Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive amending Council Directive 89/647/EEC on a solvency ratio for credit institutions` (97/C 30/24)

On 11 April 1996 the Council decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Union, on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its Opinion on 17 July 1996. The rapporteur was Mr Pelletier.

At its 338th Plenary Session of 25 and 26 September 1996 (meeting of 26 September) the Economic and Social Committee adopted the following Opinion by 87 votes to 13 with 19 abstentions.

1. Introduction

The purpose of the proposal is to amend the Directive on the solvency ratio for credit institutions.

Two Articles are being amended.

1.1. Article 6(1)(c)(1)

1.1.1. This allows mortgage-backed securities to be treated in the same way, from the point of view of risk weighting, as the mortgage loans referred to in Articles 6 and 11.

1.1.2. As the solvency ratio is worded at present, the risk on these securities is weighted at 100 %. The aim of the amendment is to enable the competent authorities to weight them at 50 % if they consider that the risk is the same as for the underlying mortgage loans.

1.2. Article 11(4)

1.2.1. The existing article allows only four Member States (Denmark, Germany, Greece and Austria) to weight certain mortgage loans at 50 % instead of 100 % and to do so until 1 January 1996. The amendment extends this possibility to all Member States until 1 January 2001.

1.2.2. The loans must be completely secured by mortgages on offices or on multi-purpose commercial premises situated within the territory of the Member States. The sum borrowed cannot exceed 60 % of the value of the property in question, calculated on the basis of rigorous assessment criteria laid down in statutory or regulatory provisions.

1.2.3. The property must also be either used or let by the owner. In the latter case, the rental value must be secured at least at a level envisaged in the assessment of the value of the property.

2. General comments

2.1. Mortgage loans for commercial purposes play a major role in the European economy. The granting of commercial mortgage loans, the reduction of credit costs for borrowers, and more flexible refinancing conditions for credit institutions, are essential for continuing economic recovery in Europe. The cost of credit is ultimately reflected in consumer prices, which is why there is a tendency to look favourably on everything that can help to reduce such costs.

2.2. Moreover, studies show that commercial mortgage loans do not carry abnormally high risks and that losses in this sector are not significantly greater than losses on residential mortgage loans; the two types of loan should therefore be in the same risk category.

2.3. This comment is not at odds with the findings set out by the BIS in its annual report, namely that property prices have fallen heavily over the last few years, as has the value of the corresponding bank assets. But it is important not to take the property market as a whole, i.e. by lumping together the risky loans made by certain banks and the loans falling under the draft Directive which, as has been pointed out in paragraph 1.2, are exceptionally secure.

2.3.1. By way of example, unsold and unoccupied office blocks, which account for much of the difficulty faced by European banks, could not benefit from the current proposal on the reduction of risk weighting under Article 1 of the draft Directive.

2.3.2. Sound management means that banks with risky loans on their books must provide risk cover for them from their own funds to the tune of at least 100 %.

2.4. Experience has shown that when a company goes bankrupt and its assets are released, the asset which loses least value is property. This is because property, unlike materials, can easily be used again.

2.5. The draft Directive embraces the general principle set out in Article 6(1) of the 18 December 1989 Directive on solvency ratios. This principle, which is valid for all weightings, stipulates that the competent authorities may fix higher weightings if they deem this to be appropriate.

2.6. This right entails the risk of a reverse distortion of competition between the Member States by allowing the competent authorities to stipulate, before 1 January 2001, a higher risk weighting than the 50 % authorized by the Directive for loans granted in their own territory.

2.7. There is thus the danger of the development of different levels of mortgage risk protection, with some Member States accepting a 50 % weighting whilst other more stringent Member States stipulate a weighting of anything up to 100 %. This is at odds with the fundamental principle of a unified market for credit operations within the European Union. This difference in treatment is likely to be all the more grotesque in the medium term as the property market will tend to become more and more uniform with the advent of the single currency.

2.8. The Commission is aware of this risk and tries to limit it by specifying in the last paragraph of Article 1 that:

'...competent authorities of a Member State, which applies a higher risk weighting in its territory, may allow the 50 % risk weighting to apply for this type of lending in the territories of those Member States that allow the 50 % risk weighting.`

2.9. It is therefore clear that a banking institution established in a country applying a 50 % risk weighting cannot go and compete in the territory of countries whose banking institutions apply a higher risk weighting. On the other hand, a banking institution which enjoys favourable conditions for its national mortgage-loan activities will have a higher profit margin potential than its EU competitors and hence a higher level of competitiveness.

2.10. The risk of distorted competition is real since the property market crisis experienced by several Member States, and sometimes involving serious banking risks, has prompted the supervisory authorities of the majority of Member States to opt for maximum i.e. 100 % risk cover.

2.11. One can only hope that the effect of the draft Directive will be to harmonize the practices of the supervisory authorities, thereby eliminating reverse distortion, but this is only a hypothesis and is by no means certain.

2.12. Notwithstanding these concerns, the Committee can only conclude from a random analysis of the particular case of mortgage credit a) that the parent Directive on solvency ratios of 18 December 1989 authorizes national supervisory authorities to adopt varying practices in an area that has a very heavy bearing on bank profitability and b) that the judgments of the Court of Justice tend to follow suit.

2.13. The Committee approves the Commission's proposal, which aims to open the door to the 50 % weighting of commercial mortgage risks. It would nevertheless draw the attention of the Commission and Council to future arguments for harmonizing provisions on banking risk cover in order to obviate the risk of distorted competition, including those cases where the Member States themselves are the cause of the distortion.

2.14. The present draft Directive must be seen as a step in this direction. The Committee hopes that the Commission will press on with its work to harmonize risk cover, bearing in mind in particular the variability and volatility of the markets in question.

3. Specific comment

3.1. Add the words 'or equivalent concept` after the word 'trustee` in Article 6(1)(c)(1)(ii) as amended by Article 1 of the new Directive. Some European countries are not familiar with the concept of a trustee.

Brussels, 26 September 1996.

The President of the Economic and Social Committee

Carlos FERRER

APPENDIX to the Opinion of the Economic and Social Committee

Rejected amendment

The following amendment, which received more than a quarter of the votes cast, was examined and rejected:

Paragraph 1.1.2

After '100 %` add: 'in line with the Basle Accord for reasons of prudence`.

Result of the vote

For: 29; against: 60; abstentions: 17.