PROPOSAL FOR A COUNCIL DIRECTIVE ON MONITORING AND CONTROLLING LARGE EXPOSURES OF CREDIT INSTITUTIONS
Date: 1991-04-23
Institutions: European Commission
Subjects: approximation of laws, credit institution, financial institution, subsidiary, venture capital

COMMISSION OF THE EUROPEAN  COMMUNITIES 

C0M(91) 68 final - SYN 333 

Brussels, 23 Apr i I 1991 

Proposal  for a 

COUNCIL  DIRECTIVE 

on monitoring and controlling  large exposures 

of credit  institutions 

(presented by the Commission) 

-  2 -

EXPLANATORY  MEMORANDUM 

A.  General 

Risk  spreading  is  a  golden  rule  of  financial  activity  in  general.  It  is 

the prime  responsibility of  the supervisory  authorities  to ensure  that  this 

rule  is  closely  observed  by  credit  institutions.  In  the  area  of  credit 

risks,  too  great  a  concentration  of  exposures  to  any  one  party  could 

jeopardize  the  independence  of  the  credit  institution's management  and,  in 

the event  of  that  party  failing,  could  cause  it  such  a  loss as  to  threaten 

its stability. 

This  is  therefore  a  key  rule  of  supervision  which  should  be  harmonized  at 

Community  level.  Furthermore,  specific  mention  of  this  was  made  in  the 

Commission's  White  Paper  on  completing  the  internal  market.  However,  there 

is a second  reason  for  such  harmonization, namely  the need  to prevent  clear 

distortion  of  competition.  As  the  rules  governing  the  division  of  risks 

are  primarily  intended  to  limit  the  assistance  which  a  credit  institution 

may  grant  a  given  client,  another  institution  would  have  a  competitive 

advantage  if  it were  subject  to  less stringent  rules. 

-  3 -

In  line  with  the  objectives  set  out  in  the  White  Paper,  the  Commission 
adopted,  in  1986, a Recommendation  on  large  exposures1  in order  to  prepare 

credit  institutions  and Member  States gradually  for  the adoption of  binding 

standards.  A  recital  in  that  Recommendation  specifically  promised  a  later 

proposal  for  a Directive.  The approaching  internal  market  deadline and  the 

agreement  reached  by  the  national  supervisory  authorities  within  the 

Banking Advisory  Committee  suggest  that  the  time  is ripe  for  a proposal  for 

a Directive  to be  adopted. 

The  attached  proposal  for  a  Directive  submitted  for  the  Commission's 

approval  contains  stricter  standards  than  those  set  out 

in  the 

Recommendation.  Mentioning  only  the  key  rules,  the  absolute  limit  on 

exposures  to  a  single  client  has  been  set  at  25%  of  the  lending  credit 

institution's own  funds  (the corresponding  percentage  in the  Recommendation 

was  4 0 % ), while  the  threshold  at  which  an  exposure  is  considered  to  be  a 

large  exposure  has  been  reduced  to  10% of  the  lending  institution's  own 

funds  (from  15%  in the  Recommendation). 

This  reinforcement  of  standards  is  in  response  to  the  earnestly  expressed 

wishes  of  the  Banking  Advisory  Committee  and  is  also  supported  in  a 

document  on  sound  practices  presented  by  the  Basle  Committee  on  banking 

supervision  at  the  recent  world  conference of  bank  inspectors  in Frankfurt. 

Stricter  standards  can  only  reinforce  the  solidity  and  stability  of  the 

Community's  banking  system.  Furthermore,  a  limit  of  25%  of  the  lending 

institution's  own  funds  can  in  no  way  be  regarded  as  excessively  low, 

Commission  Recommendation  of  22 December  1986  on  monitoring  and 

controlling  large  exposures  of  credit 

institutions,  0J  No L 33, 

4.2.1987, p. 10. 

-  4  -

since,  if a client  to which  such  a  large exposure  had  been  incurred  were  to 

fail,  the  credit  institution  could  lose  a  quarter  of  its own  funds,  which 

is  a  considerable  amount  and  should,  ideally,  be  reduced  still  further. 

Moreover,  this  is  a  ceiling,  and  credit  institutions  should  discipline 

themselves  to  reach  or  near  that  ceiling  only  In  the  case  of  exposures  of 

impeccable  qua Iity. 

Nevertheless,  the  significant  reduction  in  the  ceiling  compared  with  that 

in  the  Recommendation  may  pose  adjustment  problems  for  some  credit 

institutions  or,  in  a  more  structural  manner,  for  certain  banking  systems 

or  parts  of  banking  systems.  Furthermore,  assistance  already  granted  in 

excess  of  25%  of  own  funds  cannot  always  be  reduced  quickly  by  credit 

institutions  which  are  contractually  bound  to  the  recipients  of  that 

assistance.  Accordingly,  the  attached  proposal  contains  a  provision 

authorizing  the  competent  authorities  to  grant  credit  institutions  a 

maximum  period of  five years  in which  to bring existing  exposures  into  line 

with  the  limits  laid  down;  in  addition,  loans  of  longer  maturity  with 

contractually  binding  terms  for  the  lending  institution,  may  be  held  until 

maturity. 

B.  Comments on  the Articles 

Article  1;  Definitions 

The  definitions  in  this  Article  are  drawn  mainly  from  other  Community 

Directives  or  proposals  for  Directives  in  the  banking  sphere  and  their 

retention  is justified  in the  interests of  consistency. 

However,  two  definitions  are  peculiar  to  this  proposal  and  merit  special 

comment. 

-  5  -

The  first  of  these  is  the  definition  of  "exposures"  (letter  h)  of  the 

definitions).  The 

above-mentioned 

Commission 

Recommendation 

defined 

exposures  as  any  facility  granted,  whether  drawn  or  undrawn,  by  a  credit 

institution  to  a  client  or  group  of  connected  clients,  on  or  off  balance 

sheet,  and  includes  those  commitments  and  contingent  items  deemed  to  be 

relevant  by  the  respective  competent  authorities  when  assessing  the 

identifiable  risks  of  that  institution.  A  list  of  exposures  was  set  out, 

for  guidance,  in the Appendix  to the  Recommendation. 

