WRITTEN QUESTION E-1420/02

by Erik Meijer (GUE/NGL) to the Commission

(23 May 2002)

Subject: Abolition of multi-year fixed interest rates for loans to home-owners an unintended side-effect of new book-keeping rules

1. Is the Commission aware that many people are only able to become owner-occupiers with the aid of mortgage loans, which entail paying regular instalments of interest on a loan equivalent to the value of the home or part of it?

2. Can the Commission confirm that, as from 2005, the proposals for International Accounting Standards will require European businesses and banks to record their assets annually at the market value which obtains at the time (fair value), for which purpose they will also constantly have to reassess their mortgage portfolios in such a way that the value of fixed-interest mortgage claims will fall if interest rates rise?

3. As a result of this annual reassessment, is there a danger that in future mortgage loans will no longer be made available at interest rates fixed for a relatively large number of years, because fluctuations in value will result in fluctuations in profits, so that banks will no longer see any advantage in concluding fixed-interest mortgage loan agreements?

4. What consequences is it likely to have if all or most mortgage loans are subject to variable interest rates, so that the amounts which home-owners have to pay are liable to change radically from year to year? Is this likely to discourage people from buying their own homes, to reduce the purchasing power available for the acquisition of other goods, or to increase the number of bankruptcies because many people will be unable to bear the risks of annual fluctuations?

5. Are the new rules likely to create a situation in which businesses will continue to offer fixed-interest mortgage loans because there is a demand for them, but the value of these mortgages will be determined by a futures/options market, as a result of which the overheads on mortgage portfolio management will increase?

6. Is it desirable to protect those who are compelled to pay rent against the adverse consequences of annual fluctuations and also to avoid other types of rise in costs to consumers? How can this be achieved?

Source: De Volkskrant (Dutch daily newspaper), 15 and 16 April 2002.

Answer given by Mr Bolkestein on behalf of the Commission

(25 July 2002)

The Commission is fully aware that many people are only able to become owners-occupiers with the aid of mortgage loans which entail regular instalments for interest.

The Commission cannot confirm that, from 2005 onwards when listed Community companies will be required to use endorsed International Accounting Standards (IAS) for the preparation of their consolidated accounts, banks and business will be required to measure their mortgage portfolios at fair value.

The relevant IAS 39 that deals with recognition and measurement of financial instruments at fair value excludes the application of fair value for loans and receivables originated by the reporting company. Therefore, the application of IAS 39 is not the cause of the suggested implications for fixed-interest mortgage loans.

The limits to the scope of IAS 39 have been laid down in the pre-amble of Directive 2001/65/EC of the Parliament and of the Council of 27 September 2001 amending Directives 78/660/EEC, 83/349/EEC and 86/635/EEC as regards the valuation rules for the annual and consolidated accounts of certain types of companies as well as of banks and other financial institutions(1), that amongst others introduces the application of fair value within the Community. One of the preamble points makes explicit that financial reporting on the basis fair value should only be appropriate for those items where there is a well developed international consensus. At the moment, there is no consensus that fair value should be applied to all financial assets and liabilities.

Finally, the minutes of the Council when the aforementioned Directive was adopted (31 May 2001) includes a statement that application of IAS 39 does not serve to alter the provision of mortgage loans with a fixed interest rate.

The Commission is aware that the International Accounting Standards Board (IASB) is working on an improvement to the present IAS 39. The proposals for improvement do, as known by now, not modify the scope of application of the fair value concept in such a way that it would have consequences for the provision of fixed interest rate mortgage loans.

(1) OJ L 283, 27.10.2001.