Directive cannot apply. The provisions of this Directive shall Ö should Õ not prejudice the application of national laws which provide for special supplementary authorisations permitting credit institutions to carry on specific activities or undertake specific kinds of operations.

ê 2000/12/EC Recital 7 (adapted)

(6) The approach which has been adopted is Ö It is appropriate Õ to achieve Ö effect Õ only the essential harmonisation necessary and sufficient to secure the mutual recognition of authorisation and of prudential supervision systems, making possible the granting of a single licence recognised throughout the Community and the application of the principle of home Member State prudential supervision. Therefore, the requirement that a programme of operations must be produced should be seen merely as a factor enabling the competent authorities to decide on the basis of more precise information using objective criteria. A measure of flexibility may Ö should Õ none-the-less be possible as regards the requirements on the legal form of credit institutions of Ö concerning Õ the protection of banking names.

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(7) Since the objective of the proposed action cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and the effects of the action, be better achieved at Community level, the Community may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty. In accordance with the principle of proportionality, as set out in that Article, this Directive confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose.

ê 2000/12/EC Recital 8 (adapted)

(8) Equivalent financial requirements for credit institutions are necessary to ensure similar safeguards for savers and fair conditions of competition between comparable groups of credit institutions. Pending further coordination, appropriate structural ratios should be formulated that will make Ö making Õ it possible within the framework of cooperation between national authorities to observe, in accordance with standard methods, the position of comparable types of credit institutions. This procedure should help to bring about the gradual approximation of the systems of coefficients established and applied by the Member States. It is necessary, however to make a distinction between coefficients intended to ensure the sound management of credit institutions and those established for the purposes of economic and monetary policy.

ê 2000/12/EC Recital 9 (adapted)

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(9) The principles of mutual recognition and home Member State supervision require that Member States' competent authorities should not grant or should withdraw Ö an Õ authorisation where factors such as Ö the Õ content of the activities programmes, the geographical distribution Ö of activities Õ or the activities actually carried on indicate clearly that a credit institution has opted for the legal system of one Member State for the purpose of evading the stricter standards in force in another Member State within whose territory it carries on or intends to carry on the greater part of its activities. A credit institution which is a legal person must Ö should Õ be authorised in the Member State in which it has its registered office. A credit institution which is not a legal person must Ö should Õ have its head office in the Member State in which it has been authorised. In addition, Member States must Ö should Õ require that a credit institution's head office always be situated in its home Member State and that it actually operates there.

ê 2000/12/EC Recital 10 (adapted)

(10) The competent authorities should not authorise or continue the authorisation of a credit institution where they are liable to be prevented from effectively exercising their supervisory functions by the close links between that institution and other natural or legal persons. Credit institutions already authorised must Ö should Õ also satisfy the competent authorities in that respect. The definition of «close links» in this Directive lays down minimum criteria. That does not prevent Member States from applying it to situations other than those envisaged by the definition. The sole fact of having acquired a significant proportion of a company's capital does not constitute participation, within the meaning of «close links», if that holding has been acquired solely as a temporary investment which does not make it possible to exercise influence over the structure or financial policy of the institution.

ê 2000/12/EC Recital 11 (adapted)

(11) The reference to the supervisory authorities' effective exercise of their supervisory functions covers supervision on a consolidated basis which must be exercised over a credit institution where the provisions of Community law so provide. In such cases, the authorities applied to for authorisation must Ö should Õ be able to identify the authorities competent to exercise supervision on a consolidated basis over that credit institution.

ê 2000/12/EC Recital 12 (adapted)

The home Member State may also establish rules stricter than those laid down in Article 5(1), first subparagraph and (2), and Articles 7, 16, 30, 51 for institutions authorised by its competent authorities.

ê 2000/12/EC Recital 13 (adapted)

The abolition of the authorisation requirement with respect to the branches of Community credit institutions necessitates the abolition of endowment capital.

ê 2000/12/EC Recital 14 (adapted)

(12) By virtue of mutual recognition, the approach chosen permits cCredit institutions authorised in their home Member States Ö should be allowed Õ to carry on, throughout the Community, any or all of the activities listed in Annex I by establishing branches or by providing services. The carrying-on of activities not listed in the said Annex enjoys the right of establishment and the freedom to provide services under the general provisions of the Treaty.

ê 2000/12/EC Recital 15 (adapted)

(13) It is appropriate, however to extend mutual recognition to the activities listed in Annex I when they are carried on by financial institutions which are subsidiaries of credit institutions, provided that such subsidiaries are covered by the consolidated supervision of their parent undertakings and meet certain strict conditions.

ê 2000/12/EC Recital 16 (adapted)

(14) The host Member State may Ö should be able Õ, in connection with the exercise of the right of establishment and the freedom to provide services, Ö to Õ require compliance with specific provisions of its own national laws or regulations on the part of institutions not authorised as credit institutions in their home Member States and with regard to activities not listed in Annex I provided that, on the one hand, such provisions are compatible with Community law and are intended to protect the general good and that, on the other hand, such institutions or such activities are not subject to equivalent rules under this legislation or regulations of their home Member States.

ê 2000/12/EC Recital 17 (adapted)

(15) The Member States must Ö should Õ ensure that there are no obstacles to carrying on activities receiving mutual recognition in the same manner as in the home Member State, as long as the latter do not conflict with legal provisions protecting the general good in the host Member State.

ê 2000/12/EC Recital 18 (adapted)

There is a necessary link between the objective of this Directive and the liberalisation of capital movements being brought about by other Community legislation. In any case the measures regarding the liberalisation of banking services must be in harmony with the measures liberalising capital movements.

ê 2000/12/EC Recital 19 (adapted)

(16) The rules governing branches of credit institutions having their head office outside the Community should be analogous in all Member States. It is important at the present time to provide that such rules may not be more favourable than those for branches of institutions from another Member State. It should be specified that tThe Community may Ö should be able to Õ conclude agreements with third countries providing for the application of rules which accord such branches the same treatment throughout its territory, account being taken of the principle of reciprocity. The branches of credit institutions authorised in third countries do Ö should Õ not enjoy the freedom to provide services under the second paragraph of Article 49 of the Treaty or the freedom of establishment in Member States other than those in which they are established. However, requests for the authorisation of subsidiaries or of the acquisition of holdings made by undertakings governed by the laws of third countries are should subject to a procedure intended to ensure that Community credit institutions receive reciprocal treatment in the third countries in question.

ê 2000/12/EC Recital 20 (adapted)

The authorisations granted to credit institutions by the competent national authorities pursuant to this Directive have Community-wide, and no longer merely nationwide, application. Existing reciprocity clauses have therefore no effect. A flexible procedure is therefore needed to make it possible to assess reciprocity on a Community basis. The aim of this procedure is not to close the Community's financial markets but rather, as the Community intends to keep its financial markets open to the rest of the world, to improve the liberalisation of the global financial markets in other third countries. To that end, this Directive provides for procedures for negotiating with third countries and, as a last resort, for the possibility of taking measures involving the suspension of new applications for authorisation or the restriction of new authorisations.