Since  then,  the  solvency  ratio  Directive1  has  been  adopted,  which  contains 

a detailed  nomenclature of  risks.  By  referring  to  this nomenclature,  it  is 

possible  to  have  both  a  more  precise  and  a  more  binding  definition  of 

exposures.  It  should  be  emphasized,  however,  that  this  borrowing  from  the 

solvency  ratio  Directive  covers  only  the  risk  nomenclature  and  not  the 

weightings  attributed  to  the  risks  in  the  Directive  according  to  the  party 

or  degree  of  risk  involved  in  the  transaction.  These  weightings  in 

Directive 89/647/EEC were  not  designed  to measure  exposure  to an  individual 

client  but  instead  to  set  up  a  general  solvency  requirement  to  cover  the 

credit  risk  of  credit  institutions.  Given  the  fundamental  aim  underlying 

the  rules on  risk  spreading  (to  limit  an  institution's maximum  risk of  loss 

with  respect  to  a  given  client),  a  prudent  approach  must  take  account  of 

exposures  at  their  nominal  value, without  any weighting or  degree of  risk. 

Council  Directive  89/647/EEC  of  18 December  1989  on  a  solvency  ratio 

for  credit  institutions, OJ  No L 386, 30.12.1989, p. 14. 

-  6  -

It  will  be  noted  that  the  definition  of  exposures  also  includes 

underwriting  commitments  for  the  issue  of  securities.  The  amount  taken 

into  account  is  the  institution's  net  commitment,  subject  to  deduction  of 

the shares  transferred  to other  credit  or  financial  institutions. 

The  second  definition  peculiar  to  this  proposal  is  that  of  a  "group  of 

connected  clients"  (letter  m)  in  Article  1 ).  This  definition  is  very 

similar  to  that  in  the  1986  Recommendation.  The  first  part  of  the 

definition  refers  to  the existence of  a power  of  control  as  defined  in the 

eleventh  indent  in  Article  1.  The  second  part  refers  to  a  de  facto 

interconnection  resulting  from  certain  links, examples of which  are  set out 

in  the  proposal  for  guidance.  The  competent  authorities  will  be 

responsible  for  examining  the  combinations  of  exposures  incurred  by  credit 

Institutions  on  the  basis  of  the  rules  transposing  this  definition  into 

national  law and  for  assessing  whether  those  combinations  of  exposures  are 

in  fact  consistent  with  the  letter  and  spirit  of  the  Community  definition. 

In order  to give  the  competent  authorities  the  necessary  flexibility  in an 

area  which  depends  more  on  economic  appraisal  than  on  legal  criteria,  the 

proposal  makes  it  clear  that  the  combined  exposure  presumptions  in  the 

definition  are  relative  presumptions  which  can  be  reversed  if  there  is 

proof  to the  contrary. 

Article  2: Scope 

The  Directive  will  apply  to  credit  institutions  which  have  obtained  the 

authorization  referred  to  In  Article  3  of  Directive 77/780/EEC  of 
12 December  1977  (first  coordination  Directive),1  i.e.  all  the  credit 

institutions  in  the  Community.  However,  Member  States  will  not  have  to 

apply  the Directive  to: 

1 

OJ  No L 322, 17.12.1977, p. 30. 

-  7  -

institutions  permanently  excluded  from  the  scope  of  the  first 

coordination  Directive  (mainly  central  banks,  post  office  giro 

institutions 

and 

certain 

particular 

institutions 

in 

each 

Member  State); 

credit  institutions  permanently  affiliated  to  a  central  body  which 

supervises  them  and which  is established  in the  same Member  State, and 

provided 

that  the  conditions  set  out 

In  Article  2(4)(a)  of 

Directive 77/780/EEC  are  met.  In  that  case, without  prejudice  to  the 

application 

of 

the 

Directive 

to 

the 

central 

body, 

the 

whole - constituted 

by 

the  central 

body 

and 

its  affiliated 

institutions - m u st  be  the  subject  of  global  supervision  with  regard 

to  large exposures. 

Article  3: Reporting  of  large  exposures 

Effective  supervision  of  large  exposures  clearly  calls  for  such  exposures 

to  be  notified  regularly  to  the  competent  authorities.  Such  is the  aim  of 

Article  3. 

Paragraph  1  of  Article  3  stipulates  that  large  exposures  must  be  reported 

to  the  competent  authorities.  At  their  discretion,  Member  States  will 

provide  for  this  reporting  to  be  carried  out  by  one  of  the  following 

methods: 

notification of  all  large exposures  at  least  once  a year, backed  up by 

communication  during  the  year  of  any  modifications  to  the  annual 

notification; 

notification of  all  large exposures  at  least  four  times a year. 

-  8  -

The  first  of  these  two methods, which  did  not  appear  in the  Recommendation, 

was suggested  to  the Commission  by  the Banking Advisory  Committee. 

As  to  the  second  method,  the  minimum  frequency  of  notification  has  been 

increased  to  four  times  a  year  from  the  single  report  provided  for  in  the 

Recommendation.  Effective  monitoring  of  large  exposures  presupposes  that 

sufficiently  frequent  information  reaches  the  supervisory  authorities. 

Moreover,  one  of  the  recitals  In  the  Recommendation  suggested  that  the 

competent  authorities should  seek more  frequent  reporting. 

Member  States  will  have  the  choice  of  transposing  into national  law either 

one of  these methods only  or  both methods.  In the  latter  case,  they will  be 

able  to decide whether  the choice of method  should  be  left  to  the  competent 

authorities or  to  the credit  institution  itself. 

