OPINION OF THE EUROPEAN MONETARY INSTITUTE
Consultation from the Council of the European Union under Article 109f (6) of the Treaty
establishing the European Community (the “Treaty”)
on a Commission Proposal for a European Parliament and Council Directive (EC)
amending Council Directive 93/6/EEC
on the capital adequacy of investment firms and credit institutions
CON/97/14
1. On 4 July 1997 the EMI received from the Council of the European Union the request for an
opinion on a Commission Proposal for a European Parliament and Council Directive (EC)
amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit
institutions. The Council of the European Union transmitted for this purpose document
COM(97)  71 final, containing the  text of the proposal and the explanatory memorandum.
 
2. The EMI considers that this consultation is not optional as it was stated by the Council. The
present proposal relates to the field of competence of the EMI. It concerns inter alia the
supervision of credit institutions and investment firms, an area which falls within the competence
of a number of national central banks. This activity could have a potential impact upon the
stability of financial institutions and financial markets.
 
3. The EMI notes the objective of the proposal to allow the use of internal risk management models
for the calculation of capital requirements for market risks and the inclusion of a framework for
specific capital requirements for market risks inherent in commodity trading and commodity
derivatives business. It is also noted that by the proposed amendments to Directive 93/6/EEC the
Commission has discharged its obligation laid down in Article 13 of that Directive to submit to
the Council proposals for the capital requirements in respect of commodities trading and
commodity derivatives. In line with Article 14 of Directive 93/6/EEC, the Commission proposes
to reflect in the European legislation amendments to the Basle Capital Accord of 1988 which
have been issued by the Basle Committee on Banking Supervision in January 1996 and which
will come into effect by end of 1997.1 The EMI takes note of the other minor proposed changes
aiming at clarification of certain provisions of the Directive.
                                                                1 See “Overview of the Amendment to the Capital Accord to incorpor ate market risks”, “Amendment to the
Capital Accord to incorporate market risks”, and “Supervisory framework for the use of ‘backtesting’ in
- 2 -
 
4. The EMI welcomes the proposal. The EMI hopes that the positive effects on the stability of the
financial system which are expected to be triggered by the proposal will materialise. The use of
results of institutions’ internal models for the calculation of supervisory capital requirements
should give institutions an incentive to employ accurate risk measurement and management
methods. The regular backtesting of these results will ideally prove to turn out to be an efficient
procedure for the on-going re-assessment of the performance of the internal models and will
contribute to their upgrade and development. The inclusion of a specific framework of capital
requirements for commodity business carried out by credit institutions and investment firms into
the Directive 93/6/EEC is welcomed by the EMI.
 
 The EMI welcomes the fact that the draft will bring EU legislation in line with the amended Basle
Capital Accord of 1988 and will thus maintain a level regulatory playing field in a wider
international context. The EMI recognises the competitive aspects of the regulatory framework
to which reference is made in the fourth whereas clause of the draft proposal and the ensuing
need for a rapid adoption of the proposed legislation. In this context, the EMI wishes to point out
that many of the proposed amendments are of technical nature and that further amendments of
the Basle Capital Accord cannot be ruled out for the future. It will therefore be of importance
for the EU financial sector that changes to technical details of the Directive can be made flexibly
and speedily. In order to provide for this, the EMI recommends that the Council considers the
appropriateness of wording which specifies areas of the Directive which could be changed by
conferring implementation powers on the Commission (comitology). Moreover, in case that such
amendments to the Basle Capital Accord will be decided upon at a time where the adoption of
this draft directive is still pending, the EMI wishes to encourage the Council to work towards
taking account of such developments still in this legislative procedure, whenever this is
procedurally possible.
 
5. Apart from these general observations the following specific aspects may be considered by the
Council. First, the EMI notes that Article 7 of Directive 93/6/EEC in combination with the
amended Article 4 of Directive 93/6/EEC will govern the supervision on a consolidated basis of
capital requirements for market risk. The interplay between the use of internal models according
to the new Annex VIII and the application of capital requirements on a consolidated basis may
usefully be studied in more detail in the future on the basis of experience gained in the practice.
Similarly, there may be merit in studying and clarifying the interplay between the use of internal
models and the application of the large exposure rules set out in the Capital Adequacy Directive.
Second, the definition of “stock financing” may be clarified. Distinguishing between the practice
                                                                                                                                                                                                          
conjunction with the internal models approach to market risk capital requirements”, Basle Committee on
Banking Supervision, Bank for International Settlements, Basle 1996
- 3 -
of stock financing and the resulting positions could be helpful. Notwithstanding the eighth recital
of the draft Directive that refers to the specific case of certain investment firms dealing primarily
in commodities and commodity derivatives, the EMI, lastly, notes that the transitional rule under
Article 12a, that applies to investment firms only, might give rise to the question of justifying the
different treatment.
 
6. This opinion will be published in the Official Journal of the European Communities.
      7 October 1997