ê 2000/12/EC Recital 21 (adapted)

(17) It is desirable that aAgreement should be reached, on the basis of reciprocity, between the Community and third countries with a view to allowing the practical exercise of consolidated supervision over the largest possible geographical area.

ê 2000/12/EC Recital 22 (adapted)

(18) Responsibility for supervising the financial soundness of a credit institution, and in particular its solvency, rests Ö should lay Õ with the competent authorities of its home Member State. The host Member State's competent authorities retain Ö should be Õ responsibility Ö responsible Õ for the supervision of Ö the Õ liquidity Ö of the branches Õ and monetary policy Ö policies Õ. The supervision of market risk must Ö should Õ be the subject of close cooperation between the competent authorities of the home and host Member States.

ê 2000/12/EC Recital 23 and 24 (adapted)

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(19) The smooth operation of the internal banking market requires not only legal rules but also close and regular cooperation ð and significantly enhanced convergence of regulatory and supervisory practices ï between the competent authorities of the Member States. For the Ö To this end, in particular, Õ consideration of problems concerning individual credit institutions ð and the mutual exchange of information should take place in ï the «groupe de contact» (contact group) ð Committee of European Banking Supervisors ï set up ð by Commission Decision 2004/5/EC [15] ï between the banking supervisory authorities remains the most appropriate forum. That group is a suitable body for the mutual exchange of information provided for in Article 28. That mutual information procedure does Ö should Õ not in any case replace the bilateral collaboration Ö co-operationÕ established by Article 28. The competent host Member State authorities can,. wWithout prejudice to their powers of proper control, Ö the competent authorities of the host Member States should be able Õ continue either, in an emergency, on their own initiative or following the initiative of the competent Ö authorities of Õ home Member State authorities, to verify that the activities of a credit institution established within their territories comply with the relevant laws and with the principles of sound administrative and accounting procedures and adequate internal control.

ê 2000/12/EC Recital 25 (adapted)

(20) It is appropriate to allow the exchange of information between the competent authorities and authorities or bodies which, by virtue of their function, help to strengthen the stability of the financial system. In order to preserve the confidential nature of the information forwarded, the list of addressees must Ö should Õ remain within strict limits.

ê 2000/12/EC Recital 26 and 27 (adapted)

(21) Certain behaviour, such as fraud and insider offences, is liable to affect the stability, including the integrity, of the financial system, even when involving institutions other than credit institutions. It is necessary to specify the conditions under which such exchanges of information Ö in such cases Õ are Ö is Õ authorised.

ê 2000/12/EC Recital 28 (adapted)

(22) Where it is stipulated that information may be disclosed only with the express agreement of the competent authorities, these may Ö should be able Õ, where appropriate, Ö to Õ make their agreement subject to compliance with strict conditions.

ê 2000/12/EC Recital 29

(23) Exchanges of information between, on the one hand, the competent authorities and, on the other, central banks and other bodies with a similar function in their capacity as monetary authorities and, where appropriate, other public authorities responsible for supervising payment systems should also be authorised.

ê 2000/12/EC Recital 30 (adapted)

(24) For the purpose of strengthening the prudential supervision of credit institutions and Ö the Õ protection of clients of credit institutions, it should be stipulated that an auditors must Ö should Õ have a duty to report promptly to the competent authorities, wherever, as provided for by this Directive, he Ö during the performance of their tasks, Õ becomes aware, while carrying out his tasks, of certain facts which are liable to have a serious effect on the financial situation or the administrative and accounting organisation of a credit institution. Having regard to the aim in view, it is desirable for the Ö For the same reason Õ Member States to Ö should also Õ provide that such a duty should apply Ö applies Õ in all circumstances where such facts are discovered by an auditor during the performance of his tasks in an undertaking which has close links with a credit institution. The duty of auditors to communicate, where appropriate, to the competent authorities certain facts and decisions concerning a credit institution which they discover during the performance of their tasks in a non-financial undertaking does Ö should Õ not in itself change the nature of their tasks in that undertaking nor the manner in which they must perform those tasks in that undertaking.

ê 2000/12/EC Recitals 31 to 35 (adapted)

Common basic standards for the own funds of credit institutions are a key factor in the creation of an internal banking market since own funds serve to ensure the continuity of credit institutions and to protect savings. Such harmonisation strengthens the supervision of credit institutions and contributes to further coordination in the banking sector.

Such standards must apply to all credit institutions authorised in the Community.

The own funds of a credit institutions can serve to absorb losses which are not matched by a sufficient volume of profits. The own funds also serve as an important yardstick for the competent authorities, in particular for the assessment of the solvency of credit institutions and for other prudential purposes.

Credit institutions, in an internal banking market, engage in direct competition with each other, and the definitions and standards pertaining to own funds must therefore be equivalent. To that end, the criteria for determining the composition of own funds must not be left solely to Member States. The adoption of common basic standards will be in the best interests of the Community in that it will prevent distortions of competition and will strengthen the Community banking system.

The definition of own funds laid down in this Directive provides for a maximum of items and qualifying amounts, leaving it to the discretion of each Member State to use all or some of such items or to adopt lower ceilings for the qualifying amounts.

ê 2000/12/EC Recital 36 (adapted)

(25) This Directive specifies the Ö that for certain own funds items Õ qualifying criteria for certain own funds items Ö should be specified, without prejudice to the possibility of Õ and the Member States remain free to apply more stringent provisions.

ê 2000/12/EC Recital 37 (adapted)

At the initial stage common basic standards are defined in broad terms in order to encompass all the items making up own funds in the different Member States.

ê 2000/12/EC Recital 38

(26) According to the nature of the items making up own funds, this Directive distinguishes between on the one hand, items constituting original own funds and, on the other, those constituting additional own funds.

ê 2000/12/EC Recital 39 (adapted)

(27) To reflect the fact that items constituting additional own funds are not of the same nature as those constituting original own funds, the amount of the former included in own funds must Ö should Õ not exceed the original own funds. Moreover, the amount of certain items of additional own funds included must Ö should Õ not exceed one half of the original own funds.

ê 2000/12/EC Recital 39 (adapted)

(28) In order to avoid distortions of competition, public credit institutions must Ö should Õ not include in their own funds guarantees granted them by the Member States or local authorities.

ê 2000/12/EC Recital 40 (adapted)

(29) Whenever in the course of supervision it is necessary to determine the amount of the consolidated own funds of a group of credit institutions, the calculation shall Ö should Õ be effected in accordance with this Directive.