Paragraph  2 of  Article  3  stipulates  that  an  exposure  to  a  client  or  group 

of  connected  clients  is  to  be  considered  a  large  exposure  where  its  value 

is  equal  to  or  exceeds  10% of  the  lending  institution's  own  funds.  The 

corresponding  percentage  in  the  Recommendation  was  15%.  The  reduction  in 

this  threshold  is  Justified  by  the  general  need  to  make  the  system  of 

supervising  large  exposures  more  stringent  in  order  to  reinforce  the 

stability  of  the  Community's  banking  system.  More  specifically,  once  the 

ceiling  on  individual  exposures  has  itself  been  cut  (see  Article  4(1) 

below),  it  is  logical  to  reduce  the  reporting  threshold.  Some  countries 

already  employ  a  10% threshold,  and  the  Commission  considers,  in  the  light 

of  their  experience,  that  such  a  threshold  cannot  be  regarded  as  imposing 

bureaucratic  obligations.  Since  the  proposal  also  provides  for  an 

aggregate  limit  on  large  exposures  of  800% of  own  funds  (see  Article  4(3) 

below),  the  reporting  exercise  is  limited  to  a  theoretical  maximum  of  80 

exposures.  Moreover,  this  reporting  exercise  can easily  be  computerized. 

-  9  -

The  reduction  in  the  threshold  to  10% will  ease  administrative  obligations 

in  a  further  respect.  The  Commission  has  not  retained  paragraphs  3  and  4 

of  the  corresponding  Article  in  the  Recommendation,  which  provided  for  a 

credit  Institution's  ten  largest  exposures  to  be  reported,  whether  or  not 

these  were  "large  exposures".  The  Banking  Advisory  Committee  agreed  that 

such  reporting  would  lose much  of  its value  as  a  result  of  the  widening  of 

the  concept  of  "large  exposure".  As  to  the  supervision  of  institutions 

which  do  not  have  exposures  in excess  of  10% of  their  own  funds,  this  is, 

by  definition,  not  subject  to  legislation  governing  the  spreading  of  large 

exposures. 

Article  4 

Paragraph 1 

This  key  provision  in  the  draft  Directive  stipulates  that  credit 

institutions  may  not  incur  an  exposure  to  a  client  or  group  of  connected 

clients  where  its  value  exceeds  25%  of  own  funds.  This  represents  an 

appreciable  reduction  compared  with  the  Recommendation,  which  provided  for 

a  40%  ceiling.  Apart  from  the  fact  that  the  introduction  of  stricter 

standards  more  than  four  years  after  the  adoption  of  the  Recommendation, 

which  was  only  an  initial  stage,  is a  logical  step,  this  reinforcement  of 

the  standard  was  specifically  called  for  by  a  significant  majority  of  the 

Banking  Advisory  Committee,  subject  to  a  transitional  period  for  existing 

exposures  (see  Article 6  below).  Support  for  a  25%  ceiling  can  also  be 

found  in a document  presented  by  the Basle  Committee  on  banking  supervision 

at  the  world  conference  of  bank  inspectors  held  in  Frankfurt  in 

October  1990. 

-  10 -

A  25%  ceiling  should  not  be  regarded  as  excessively  low  since,  while 

complying  with  that  limit,  a  credit  institution  could  still,  under  the 

worst  hypothesis,  lose  a  quarter  of  its own  funds.  This  is a  considerable 

amount  and  should,  ideally, be  reduced  further.  The  point  is that  this  is 

a  maximum  ceiling  for  exposures  of  impeccable  quality,  and  credit 

institutions  should  discipline  themselves  to  reach  or  approach  that  limit 

only  In the case of  exposures of  such  quality. 

Paragraph  2 

Bank  supervisors  know  from  experience  that  there  is frequently  an  increased 

risk  where  a  credit  institution  lends  to  enterprises  linked  to  it.  The 

Banking  Advisory  Committee  specifically  requested  the Commission  to provide 

for  a  lower  limit  for  exposures  to  associated  enterprises  (parent 

undertaking  of  the credit  institution  and other  subsidiaries of  that  parent 

undertaking).  It  had  initially  been  planned  to  incorporate  such  a 

provision  in  the  proposal  for  a  Directive  relating  to  the  supervision  of 
credit  institutions  on  a  consolidated  basis.1  But,  as  indicated  in  the 

fourth  recital  of  that  proposal,  it  was  considered  preferable  to  settle 

this  question  in  a  more  systematic  manner  within  the  framework  of  the 

future Directive on  large exposures. 

The  Commission  has  set  this  lower  limit  at  20%  (compared  with  the  normal 

25%  limit  laid  down  in paragraph 1 ). 

Provision  is made  for  exceptions  to  this  rule  in  paragraphs  5  and  6  (see 

below). 

1 

C0M(90) 451, OJ  No C  315, 14.12:1990, p. 15. 

J  A. » 

-  11  -

Paragraph  3 

The  Commission  has  retained  the  aggregate  limit  on  large  exposures  provided 

for  in the  Recommendation,  i.e. 800% of  own  funds.  However,  as  the  concept 

of  "large  exposure"  has  been  broadened  (see Article  3(2) above),  this  limit 

has  now  become,  indirectly, more  strict. 

An  aggregate  limit  is a valuable  complement  to  the  limitation of  individual 

risks  in  legislation  governing  large  exposures.  While  the  limitation  of 

individual  risks ensures  that  no exposure  exceeds  the  ceiling  laid  down,  it 

does  not  affect  the  spread  of  risks  throughout  the  portfolio.  An  aggregate 

limit  of  800%,  however,  will  mean  that  a  credit  institution  can  at  most 

have  80  large  exposures  and  a  maximum  of  32  exposures  which  reach  the 

individual  ceiling  of  25% of  own  funds. 

Paragraph 4 

This  paragraph  provides  that  Member  States  may  impose  more  stringent  limits 

than  those  laid  down  in paragraphs  1,  2 and  3. 

Paragraph  5 

This  paragraph  requires  the  limits  laid  down  in  the  first  three  paragraphs 

to  be  observed  at  all  times.  If  those  limits  were  to  be  exceeded  -  which 

could  happen  accidentally - the  proposal  stipulates  that  they  may  be 

exceeded  only  in  exceptional  and  temporary  circumstances  and,  in  such 

cases,  the  competent  authorities  would  have  to  fix  a  deadline  within  which 

the  credit  institution would  be obliged  to  regularize  its situation. 

Paragraph  6 

This  paragraph  permits  Member  States  to  exempt  fully  or  partially  from  the 

need  to  observe  the  special  20%  limit  laid  down  in  paragraph  2  exposures 

incurred  by  the  credit  institution  to  a  financial  holding  company  which  is 

-  12  -

its parent  undertaking  and  to other  subsidiaries  of  that  financial  holding 

company 

which 

are  credit 

institutions,  financial 

institutions  or 

undertakings  providing  ancillary  banking  services. 

The  presumption  of  increased  risk  underlying  the  special  20%  limit 

applicable  to  exposures  to  associated  undertakings  is  not  necessarily 

relevant  in  the  case  of  exposures  to  banking  and  financial  entities  in  the 

group.  In that  event,  however,  the group  should  structure  itself  in such  a 

way  that  those  entities  can  be  the subject  of  supervision  on  a  consolidated 

basis  exercised  in accordance  with  the  future  Directive  in  this  field  (see 

the  reference  above  to  the  proposal  for  a  Directive  presented  by  the 

Commission). 

Paragraph  7 

This  paragraph  permits  Member  States  to exempt  fully  or  partially  from  all 

the  limits  laid  down  in paragraphs  1,  2  and  3  (but  not  from  the  reporting 

obligations  set  out  in  Article  3)  exposures  incurred  by  the  credit 

institution  to: 

its  parent  undertaking,  provided  that  that  undertaking  is  itself  a 

credit  institution.  It  does  not  seem  Justified  to  limit  the  flow  of 

funds  which  a  subsidiary  can  provide  for 

its  parent  credit 

institution.  Of  course,  the  proviso  here  is  again  that  the  parent 

undertaking  Is  subject  either  to  supervision  on  a  consolidated  basis 

exercised  in  accordance  with  the  Community  Directive  in  question  or, 

if  it  is  located  in a  third  country,  to equivalent  supervision; 

subsidiaries, 

provided 

that 

those 

subsidiaries 

are 

credit 

institutions,  financial 

institutions  or  undertakings 

providing 

ancillary  banking  services.  Since  these  are  activities  which  the 

-  13 -

credit  institution  could  carry  out  directly,  there  is  no  reason  to 

limit  the  funding  which  It provides  for  its subsidiaries.  Once  again, 

the  exemption  is  subject  to  the  proviso  that  the  subsidiaries  in 

question  are  Included  In  the  consolidated  supervision  of  the  parent 

undertaking. 

Paragraph  8 

This  paragraph  authorizes  Member  States  to  exempt  a  number  of  specific 

exposures  fully  or  partially  from  the  application  of  the  limits  laid  down 

in paragraphs  1, 2 and  3. 

The  first  six  indents  (letters  a)  to  f)) cover  exposures  incurred  directly 

or  indirectly  to  Zone A  central  governments  and  central  banks  and  to  the 

European  Communities.  No  Member  State  imposes  or  seems  prepared  to  impose 

limits  on  exposures  incurred  by  its  credit  institutions  to  itself.  Given 

the  rule  of  non-discrimination  within  the  Community,  this  lack  of 

limitation  should  in  any  case  apply  to  exposures  incurred  to  other 

Member  States.  But,  for  reasons  similar  to  those  given  in connection  with 

the above-mentioned  Directive 89/647/EEC or  the proposal  for  a Directive on 
capital  adequacy  of  investment  firms  and  credit  institutions,1  it  seems 

pertinent  to  refer  to  a  wider  geographical  area,  namely  Zone A  as  defined 

in Directive  89/647/EEC. 

Letters  g) and  h) cover  cases where  the  risk  can  be  considered  to be  small 

or  even  nil,  i.e.  where  it  is covered  by  a  guarantee  in  the  form  of  cash 

deposits or  certificates of  deposit  lodged with  the  lending  institution. 

Letter  i) covers  claims  with  a  maturity  of  up  to one  year  on  other  credit 

institutions.  The  aim  here  is  to  cover  transactions  on  the  interbank 

market.  This  is  a  market  which  operates  between  professionals  who  know 

each  other  and  which  requires  some  flexibility  in  order  to  function 

harmoniously.  The  Commission  does  not  therefore  consider  it  appropriate, 

1 

COM(90) 141; OJ  No C  152, 21.6.1990, p.  6. 

-  14 -

at  this  stage,  to  establish  a  single  harmonized  limit  at  Community  level 

for exposures  incurred on  this market. 

The  same  reasoning  applies  to  letter  j ), which  concerns  commercial  paper 

meeting  certain  conditions,  and  to  letter  k ),  which  concerns  the 

obligations  defined  in  article  22  paragraph  4  of  directive  85/611/EEC  on 
UCITS1. 

Letter  I) covers  cooperative  banks or  savings  banks  belonging  to  a  network 

and  for which  there  is a centralized  cash  clearing  operation. 

Paragraph  9 

Paragraph  9  refers  to exposures  incurred  directly or  indirectly  to  regional 

and  local  authorities  in  the  Member  States.  In  view  of  the  fact  that  the 

degree  of  risk  involved  here  is normally  lower,  the  proposal  permits  a 20% 

weighting  to  be  applied.  This  rate  may  be  reduced  to  0%  subject  to  the 

conditions  laid  down  in Article  7 of  Directive  89/647/EEC.  Given  the  wide 

differences  which  may  exist  between  the  rules  governing  regional  and  local 

authorities  outside  the  Community,  the  Commission  does  not  consider  it 

appropriate  to extend  this arrangement  to  the whole of  Zone  A. 

Paragraph  10 

This  paragraph  states, as  a general  principle,  that  where  an  exposure  to a 

client  is guaranteed,  to  the  satisfaction  of  the  competent  authorities, by 

a  third  party,  the competent  authorities may  deem  the exposure  to have  been 

incurred  to  that  third  party  and  not  to  the  client.  Thus,  where,  for 

example,  a credit  institution  incurs  an  exposure  of  50  to client  A  and  one 

of  20  to  client  B,  but  with  client  B  guaranteeing  10  of  A's  debt  to  the 

credit  institution,  the exposure  to A  and B may  be deemed  to be as follows: 

-  A:  40 

-  B: 30. 