ê 2000/12/EC Recital 41 (adapted)

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(30) The precise accounting technique to be used for the calculation of own funds, the solvency ratio ð their adequacy for the risk to which a credit institution is exposed ï, and for the assessment of the concentration of exposures must Ö should Õ take account of the provisions of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions[16], which incorporates certain adaptations of the provisions of Council Directive 83/349/EEC of 13 June 1983 based on Article 44(2)(g) of the Treaty on consolidated accounts Ö [17] Õ ð or of Regulation (EC) No 1606/2002 of the European Parliament and Council of 19 July 2002 on the application of international accounting standards[18] whichever governs the accounting of the credit institutions under national law ï.

ê 2000/12/EC Recital 42 to 47 (adapted)

The provisions on own funds, form part of the wider international effort to bring about approximation of the rules in force in major countries regarding the adequacy of own funds.

In an internal banking market, institutions are required to enter into direct competition with one another and the common solvency ration in the form of a minimum ratio prevent distortions of competition and strengthen the Community banking system.

The Commission will draw up a report and periodically examine, with the aim of tightening them, the provisions on own funds and thus achieving greater convergence on a common definition of own funds. Such convergence will allow the alignment of Community credit institutions' own funds.

The provisions on solvency ratios are the outcome of work carried out by the Banking Advisory Committee which is responsible for making suggestions to the Commission with a view to coordinating the coefficients applicable in the Member States.

The establishment of an appropriate solvency ratio plays a central role in the supervision of credit institutions.

A ratio which weights assets and off-balance-sheet items according to the degree of credit risk is a particularly useful measure of solvency.

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(31) Minimum capital requirements play a central role in the supervision of credit institutions and in the mutual recognition of supervisory techniques. In that respect, the provisions on minimum capital requirements should be considered in conjunction with other specific instruments also harmonising the fundamental techniques for the supervision of credit institutions.

(32) In order to prevent distortions of competition and to strengthen the banking system in the internal market, it is appropriate to lay down common minimum capital requirements.

(33) For the purposes of ensuring adequate solvency it is important to lay down minimum capital requirements which weight assets and off-balance-sheet items according to the degree of risk.

ê 2000/12/EC Recitals 48 to 51 (adapted)

The development of common standards for own funds in relation to assets and off-balance-sheet items exposed to credit risk is, accordingly, an essential aspect of the harmonisation necessary for the achievement of the mutual recognition of supervision techniques and thus the completion of the internal banking market.

In that respect, the provisions on a solvency ratio must be considered in conjunction with other specific instruments also harmonising the fundamental techniques of the supervision of credit institutions.

In an internal banking market, institutions are required to enter into direct competition with one another and the common solvency standards in the form of a minimum ratio prevent distortions of competition and strengthen the Community banking system.

This Directive provides for different weightings to be given to guarantees issued by different financial institutions. The Commission accordingly undertakes to examine whether this Directive taken as a whole significantly distorts competition between credit institutions and insurance undertakings and, in the light of that examination, to consider whether any remedial measures are justified.

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(34) It is essential to take account of the diversity of credit institutions in the Community by providing alternative approaches to the calculation of minimum capital requirements for credit risk incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. Use of external ratings and credit institutions’ own estimates of individual credit risk parameters represents a significant enhancement in the risk-sensitivity and prudential soundness of the credit risk rules. There should be appropriate incentives for credit institutions to move towards the more risk-sensitive approaches.

(35) The minimum capital requirements should be proportionate to the risks addressed. In particular the reduction in risk levels deriving from having a large number of relatively small exposures should be reflected in the requirements.

(36) Increased recognition should be given to techniques of credit risk mitigation within a framework of rules designed to ensure that solvency is not undermined by undue recognition.

(37) In order to ensure that the risks and risk reductions arising from credit institutions’ securitisation activities and investments are appropriately reflected in the minimum capital requirements of credit institutions it is necessary to include rules providing for a risk-sensitive and prudentially sound treatment of such activities and investments.

ê 2000/12/EC Recital 52 (adapted)

Annex III lays down the treatment of off-balance-sheet items in the context of the calculation of credit institutions' capital requirements. With a view to the smooth functioning of the internal market and in particular with a view to ensuring a level playing field Member States are obliged to strive for uniform assessment of contractual netting agreements by their competent authorities. Annex III takes account of the work of an international forum of banking supervisors on the supervisory recognition of bilateral netting, in particular the possibility of calculating the own-funds requirements for certain transactions on the basis of a net rather than a gross amount provided that there are legally binding agreements which ensure that the credit risk is confined to the net amount. For internationally active credit institutions and groups of credit institutions in a wide range of third countries, which compete with Community credit institutions, the rules adopted on the wider international level will result in a refined supervisory treatment of over-the-counter (OTC) derivative instruments. This refinement results in a more appropriate compulsory capital cover taking into account the risk-reducing effects of supervisorily recognised contractual netting agreements on potential future credit risks. The clearing of OTC derivative instruments provided by clearing houses acting as a central counterparty plays an important role in certain Member States. It is appropriate to recognise the benefits from such a clearing in terms of a reduction of credit risk and related systemic risk in the prudential treatment of credit risk. It is necessary for the current and potential future exposures arising from cleared OTC derivatives contracts to be fully collateralised and for the risk of a build-up of the clearing house's exposures beyond the market value of posted collateral to be eliminated in order for cleared OTC derivatives to be granted for a transitional period the same prudential treatment as exchange-traded derivatives. The competent authorities must be satisfied as to the level of the initial margins and variation margins required and the quality of and the level of protection provided by the posted collateral. For credit institutions incorporated in the Member States, Annex III creates a similar possibility for the recognition of bilateral netting by the competent authorities and thereby offers them equal conditions of competition. The rules are both well balanced and appropriate for the further reinforcement of the application of prudential supervisory measures to credit institutions. The competent authorities in the Member States should ensure that the calculation of add-ons is based on effective rather than apparent national amounts.

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(38) Operational risk is a significant risk faced by credit institutions requiring coverage by own funds. It is essential to take account of the diversity of credit institutions in the Community by providing alternative approaches to the calculation of operational risk requirements incorporating different levels of risk-sensitivity and requiring different degrees of sophistication. There should be appropriate incentives for credit institutions to move towards the more risk-sensitive approaches. In view of the emerging state of the art for the measurement and management of operational risk the rules should be kept under review and updated as appropriate including in relation to the charges for different business lines and the recognition of risk mitigation techniques.

(39) In order to ensure adequate solvency of credit institutions within a group it is essential that the minimum capital requirements apply on the basis of the consolidated financial situation of the group. In order to ensure that own funds are appropriately distributed within the group and available to protect savings where needed, the minimum capital requirements should apply to individual credit institutions within a group, unless this objective can be effectively otherwise achieved.

ê 2000/12/EC Recital 53 (adapted)

The minimum ratio provided for in this Directive reinforces the capital of credit institutions in the Community. A level of 8% has been adopted following a statistical survey of capital requirements in force at the beginning of 1988.