1 

0J  No L 375, 31.12.1985, p. 3. 

-  15  -

Article  5:  Supervision  on  a consolidated  or  non-consolidated  basis 

This 

Article 

includes 

provisions 

already 

adopted 

as 

part 

of 

Directive  89/647/EEC  on  a solvency  ratio,  and  in particular  Article  3(2)  to 

(6) of  that  Directive. 

Paragraph  1  covers  the  case  of  a  credit  institution  which  is  neither  a 

parent  undertaking  nor  a  subsidiary. 

Paragraph  2  establishes  the  principle  of  applying  the  rules  set  out  in 

Articles  3 and  4 on  a consolidated  basis. 

Paragraph  3  lays down  the arrangements  for  the non-consolidated  supervision 

of  a parent  credit  institution and  its subsidiaries  established  in the  same 

Member  State. 

Paragraph  4  concerns  the  supervision,  on  a  non-consolidated  basis,  of 

subsidiaries  established  in other  Member  States. 

Paragraph  5  provides  for  possible  bilateral  agreements  under  which  the 

competent  authorities  in the Member  State  in which  a subsidiary  is situated 

could  delegate  their  responsibility  for  supervision  to  the  competent 

authorities  in  the  Member  State  in  which  the  parent  credit  undertaking  is 

established. 

Article  6:  Transitional  provisions  relating  to  exposures  in excess  of  the 

limits 

Article  6  concerns  exposures  existing  at  the  time  the  Directive  is 

published  in  the  Official  Journal  of  the  European  Communities  which  exceed 

the  limits  laid  down  by  the  Directive.  It  would  seem  Justified  to  make 

transitional  arrangements  for  this  type  of  exposure,  in  order  to  allow 

credit  Institutions  the  time  to  find  a  solution  which  would  not  overturn 

their  commercial  relationship  with  their  clients.  In  any  event,  credit 

-  16 -

institutions  may  be  bound  - with  regard  to  the  parties  to  whom  those 

exposures  have  been  incurred  - by  contractual  arrangements  which  do  not 

necessarily  permit  them  to reduce such  exposures  quickly. 

Paragraph  1  specifies  that  risks  entered  into  force  before  the  date  of 

publication  of  the  directive  in  the  Official  Journal  of  the  European 

Community  shall  be  eligible  for  the  grandfathering  provisions.  The  choice 

of  this  cut-off  point  is  Justified  by  the  consideration  that  from  the 

moment  when  the  directive  is  published,  credit  institutions  should  not  be 

able  to  take exposures exceeding  the  limits  that  will  apply  subsequently. 

This  paragraph  also  stipulates  that  the  competent  authorities  must  require 

the  credit  institution  in question  to  take  the  steps  necessary  to  have  the 

excess  exposure  or  exposures  brought  into  line  with  the  provisions  of  the 

Direct ive. 

Paragraph  2 provides  for  the process of  reducing  the excess exposures  to be 

implemented  and  completed  within  the  period  deemed  by  the  competent 

authorities  to be  consistent  with  the principle of  sound  administration  and 

fair  competition.  The  competent  authorities  are  required  to  inform  the 

Commission  and  the  Banking  Advisory  Committee  of  the  schedule  for  the 

general  process  adopted. 

In  accordance  with  paragraph  4,  however,  the  period  in  question  may  not 

exceed  five years  from  the  date  stipulated 

in  Article  8(1),  i.e. 

1  January  1993.  However 

loans  with  a  longer  maturity  with  binding 

contractual  terms  for  the credit  institution may  be  held  until  maturity. 

Paragraph  3  stipulates  that,  credit  institution  may  only  take  advantage  of 

the period  specified  in paragraph  2  to the extent  that  it does not  take any 

measure which  would  cause  the exposures  to exceed  the  level  existing  at  the 

date  of  publication  of  the  directive  in  the Official  Journal.  The  emphasis 

is therefore on  the deliberate  action  of  the credit  institution. 

-  17 -

Finally,  paragraph  5  contains  a  specific  provision  which  Member  States  may 

apply  to  the  particular  categories  of  credit  institution  referred  to  in 

Article  4(2)  of  Directive 89/646/EEC.  This  provision  is  justified  by  the 

fact  that,  as  the  own  funds  of  such  institutions  are  limited,  immediate 

application  of  the  25%  rule  would  reduce  their  lending  activity  too 

abruptly.  The  arrangements  set  out  in  paragraph  5  can  be  summarized  as 

fol lows: 

from  1 January  1993  to  31  December  1997,  the  institutions  in  question 

may  be  subjected  to  a  limit  of  40%  instead  of  the  25%  limit  laid  down 

in  Article  4(1);  in  that  event,  all  new  exposures  incurred  by  such 

institutions  are  to be subject  to  that  40%  limit; 

exposures  existing  on  the  date  the  Directive  is  published  in  the 

Official  Journal  may  be  maintained,  whatever  their  level,  until 

31  December  1997,  subject  to  the  sole  proviso  that  they  may  not  be 

increased  beyond  the  level  reached  on  the  date of  publication; 

as  from  1 January  1998,  the  25%  limit  will  come  into  force  and  will 

apply  to all  new  exposures; 

however,  exposures  between  25%  and  40%  of  own  funds  existing  at  the 

end  of  the  maximum  period  of  five  years  (i.e.  in  principle  on 

31  December  1997)  may  be  maintained 

for  a  maximum  period  of 

three  years  (i.e. until  31  December  2000),  subject  to  the  same 

condition  that  they may  not  be  increased; 

as  from  1 January  1998, therefore,  no exposure  in excess  of  40% of  own 

funds  may  be  maintained,  and,  as  from  1 January  2001,  no  exposure  in 

excess of  25% of  own  funds may  be maintained; 

paragraph  4  provides,  however,  that  loans  with  a  longer  maturity  than 

the  dates  referred  to above  and with  binding  contractual  terms  for  the 

lending  credit  institution  may  in  all  cases  be  maintained  until 

maturity. 

-  18 -

Article 7:  Subsequent  amendments 

Paragraph  1  specifies  the  fields  in  which  the  procedure  for  making 

technical  amendments  to  the  Directive  are  to  apply.  The  first  three 

indents  concern  the  adaptation  of  definitions  or  terminology.  The  fourth 

relates  to  the  frequency  of  large exposure  reporting  ((Article  3(1)).  The 

fifth  indent  concerns  the  clarification  or  extension  of  the  exemptions 

provided  for  in Article  4(5) to  (9).  The  sixth  indent,  finally,  refers  to 

the  maximum  period  for  reducing  the  excess  exposures  outstanding  at  the 

time  of  the  publication  of  the  Directive  in  the  Official  Journal  of  the 

European  Communities.  This  maximum  period  laid  down  in  Article 6(4)  is 

five years. 

The  procedure  laid  down  in  paragraph  2  is  Procedure  III,  Variant  (a), in 

Council  Decision  87/373/EEC  of  13 July  1987  laying  down  the  procedures  for 

the exercise of  implementing  powers conferred  on  the  Commission. 

Article 8:  Final  provisions 

The  first  subparagraph  of  paragraph  1 requires Member  States  to comply  with 

the Directive by  1 January  1993. 

The  second  subparagraph  stipulates  that,  when  Member  States  adopt  the 

necessary  provisions  of  national  law,  these  must  contain  a  reference  to 

this  Directive  or  must  be  accompanied  by  such  reference  when  they  are 

official I y pub Iished. 

Paragraph  2  deals  with  the  transmission  to  the  Commission  of  the  main 

provisions of  national  law adopted  by  the Member  States. 

Article  9 

This Article contains  the usual  wording  to the effect  that  the Directive^ is 

addressed  to all  Member  States. 

-  19 -

Proposal  for a 

COUNCIL  DIRECTIVE 

on monitoring  and  controlling  large  exposures 

of  credit  institutions 

THE COUNCIL OF  THE  EUROPEAN  COMMUNITIES, 

Having  regard  to  the  Treaty  establishing  the  European  Economic  Community, 

and  in particular  the  first  and  third  sentences of  Article  57(2) thereof, 

Having  regard  to the proposal  from  the  Commission1, 

In cooperation  with  the European  Parliament2, 

Having  regard  to the opinion of  the Economic  and  Social  Committee3, 

Whereas  this  Directive  is  consistent  with  the  aims  set  out  in  the 
Commission's  White  Paper  on  completing  the  internal  market4; 

Whereas  the  suitable  approach  is  to  achieve  harmonization  of  essential 

supervisory  rules; whereas Member  States should  have  the option of  adopting 

more  stringent  provisions  than  those provided  for  by  this Directive; 

Whereas  this  Directive  has  been  the  subject  of  consultation  with  the 

Banking  Advisory  Committee,  which  is  responsible,  under  Article 6(4)  of 

Council  Directive 77/780/EEC  of  12 December  1977  on  the  coordination  of 

1 

2 

3 

4 

C0M(85)310. 

-  20  -

laws,  regulations  and  administrative  provisions  relating  to  the  taking-up 
and  pursuit  of  the  business  of  credit  institutions1,  as  last  amended  by 
Directive  89/646/EEC2,  for  making  suggestions  to  the  Commission  with  a 

view  to coordinating  the coefficients  applicable  in the Member  States; 

Whereas  monitoring  and  controlling  the exposures  of  a credit  institution  is 

an  integral  part  of  prudential  supervision;  whereas  excessive  concentration 

of  exposures  to a single  client  or  group  of  connected  clients may  result  in 

an  unacceptable  risk;  whereas  such  a  situation  may  be  deemed  to  be 

prejudicial  to  the solvency  of  a credit  institution; 

Whereas  common  guidelines  for  monitoring  and  controlling  exposures  of 

credit  institutions were  introduced  initially  by  Commission  Recommendation 
87/62/EEC3;  whereas  that  instrument  was  chosen  since  it  permitted  existing 

systems  to be  adjusted  gradually  and  new  systems  to be  established  without 

causing  dislocation  to  the  banking  system  of  the  Community;  whereas,  with 

that  first  phase  now  over,  it  is necessary  for  a  binding  instrument  to  be 

adopted,  applicable  to all  Community  credit  institutions; 

Whereas  credit  institutions  in  a  unified  banking  market  engage  in  direct 

competition  with  each  other  and  the  prudential  supervision  requirements 

throughout  the Community  should,  therefore, be equivalent;  whereas,  to  that 

end,  the  criteria  applied  for  determining  the  concentration  of  exposures 

should  be  the  subject  of  legally  binding  rules  at  Community  level  and 

cannot  be  left  entirely  to  the discretion  of  the Member  States; whereas  the 

adoption  of  common  rules  will  therefore  best  serve  the  interests  of  the 

Community,  since  it  will  prevent  differences  in  competitive  conditions, 

while at  the same  time  strengthening  the Community's  banking  system; 

1 

2 

3 

OJ  No L 322, 17.12.1977, p. 30. 

OJ  No L 386, 30.12.1989,  p.  1. 

OJ  No L  33,  4. 2.1987, p. 10. 

-  21  -

Whereas  as  regards  the  precise  accounting  technique  to  be  used  for 

assessing  exposures,  reference  is  made  to  the  provisions  of  Council 

Directive  86/635/EEC  of  8 December  1986  on  the  annual  accounts  and 
consolidated  accounts of  banks  and  other  financial  institutions1; 

Whereas  Council  Directive  89/647/EEC  of  18  December  1989  on  a  solvency 
ratio  for  credit  institutions2  contains  a  list  of  credit  risks  which  may 

be  incurred  by  credit  institutions;  whereas  it  is  therefore  justified  to 

refer  to  that  list  in  the  definition  of  exposure  for  the  purpose  of  this 