ê 2000/12/EC Recital 54

(40) The essential rules for monitoring large exposures of credit institutions should be harmonised. Member States should still be able to adopt provisions more stringent than those provided for by this Directive.

ê 2000/12/EC Recital 55 (adapted)

(41) The monitoring and control of a credit institution's exposures is Ö should be Õ an integral part of its supervision. Ö Therefore Õ Eexcessive concentration of exposures to a single client or group of connected clients may result in an unacceptable risk of loss. Such a situation may Ö can Õ be considered prejudicial to the solvency of a credit institution.

ê 2000/12/EC Recital 56 (adapted)

(42) In an internal banking market, Ö Since Õ credit institutions Ö in the internal market Õ are engaged in direct competition, with one another and monitoring requirements throughout the Community should therefore be equivalent Ö throughout the Community Õ. To that end, the criteria applied to determining the concentration of exposures must be the subject of legally binding rules at Community level and cannot be left entirely to the discretion of the Member States. The adoption of common rules will therefore best serve the Community's interests, since it will prevent differences in the conditions of competition, while strengthening the Community's banking system.

ê 2000/12/EC Recital 57 (adapted)

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(43) The provisions on a solvency ratio for credit institutions include a list of credit risks which may be incurred by credit institutions. That list should therefore be used also for the definition of exposures for the purposes of limits to large exposures. It is not, however, ð While it is appropriate to base the definition of exposures for the purposes of limits to large exposures on that provided for the purposes of minimum own funds requirements for credit risk, it is not ï appropriate to refer on principle to the weightings or degrees of risk laid down in the said provisions. Those weightings and degrees of risk were devised for the purpose of establishing a general solvency requirement to cover the credit risk of credit institutions. In the context of the regulation of large exposures, the aim is. Ö In order Õ to limit the maximum loss that a credit institution may incur through any single client or group of connected clients. It Ö it Õ is therefore appropriate to adopt a prudent approach in which, as a general rule, account is taken of the nominal value of exposures, but no Ö rules for the determination of large exposures which take account of the nominal value of the exposure without applying Õ weightings or degrees of risk are applied.

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(44) While it is desirable, pending further review of the large exposures provisions, to permit the recognition of the effects of credit risk mitigation in a manner similar to that permitted for minimum capital requirement purposes in order to limit the calculation requirements, the rules on credit risk mitigation were designed in the context of the general diversified credit risk arising from exposures to a large number of counterparties. Accordingly, recognition of the effects of such techniques for the purposes of limits to large exposures designed to limit the maximum loss that may be incurred through any single client or group of connected clients should be subject to prudential safeguards.

ê 2000/12/EC Recital 58 (adapted)

(45) When a credit institution incurs an exposure to its own parent undertaking or to other subsidiaries of its parent undertaking, particular prudence is necessary. The management of exposures incurred by credit institutions must Ö should Õ be carried out in a fully autonomous manner, in accordance with the principles of sound banking management, without regard to any Ö other Õ considerations other than those principles. The provision of this Directive require that wWhere the influence exercised by persons directly or indirectly holding a qualifying participation in a credit institution is likely to operate to the detriment of the sound and prudent management of that institution, the competent authorities shall Ö should Õ take appropriate measures to put an end to that situation. In the field of large exposures, specific standards Ö , including more stringent restrictions, Õ should also be laid down for exposures incurred by a credit institution to its own group, and in such cases more stringent restrictions are justified than for other exposures. More stringent restrictions Ö. Such standards Õ need not, however be applied where the parent undertaking is a financial holding company or a credit institution or where the other subsidiaries are either credit or financial institutions or undertakings offering ancillary banking services, provided that all such undertakings are covered by the supervision of the credit institution on a consolidated basis. In such cases the consolidated monitoring of the group of undertakings allows for an adequate level of supervision, and does not require the imposition of more stringent limits on exposure. Under this approach banking groups will also be encouraged to organise their structures in such a way as to allow consolidated monitoring, which is desirable because a more comprehensive level of monitoring is possible.

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(46) Credit institutions should ensure that they have internal capital which, having regard to the risks to which they are or might be exposed, is adequate in quantity, quality and distribution. Accordingly, credit institutions should have strategies and processes in place for assessing and maintaining the adequacy of their internal capital.

(47) Competent authorities have responsibility to be satisfied that credit institutions have good organisation and adequate own funds, having regard to the risks to which the credit institutions are or might be exposed to.

(48) In order for the internal market in banking to operate effectively the Committee of European Banking Supervisors should contribute to the consistent application of this directive and to the convergence of supervisory practices throughout the Community.

(49) For the same reason and to ensure that Community credit institutions which are active in several Member States are not disproportionately burdened as a result of the continued responsibilities of individual Member State competent authorities for authorisation and supervision, it is essential to significantly enhance the co-operation between competent authorities. In this context the role of the consolidated supervisor should be strengthened. The Committee of European Banking Supervisors should support and enhance such co-operation.

ê 2000/12/EC Recital 65 (adapted)

(50) Supervision of credit institutions on a consolidated basis must be aimed Ö aims Õ at, in particular, protecting the interests of the depositors of the said Ö credit Õ institutions and Ö at Õ ensuring the stability of the financial system.

ê 2000/12/EC Recital 59 (adapted)

(51) In order to be effective, supervision on a consolidated basis must Ö should therefore Õ be applied to all banking groups, including those the parent undertakings of which are not credit institutions. The competent authorities must Ö should Õ hold the necessary legal instruments to be able to exercise such supervision.

ê 2000/12/EC Recital 60 (adapted)

(52) In the case of groups with diversified activities Ö where Õ the parent undertakings of which control at least one credit institution subsidiary, the competent authorities must Ö should Õ be able to assess the financial situation of a credit institution in such a group. Pending subsequent coordination, the Member States may lay down appropriate methods of consolidation for the achievement of the objective of this Directive. The competent authorities must Ö should Õ at least have the means of obtaining from all undertakings within a group the information necessary for the performance of their function. Cooperation between the authorities responsible for the supervision of different financial sectors must Ö should Õ be established in the case of groups of undertakings carrying on a range of financial activities Ö . Pending subsequent coordination, the Member States should be able to lay down appropriate methods of consolidation for the achievement of the objective of this Directive. Õ

ê 2000/12/EC Recital 61 (adapted)

(53) The Member States can, furthermore, Ö should be able to Õ refuse or withdraw banking authorisation in the case of certain group structures considered inappropriate for carrying on banking activities, in particular because such structures could not be supervised effectively. In this respect the competent authorities Ö should Õ have the Ö necessary Õ powers mentioned in the first subparagraph of Article 7(1), Article 7(2), point (c) of Article 14(l), and Article 16 of this Directive, in order to ensure the sound and prudent management of credit institutions.

ê 2000/12/EC Recitals 62 to 64 (adapted)

The Member States can equally apply appropriate supervision techniques to groups with structures not covered by this Directive. If such structures become common, this Directive should be extended to cover them.