Directive;  whereas  it  is  not,  however,  appropriate  to  refer  to  the 

weightings  or  degrees  of  risk  set  out  by  Directive  89/647/EEC;  whereas 

these weightings and  degrees of  risk  have  been  devised  in order  to set  up a 

general  solvency  requirement  to  cover  the  credit  risk  of  credit 

institutions;  whereas  in  the  framework  of  regulating  large  exposures,  the 

purpose  is  to  limit  the  maximum  potential  loss  that  a  credit  institution 

may  incur  through  a single  client  or  a group  of  related  clients; whereas  it 

is  therefore  appropriate  to  adopt  a  prudent  approach  consisting  of  taking 

account  of  the  nominal  value  of  exposures,  without  application  of  any 

weightings or  degree of  risk; 

Whereas  when  a  credit  institution  has  an  exposure  to  its  own  parent 

undertaking,  or  to other  subsidiaries of  its parent  undertaking, particular 

prudence  is  Justified;  whereas  the  management  of  exposures  incurred  by 

credit  institutions must  be  carried  out  in a  fully  autonomous  manner,  with 

respect  to  the  principles  of  sound  banking  management,  without  regard  to 

any other  considerations beyond  these principles; whereas  the provisions  of 

the  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  and 

amending  Directive  77/780/EEC,  require  that  where  the  influence  exercised 

by  persons  holding  a  qualifying  participation  in  a  credit  institution 

directly  or  indirectly  is  likely  to  operate  to  the  detriment  of 

1 

2 

OJ  No L  372, 31.12.1986,  p.  1. 

OJ  No L  386, 30.12.1989, p. 14. 

-  22  -

the  prudent  and  sound  management  of  the  institution,  the  competent 

authorities  shall  take  appropriate  measures  to  put  an  end  to  that 

situation;  whereas  in  the  large  exposures  field,  it  is  justified  to  insert 

specific  rules  with  respect  to  an  exposure  held  by  a  credit  institution  on 

its  own  group,  and  in  such  cases  more  stringent  limitations  are  justified 

for  such  exposures  than  for  other  exposures;  whereas  this  more  stringent 

limitation  must  however  not  be  applied  when  the  parent  undertaking  is  a 

financial  holding  company  or  a  credit 

institution,  and  the  other 

subsidiaries  which  are  either  credit  or  financial 

institutions,  or 

undertaking  offering  ancillary  banking  services,  to  the  extent  that  all 

these  undertakings  are  included  in  the  supervision  on  a  consolidated  basis 

of  the  credit  institution;  whereas  in  that  case,  the  supervision  on  a 

consolidated  basis  of  the  group  allows  sufficiently  efficient  supervision, 

without  the  imposition  of  more  stringent  limits  on  exposure  being  needed; 

whereas  under  this  approach,  banking  groups  will  also  be  encouraged  to 

organize  their  structure  in such  a way  as  to make  consolidated  supervision 

possible,  which  is a  desirable  result  because  it  allows more  comprehensive 

supervision  to be  carried  out; 

Whereas  it  is necessary  to provide  for  a  two-stage  application of  the  limit 

of  25%  of  own  funds  in  the  case  of  the  particular  categories  of  credit 

institution  referred  to  in  Article  4(2)  of  Directive  89/646/EEC;  whereas, 

the  own  funds  of  such  institutions  being  limited,  a  single-stage 

application  of  the  25%  rule  would  reduce  their  lending  activity  too 

abruptly; 

Whereas  implementing  powers  of  the  same  nature  as  those  which  the  Council 

reserved  for  itself  in  Directive  89/299/EEC  of  17  April  1989  on  the  own 
funds  of  credit  institutions1  were  granted  to  the  Commission  in  Directive 

89/646/EEC; 

1 

OJ  No L  124, 5.5.1989,  p. 16. 

-  23  -

Whereas,  taking  account  of  the  specific  characteristics  of  the  sector  in 

question,  it  is  appropriate  to  give  the  committee  provided  for  in Article 

22 of  Directive 89/646/EEC  the  role of  assisting  the Commission  in carrying 

out  the  responsibilities granted  to  it according  to  the  rules  of  procedure 

laid 

down 

in  Article  2,  Procedure  III,  Variant 

(a)  of 

Council 

Decision 87/373/EEC  of  13 July  1987  laying  down  the  procedures  for  the 
exercise of  implementing  powers conferred  on  the  Commission1, 

HAS ADOPTED THIS  DIRECTIVE: 

1 

OJ  NO L  197, 18.7.1987, p. 33. 

- 24 -

Artlçlo 1 

Definitions 

For the purpose of this Directive: 

(a)  "credit  institution"  means  a  credit  institution  as  defined  in  the 

first  indent  of  Article 1  of  Directive 77/780/EEC  and  includes 

branches of  such  institutions  in third  countries  and  all  private or 

public  undertakings,  including  their  branches,  which  satisfy  the 

definition 

given 

in  the 

first 

indent 

of 

Article 1  of 

Directive 77/780/EEC  and  which  have  been  authorized  in  a  third 

country; 

(b)  "competent  authorities" means the competent authorities as defined  in 

the  ninth  indent  of  Article 1  of  Directive  ...  (supervision  on  a 

consolidated basis); 

(c)  "parent  undertaking"  means  a  parent  undertaking  as  defined  in 

Articles 1 and 2 of Council Directive 83/349/EEC1; 

(d)  "subsidiary undertaking" means a subsidiary undertaking as defined in 

Articles 1 and  2 of  Directive 83/349/EEC; any  subsidiary  undertaking 

of a subsidiary undertaking shall be deemed  to be a subsidiary of the 

parent undertaking which  is at the head of those undertakings; 

(e)  "financial  holding  company"  means  a  financial  holding  company  as 

defined  in the third  indent of Article 1 of Directive  ... (supervision 

on a consolidated basis); 

1  OJ No L 193, 18.7.1983, p. 1. 

-  25 -

(f)  "financial  institution"  means  a  financial  institution  as  defined  in 

the sixth  indent  of Article  1 of  Directive  89/646/EEC; 

(g)  "ancillary  banking  services undertaking": an undertaking  as defined  in 

Article  1,  fifth  indent,  of  Directive 

(supervision  on  a 

consolidated  basis); 