Supervision on a consolidated basis must take in all activities defined in Annex I. All undertakings principally engaged in such activities must therefore be included in supervision on a consolidated basis. As a result, the definition of financial institutions must be widened in order to cover such activities.

Directive 86/635/EEC, together with Directive 83/349/EEC, established the rules of consolidation applicable to consolidated accounts published by credit institutions. It is therefore possible to define more precisely the methods to be used in prudential supervision exercised on a consolidated basis.

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(54) In order for the internal market in banking to operate with increasing effectiveness and for citizens of the Community to be afforded adequate levels of transparency, it is necessary that competent authorities disclose publicly and in a way which allows for meaningful comparison the manner in which this Directive is implemented.

(55) In order to strengthen market discipline and stimulate credit institutions to improve their market strategy, risk control and internal management organization, appropriate public disclosure by credit institutions should be provided for.

ê 2000/12/EC Recital 66 (adapted)

(56) The examination of problems connected with matters covered by this Directive as well as by other Directive on the business of credit institutions requires cooperation between the competent authorities and the Commission within a banking advisory committee, particularly when conducted with a view to closer coordination. The Banking Advisory Committee of the competent authorities of the Member States does not rule out other forms of cooperation between authorities which supervise the taking up and pursuit of the business of credit institutions and, in particular, cooperation within the «groupe de contact» (contact group) set up between the banking supervisory authorities.

ê 2000/12/EC Recital 67 (adapted)

(57) Technical modifications to the detailed rules laid down in this Directive may from time to time be necessary to take account of new developments in the banking sector. The Commission shall accordingly make such modifications as are necessary, after consulting the Banking Advisory Committee, within the limits of the implementing powers conferred on the Commission by the Treaty. The measures necessary for the implementation of this Directive should be adopted in accordance with Council Decision 1999/468/EC of 28 June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission Ö [19] Õ .

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(58) In order to avoid disruption to markets and to ensure continuity in overall levels of own funds it is appropriate to provide for specific transitional arrangements.

(59) In view of the risk-sensitivity of the rules relating to minimum capital requirements, it is desirable to keep under review whether these have significant effects on the economic cycle. The Commission, taking into account the contribution of the European Central Bank should report on these aspects to the European Parliament and to the Council.

ê 2000/12/EC Recital 68 (adapted)

Article 36 (1) of this Directive permits joint and several commitments of borrowers in the case of credit institutions organised as cooperative societies or funds to be treated as own funds items under Article 34 (2)(7). The Danish Government has expressed a strong interest in having its few mortgage credit institutions organised as cooperative societies or funds converted into public limited liability companies. In order to facilitate the conversion or to make it possible, a temporary derogation allowing them to include part of their joint and several commitments as own funds is required. This temporary derogation should not adversely affect competition between credit institutions.

ê 2000/12/EC Recitals 69 to 71

(69) The application of a 20% weighting to credit institutions' holdings of mortgage bonds may unsettle a national financial market on which such instruments play a preponderant role. In this case, provisional measures are taken to apply a 10% risk weighting. The market for securitisation is undergoing rapid development. It is therefore desirable that the Commission should examine with the Member States the prudential treatment of asset-backed securities and put forward, before 22 June 1999, proposals aimed at adapting existing legislation in order to define an appropriate prudential treatment for asset-backed securities. The competent authorities may authorise a 50% weighting to assets secured by mortgages on offices or on multipurpose commercial premises until 31 December 2006. 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. The property must be either occupied or let by the owner. Loans for property development are excluded from this 50% weighting.

(70) In order to ensure harmonious application of the provisions on large exposures, Member States should be allowed to provide for the two-stage application of the new limits. For smaller credit institutions, a longer transitional period may be warranted inasmuch as too rapid an application of the 25% rule could reduce their lending activity too abruptly.

(71) Moreover, the harmonisation of the conditions relating to the reorganisation and winding-up of credit institutions is also proceeding.

ê 2000/12/EC Recital 72 (adapted)

(60) The arrangements necessary for the supervision of liquidity risks will also have to be harmonised.

ê 2000/12/EC Recital 73 (adapted)

This Directive must not affect to obligations of the Member States concerning the deadlines for transposition set out in Annex V, Part B

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(61) This Directive respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union as general principles of Community law.

(62) The obligation to transpose this Directive into national law should be confined to those provisions which represent a substantive change as compared with the earlier Directives. The obligation to transpose the provisions which are unchanged arises under the earlier Directives.

(63) This Directive should be without prejudice to the obligations of the Member States relating to the time-limits for transposition into national law of the Directives set out in Annex XIII, Part B.

ê 2000/12/EC

HAVE ADOPTED THIS DIRECTIVE:

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CONTENTS

TITLE I || SUBJECT MATTER, SCOPE AND DEFINITIONS

TITLE II || REQUIREMENTS FOR ACCESS TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS

TITLE III || PROVISIONS CONCERNING THE FREEDOM OF ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES

Section 1 || Credit institutions

Section 2 || Financial institutions

Section 3 || Exercise of the right of establishment

Section 4 || Exercise of the freedom to provide services

Section 5 || Powers of the competent authorities of the host Member State

TITLE IV || RELATIONS WITH THIRD COUNTRIES

Section 1 || Notification in relation to third countries' undertakings and conditions of access to the markets of these countries

Section 2 || Cooperation with third countries' competent authorities regarding supervision on a consolidated basis

TITLE V || PRINCIPLES AND TECHNICAL INSTRUMENTS FOR PRUDENTIAL SUPERVISION AND DISCLOSURE

Chapter 1 || Principles of prudential supervision

Section 1 || Competence of home and host Member State

Section 2 || Exchange of information and professional secrecy

Section 3 || Duty of persons responsible for the legal control of annual and consolidated accounts

Section 4 || Power of sanction and right to apply to the courts

Chapter 2 || Technical instruments of prudential supervision

Section 1 || Own funds

Section 2 || Provision against risks

Subsection 1 || Level of application

Subsection 2 || Calculation of requirements

Subsection 3 || Minimum Level of Own Funds

Section 3 || Minimum own funds requirements for credit risk

Subsection 1 || Standardised Approach

Subsection 2 || Internal Ratings based Approach

Subsection 3 || Credit risk mitigation

Subsection 4 || Securitisation

Section 4 || Minimum own funds requirements for operational risk

Section 5 || Large exposures

Section 6 || Qualifying holdings outside the financial sector

Chapter 3 || Credit institutions' assessment process

Chapter 4 || Supervision and disclosure by competent authorities

Section 1 || Supervision

Section 2 || Disclosure by competent authorities

Chapter 5 || Disclosure by credit institutions

TITLE VI || POWERS OF EXECUTION

TITLE VII || TRANSITIONAL AND FINAL PROVISIONS

Chapter 1 || Transitional provisions

Chapter 2 || Final provisions

ANNEX I || List of activities subject to mutual recognition

ANNEX II || Classification of off-balance-sheet items

ANNEX III || The treatment of derivative instruments

ANNEX IV || Types of derivatives

ANNEX V || Technical criteria on organisation and treatment of risks

ANNEX VI || Standardised Approach

ANNEX VI Part 1 || Risk weights

ANNEX VI Part 2 || Recognition of ECAIs and mapping of their credit assessments

ANNEX VI Part 3 || Use of ECAIs’ credit assessments for the determination of risk weights

ANNEX VII || Internal Ratings based Approach

ANNEX VII Part 1 || Risk weighted exposure amounts and expected loss amounts

ANNEX VII Part 2 || PD, LGD, and Maturity

ANNEX VII Part 3 || Exposure value

ANNEX VII Part 4 || Minimum Requirements for IRB Approach

ANNEX VIII || Credit risk mitigation

ANNEX VIII Part 1 || Eligibility

ANNEX VIII Part 2 || Minimum Requirements

ANNEX VIII Part 3 || Calculating the effects of credit risk mitigation

ANNEX VIII Part 4 || Maturity mismatches

ANNEX VIII Part 5 || Combinations of credit risk mitigation in the Standardised Approach

ANNEX VIII Part 6 || Basket CRM techniques

ANNEX IX || Securitisation

ANNEX IX Part 1 || Definitions for purposes of Annex X

ANNEX IX Part 2 || Minimum requirements for recognition of significant credit risk transfer and calculation of risk-weighted exposure amounts and expected loss amounts for securitised exposures

ANNEX IX Part 3 || External credit assessments

ANNEX IX Part 4 || Calculation

ANNEX X || Operational Risk

ANNEX X Part 1 || Basic Indicator Approach

ANNEX X Part 2 || Standardised Approach

ANNEX X Part 3 || Advanced Measurement Approaches

ANNEX X Part 4 || Combined use of different methodologies

ANNEX X Part 5 || Loss event type classification

ANNEX XI || Technical criteria on the review and evaluation by the competent authorities

ANNEX XII || Technical criteria on disclosure

ANNEX XII Part 1 || General criteria

ANNEX XII Part 2 || General requirements

ANNEX XII Part 3 || Qualifying requirements for the use of particular instruments or methodologies

ANNEX XIII Part A || Repealed Directives, together with their successive amendments (referred to in Article 158)

ANNEX XIII Part B || Deadlines for implementation (referred to in Article 159)

ANNEX XIV || Correlation table

ê 2000/12/EC (adapted)

TITLE I

Ö SUBJECT MATTER, SCOPE AND Õ DEFINITIONS AND SCOPE

ê 2000/12/EC Article 2(1) and (2) (adapted)

Article 1

1. This Directive concerns Ö lays down rules concerning Õ the taking up and pursuit of the business of credit institutions Ö , and their prudential supervision Õ. This Directive shall apply to all credit institutions.

2. Article Ö39Õ and 52 to 56 Ö Title V, Chapter 4, Section 1 Õ shall also apply to financial holding companies and mixed-activity holding companies which have their head offices in the Community.

3. The institutions permanently excluded by paragraph 3 Ö pursuant to Article 5 Õ, with the exception, however, of the Member States’ central banks Ö of the Member States Õ, shall be treated as financial institutions for the purposes of Articles 25 and 52 to 56 Ö 39 and Title V, Chapter 4, Section 1Õ.

ê 2000/12/EC Article 2(3) (adapted)

Article 2

This Directive shall not apply to Ö the following Õ :

– the central banks of Member States,

– post office giro institutions,

– in Belgium, the «Institut de Réescompte et de Garantie/Herdiscontering- en Waarborginstituut»,

– in Denmark, the «Dansk Eksportfinansieringsfond», the «Danmarks Skibskreditfond», and «Dansk Landbrugs Realkreditfond»,

– in Germany, the «Kreditanstalt für Wiederaufbau», undertakings which are recognised under the «Wohnungsgemeinnützigkeitsgesetz» as bodies of State housing policy and are not mainly engaged in banking transactions, and undertakings recognised under that law as non-profit housing undertakings,

– in Greece, the «Ελληνική Τράπεζα Βιομηχανικής Αναπτύξεως,», (Elliniki Trapeza Viomichanikis Anaptyxeos), the «Ταμείο Παρακαταθηκών και Δανείων» (Tamio Parakatathikon kai Danion), and the «Ταχυδρομικό Ταμιευτήριο» (Tachidromiko Tamieftirio),

– in Spain, the «Instituto de Crédito Oficial»,

– in France, the «Caisse des dépôts et consignations»,

– in Ireland, credit unions and the friendly societies,

– in Italy, the «Cassa depositi e prestiti»,

– in the Netherlands, the «Netherlandse Investeringsbank voor Ontwikkelingslanden NV», the «NV Noordelijke Ontwikkelingsmaatschappij», the «NV Industriebank Limburgs Instituut voor Ontwikkeling en Financiering» and the «Overijsselse Ontwikkelingsmaatschappij NV»,

– in Austria, undertakings recognised as housing associations in the public interest and the «Österreichische Kontrollbank AG»,

– in Portugal, «Caixas Económicas» existing on 1 January 1986 with the exception of those incorporated as limited companies and of the «Caixa Económica Montepio Geral»,

– in Finland, the «Teollisen yhteistyön rahasto Oy/Fonden för industriellt samarbete AB», and the «Kera Oy/Kera Ab»,

– in Sweden, the «Svenska Skeppshypotekskassan»,

– in the United Kingdom, the National Savings Bank, the Commonwealth Development Finance Company Ltd, the Agricultural Mortgage Corporation Ltd, the Scottish Agricultural Securities Corporation Ltd, the Crown Agents for overseas governments and administrations, credit unions and municipal banks.

ê Act of accession 2003

– in Latvia, the “kra¯jaizdevu sabiedrı¯bas”, undertakings that are recognised under the “kra¯jaizdevu sabiedrı¯bu likums” as cooperative undertakings rendering financial services solely to their members,

– in Lithuania, the “kredito unijos” other than the “Centrine˙ kredito unija”,

– in Hungary, the “Magyar Fejlesztési Bank Rt.” and the “Magyar Export-Import Bank Rt.”,

– in Poland, the “Spółdzielcze Kasy Oszcze˛dnos´ciowo - Kreditowe” and the “Bank Gospodarstwa Krajowego”.’

ê Directive 2004/xx/EC Art. 3.1 (adapted)

4. The Commission, pursuant to the procedure set out in Article 60(2) shall decide on any amendments to the list in paragraph 3.

ê 2000/12/EC Article 2(5) and (6) (adapted)

Article 3

1. Ö One or more Õ cCredit institutions situated in the same Member State and Ö which are Õ permanently affiliated, on 15 December 1977, to a central body which supervises them and which is established in that Ö the Õ same Member State, may be exempted from the requirements of Articles Ö 7 and 11(1)Õ 6(1), 8 and 59 if, no later than 15 December 1979, national law provides that:

(a) the commitments of the central body and affiliated institutions are joint and several liabilities or the commitments of its affiliated institutions are entirely guaranteed by the central body,

(b) the solvency and liquidity of the central body and of all the affiliated institutions are monitored as a whole on the basis of consolidated accounts,

(c) the management of the central body is empowered to issue instructions to the management of the affiliated institutions.

Credit institutions operating locally which are Ö permanently Õ affiliated, subsequent to 15 December 1977, to a central body within the meaning of the first subparagraph, may benefit from the conditions laid down therein if they constitute normal additions to the network belonging to that central body.

ê Directive 2004/xx/EC Art. 3.2 (adapted)

In the case of credit institutions other than those which are set up in areas newly reclaimed from the sea or have resulted from scission or mergers of existing institutions dependent or answerable to the central body, the Commission, pursuant to the procedure set out in Article 60(2) Ö 150 Õ may lay down additional rules for the application of the second subparagraph including the repeal of exemptions provided for in the first subparagraph, where it is of the opinion that the affiliation of new institutions benefiting from the arrangements laid down in the second subparagraph might have an adverse effect on competition.

ê 2000/12/EC Article 2(5) and (6) (adapted)

2. A credit institution which, as defined Ö referred to Õ in the first subparagraph of paragraph 5 Ö 1 Õ, may also be exempted from the provisions of ArticlesÖ 9 and 10 Õ 5, and also Articles 40 to 51, and 65 Ö Title V, Chapter 2, Sections 2, 3, 4, 5 and 6 and Chapter 3 Õ provided that, without prejudice to the application of those provisions to the central body, the whole as constituted by the central body together with its affiliated institutions is subject to the abovementioned Ö those Õ provisions on a consolidated basis.

In case of exemption, Articles Ö 16, 23, 24, 25, 26(1) to (3), 28 and 29 to 37 Õ 13, 18, 19, 20(1) to (6), 21 and 22 shall apply to the whole as constituted by the central body together with its affiliated institutions.

ê 2000/12/EC Art. 1 (adapted)

Article 4

Definitions

For the purposes of this Directive, Ö the following definitions shall apply: Õ

ê 2000/28/EC Art. 1(1) to (5) (adapted)

(1) «credit institution» shall mean Ö means Õ :

(a) an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account;or

(b) an electronic money institution within the meaning of Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit and prudential supervision of the business of electronic money institutions[20].

For the purposes of applying the supervision on a consolidated basis, shall be considered as a credit institution, a credit institution according to the first paragraph and any private or public undertaking which corresponds to the definition in the first paragraph and which has been authorised in a third country.

For the purposes of applying the supervision and control of large exposures, shall be considered as a credit institution, a credit institution according to the first paragraph, including branches of a credit institution in third countries and any private or public undertaking, including its branches, which corresponds to the definition in the first paragraph and which has been authorised in a third country;

(2) «authorisation» shall mean Ö means Õ an instrument issued in any form by the authorities by which the right to carry on the business of a credit institution is granted;

(3) «branch» shall mean Ö means Õa place of business which forms a legally dependent part of a credit institution and which carries out directly all or some of the transactions inherent in the business of credit institutions; any number of places of business set up in the same Member State by a credit institution with headquarters in another Member State shall be regarded as a single branch;

(4) «competent authorities» shall mean Ö means Õ the national authorities which are empowered by law or regulation to supervise credit institutions;

(5) «financial institution» shall mean Ö means Õ an undertaking other than a credit institution, the principal activity of which is to acquire holdings or to carry on one or more of the activities listed in points 2 to 12 of Annex I;

ò new

(6) «institutions», for the purposes of Sections 2 and 3 of Title V, Chapter 2, means institutions as defined in [Article 2(3) of Council Directive 96/3/EEC[21]];

ê 2000/12/EC Art. 1 (6) to (8) adapted (adapted)

(7) «home Member State» shall mean Ö means Õ the Member State in which a credit institution has been authorised in accordance with Articles 4 to 11 Ö 6 to 9 and 11 to 14 Õ ;

(8) «host Member State» shall mean Ö means Õ the Member State in which a credit institution has a branch or in which it provides services;

(9) «control» shall mean Ö means Õ the relationship between a parent undertaking and a subsidiary, as defined in Article 1 of Directive 83/349/EEC, or a similar relationship between any natural or legal person and an undertaking;

ê 2002/87/EC Art. 29(1)(a) (adapted)

ð new

(10) «participation» for the purposes of supervision on a consolidated basis and for the purposes of points Ö (o) and (p) Õ 15 and 16 of Articles 34 Ö 57 Õ (2), Ö 71 to 73 Õ Article 42 and Title V, Chapter 4 shall mean Ö means Õ participation within the meaning of the first sentence of Article 17 of Ö Council Õ Directive 78/660/EEC Ö [22] Õ, or the ownership, direct or indirect, of 20 % or more of the voting rights or capital of an undertaking;

ê 2000/12/EC Art. 1 (10) to (13) (adapted)

(11) «qualifying holding» shall mean Ö means Õ a direct or indirect holding in an undertaking which represents 10 % or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of the Ö that Õ undertaking in which a holding subsists. Ö ; Õ

(12) «initial capital» shall mean capital as defined in Article 34 (2)(1) and (2);

(12) «parent undertaking» shall mean Ö means Õ

(a) a parent undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC.

(b) It shall, for the purposes of supervision on a consolidated basis and control of large exposures, mean Ö Articles 71 to 73, Title V, Chapter 2, Section 5 and Chapter 4 Õ, a parent undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking which, in the opinion of the competent authorities, effectively exercises a dominant influence over another undertaking;

(13) «subsidiary» shall mean Ö means Õ

(a) a subsidiary undertaking as defined in Articles 1 and 2 of Directive 83/349/EEC;

(b) It shall, for the purposes of supervision on a consolidated basis and control of large exposures, mean Ö Articles 71 to 73, Title V, Chapter 2, Section 5, and Chapter 4 Õ a subsidiary undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any undertaking over which, in the opinion of the competent authorities, a parent undertaking effectively exercises a dominant influence.

All subsidiaries of subsidiary undertakings shall also be considered subsidiaries of the undertaking that is their original parent;

ò new

(14) “parent credit institution in a Member State” means a credit institution which has a credit institution or a financial institution as a subsidiary or which holds a participation in such an institution, and which is not itself a subsidiary of another credit institution authorised in the same Member State, or of a financial holding company set up in the same Member State, and in which no other credit institution authorised in the same Member State holds a participation;

(15) “parent financial holding company in a Member State” means a financial holding company which is not itself a subsidiary of a credit institution authorised in the same Member State, or of a financial holding company set up in the same Member State;

(16) “EU parent credit institution” means a parent credit institution in a Member State which is not a subsidiary of another credit institution authorised in any Member State, or of a financial holding company set up in any Member State, and in which no other credit institution authorised in any Member State holds a participation;

(17) “EU parent financial holding company” mean a parent financial holding company in a Member State which is not a subsidiary of a credit institution authorised in any Member State;

ê 2000/12/EC Art. 1 (14) to (18) (adapted)

(14) “Zone A» shall comprise all the Member States and all other countries which are full members of the Organisation for Economic Cooperation and Development (OECD) and those countries which have concluded special lending arrangements with the International Monetary Fund (IMF) associated with the Fund's general arrangements to borrow (GAB). Any country which reschedules its external sovereign debt is, however, precluded from Zone A for a period of five years;

(15) «Zone B» shall comprise all countries not in Zone A;

(16) «Zone A credit institutions» shall mean all credit institutions authorised in the Member States, in accordance with Article 4, including their branches in third countries, and all private and public undertakings covered by the definitions in point 1, first subparagraph and authorised in other Zone A countries, including their branches;

(17) Zone B credit institutions» shall mean all private and public undertakings authorised outside Zone A covered by the definition in point 1, first subparagraph, including their branches within the Community;

(18) «non-bank sector» shall mean all borrowers other than credit institutions as defined in points 16 and 17, central governments and central banks, regional governments and local authorities, the European Communities, the European Investment Bank (EIB) and multilateral development banks as defined in point 19;

ê 2004/69/EC Art. 1 (adapted)

«multilateral development banks» shall mean the International Bank for Reconstruction and Development, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the Council of Europe Resettlement Fund, the Nordic Investment Bank, the Caribbean Development Bank, the European Bank for Reconstruction and Development, the European Investment Fund, the Inter-American Investment Corporation and the Multilateral Investment Guarantee Agency;

ê 2000/12/EC Art. 1 (20)

(20) «full-risk», «medium-risk», «medium/low-risk» and «low-risk» off-balance-sheet items» shall mean the items described in Article 43(2) and listed in Annex II;

ò new

(18) “public sector entities” means non-commercial administrative bodies responsible to central governments, regional governments or local authorities, or authorities that in the view of the competent authorities exercise the same responsibilities as regional and local authorities;

ê 2002/87/EC Art. 29.1(b) adapted (adapted)

(19) «financial holding company» shall mean Ö means Õ a financial institution, the subsidiary undertakings of which are either exclusively or mainly credit institutions or financial institutions, at least one of such subsidiaries being a credit institution, and which is not a mixed financial holding company within the meaning of Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate[23];

(20) «mixed-activity holding company» shall mean Ö means Õ a parent undertaking, other than a financial holding company or a credit institution or a mixed financial holding company within the meaning of Directive 2002/87/EC, the subsidiaries of which include at least one credit institution;

ê 2000/12/EC Art. 1 (23) (adapted)

(21) «ancillary banking services undertaking» shall mean Ö means Õ an undertaking the principal activity of which consists in owning or managing property, managing data-processing services, or any other similar activity which is ancillary to the principal activity of one or more credit institutions;

ò new

(22) “operational risk” means the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, and includes legal risk;

ê 2000/12/EC Art. 1 (24) (adapted)

«exposures» for the purpose of applying Articles 47, 48 and 49 shall mean the assets and off-balance-sheet items referred to in Article 43 and in Annexes II and IV thereto Title V, Chapter 2, Section 2, and 3, without application of the risk weightings or degrees of risk there provided for; the risks referred to in Annex IV must be calculated in accordance with one of the methods set out in Annex III, without application of the weightings for counterparty risk; all elements entirely covered by own funds may, with the agreement of the competent authorities, be excluded from the definition of exposures provided that such own funds are not included in the credit institution’s own funds calculation of the solvency ratio for the purposes of Article 44 or in the calculation of other monitoring ratios provided for in this Directive and in other Community acts; exposures shall not include:

– in the case of foreign exchange transactions, exposures incurred in the ordinary course of settlement during the 48 hours following payment, or

– in the case of transactions for the purchase or sale of securities, exposures incurred in the ordinary course of settlement during the five working days following payment or delivery of the securities, whichever is the earlier;

ò new

(23) “central banks” include the European Central Bank unless otherwise indicated;

(24) “dilution risk” means the risk that an amount receivable is reduced through cash or non-cash credits to the obligor;

(25) “probability of default” means the probability of default of a counterparty over a one year period;

(26) “loss” means economic loss, including material discount effects, and material direct and indirect costs associated with collecting on the instrument;

(27) “loss given default” means the ratio of the loss on an exposure due to the default of a counterparty to the amount outstanding at default;

(28) “conversion factor” means the ratio, to the currently undrawn amount of the commitment, of the currently undrawn amount of a commitment subject to an advised limit that will be drawn and outstanding at default;

(29) “expected loss (EL)” shall mean the ratio of the amount expected to be lost on an exposure from a potential default of a counterparty or dilution over a one year period to the amount outstanding at default;

(30) “credit risk mitigation” means a technique used by a credit institution to reduce the credit risk associated with an exposure or exposures which the credit institution continues to hold;

(31) “funded credit protection” means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution derives from the right of the credit institution - in the event of the default of the counterparty or on the occurrence of other specified credit events relating to the counterparty - to liquidate, or to obtain transfer or appropriation of, or to retain certain assets or amounts, or to reduce the amount of the exposure to, or to replace it with, the amount of the difference between the amount of the exposure and the amount of a claim on the credit institution;

(32) “unfunded credit protection” means a technique of credit risk mitigation where the reduction of the credit risk on the exposure of a credit institution derives from the undertaking of a third party to pay an amount in the event of the default of the borrower or on the occurrence of other specified events;

(33) “repurchase transaction” means any transaction governed by an agreement falling within the definition of ‘repurchase agreement’ or ‘reverse repurchase agreement’ as defined in [Article 3 point (m) of Directive 93/6/EEC];

(34) “securities or commodities lending or borrowing transaction” means any transaction falling within the definition of ‘securities or commodities lending’ or ‘securities or commodities borrowing’ as defined in [Article 3 point (n) of Directive 93/6/EEC];

(35) “cash assimilated instrument” means a certificate of deposit or other similar instrument issued by the lending credit institution;

(36) “securitisation” means a transaction or scheme, whereby the credit risk associated with an exposure or pool of exposures is tranched, having the following characteristics:

(a) payments in the transaction or scheme are dependent upon the performance of the exposure or pool of exposures;

(b) the subordination of tranches determines the distribution of losses during the ongoing life of the transaction or scheme;

(37) “traditional securitisation” means a securitisation involving the economic transfer of the exposures being securitised to a securitisation special purpose entity which issues securities. This shall be accomplished by