(h)  "exposures"  means:  the  assets  and  off-balance-sheet  items  listed  in 

Article  6  of  Directive  89/647/EEC  and  in  Annexes  I and  III  thereto, 

without  application  of  the  weightings  or  degrees  of  risk  set  out  in 

those  provisions;  the  risks mentioned  in Annex  III  must  be  calculated 

in  accordance  with  the  method  set  out  in Annex  II  to  that  Directive, 

without  application  of  the  weightings  for  counterparty  risk;  the 

underwriting  commitments  for  the  issue  of  securities  are  included, 

subject  to  deduction  of  the  shares  transferred  to  other  credit  or 

financial  institutions; 

(i)  "Zone A"  means  the  zone  defined  in  the  second  indent  of  Article  2 of 

Directive  89/647/EEC; 

(J)  "Zone  B"  means  the  zone  defined  in  the  third  indent  of  Article  2  of 

Directive  89/647/EEC; 

(k)  "own  funds"  means  the  own  funds  of  a  credit  institution  within  the 

meaning  of  Directive 89/299/EEC; 

-  26 -

(I)  "power  of  control" means  the  relationship between  a parent  undertaking 

and  a  subsidiary,  as  defined  in  Articles  1  and  2  of  Directive 

83/349/EEC,  or  a  similar  relationship  between  any  natural  or  legal 

person  and  an undertaking; 

(m)  "group  of  connected  clients"  means  two  or  more  persons,  whether 

natural  or  legal,  who,  until  proven  otherwise,  constitute  a  single 

risk because: 

(i)  either  one  of  them  holds,  directly  or  indirectly,  power  of 

control  over  the other  or others, or 

(II) they  are  so  interconnected  that,  if  one  of  them  were  to 

experience  financial  problems,  the other  or  all  of  them  would  be 

likely 

to 

encounter 

repayment 

difficulties. 

Such 

interconnections  to  be  taken  into  consideration  include  in 

particular: 

common  ownership; 

common  directors; 

cross guarantees; 

direct 

commercial 

interdependence 

which 

cannot 

be 

substituted  in the short  term. 

- 27 -

Artie»* Z 

Scope 

Subject  to paragraph 2, this Directive  shall  apply  to credit  institutions 

which  have  obtained  the  authorization  referred  to  in  Article 3  of 

Directive 77/780/EEC. 

However, Member States need not apply this Directive to: 

(a)  credit  institutions  listed  in Article 2(2) of Directive 77/780/EEC; 

(b)  institutions  in  the  same  Member State  which,  as  defined  in 

Article 2(4)(a) of  Directive 77/780/EEC, are  affiliated  to a central 

body  in  that  Member State.  In  that  case, without  prejudice  to  the 

application  of  this  Directive  to  the  central  body,  the  whole  -

constituted by the central body and  its affiliated  institutions - must 

be the subject of global supervision with regard to large exposures. 

- 28 -

Article ? 

Reporting of  large exposures 

1.  A  report  of  every  large  exposure  within  the  meaning  of  paragraph 2 

shall be made by the credit  institution to the competent authorities. 

Member  States  shall  provide  that  this  reporting  is carried  out  at 

their discretion, in accordance with one of the following two methods: 

notification of all  large exposures at  least once a year, backed 

up by communication during the year of  any modifications to the 

annual notification; 

notification of all  large exposures at  least four times a year. 

2.  An exposure of a credit  institution to a client or group of connected 

clients  Is considered  to  be  a  "large  exposure"  where  its  value  is 

equal  to or exceeds 10% of own funds. 

-  29  -

Article  4 

Limits on  large  exposures 

1. 

Credit  institutions may  not  incur  an  exposure  to  a  client  or  group  of 

connected  clients where  its value exceeds  25% of  own  funds. 

2. 

Where  that  client  or  group  of  connected  clients  is  the  parent 

undertaking  of  the  credit  institution  and/or  one  or  more  subsidiaries 

of  that  parent  undertaking,  the percentage  provided  for  in paragraph 1 

shall  be  reduced  to 20%. 

3. 

Credit  institutions  may  not  incur  large  exposures  which,  in  the 

aggregate, exceed  800% of  own  funds. 

4. 

Member  States may  impose  more  stringent  rules  than  those  laid  down  in 

paragraphs  1, 2 and  3. 

5. 

The  limits  referred  to  in  paragraphs  1,  2  and  3  shall  be  observed  at 

all  times  by  the  credit  institution.  They  may  be  exceeded  only  in 

exceptional 

circumstances  and, 

in  such  cases,  the 

competent 

authorities  shall  fix  a  deadline  within  which  the  credit  institution 

must  regularize  its situation. 

6. 

Member  States  may  fully  or  partially  exempt  from  the  application  of 

paragraph  2  exposures  incurred  by  the  credit  institution  to  a 

financial  holding  company  which  is  its parent  undertaking  and  to other 

subsidiaries of  that  financial  holding  company,  provided  that: 

a) 

the  financial  holding  company  is  included  in the  supervision  on a 

consolidated  basis  of  the  credit 

institution  exercised  in 

accordance  with  Directive  ....  (supervision  on  a  consolidated 

basis); 

-  30 -

b) 

those  other  subsidiaries  are  credit  institutions,  financial 

institutions or undertakings  providing  ancillary  banking  services 

and  are  included  in  the  consolidated  supervision  of  the  credit 

institution  exercised 

in  accordance  with  Directive 

(supervision on a consolidated  basis). 

7. 

Member  States  may  fully  or  partially  exempt  from  the  application  of 

paragraphs  1, 2 and  3 exposures  incurred  by  the credit  institution  to: 

a) 

its parent  undertaking, provided  that  the parent  undertaking  is a 

credit  institution subject  to supervision on a consolidated  basis 

exercised  in  accordance  with  Directive  ....  (supervision  on  a 

consolidated  basis)  or  to  equivalent  standards  in  force  in  a 

third  country; 

b) 

subsidiaries,  provided  that  those  subsidiaries  are  credit 

institutions,  financial  institutions  or  undertakings  providing 

ancillary  banking  services  and  are  included  in  the  consolidated 

supervision  of  the  credit  institution  exercised  in  accordance 

with  Directive  ....  (supervision on  a consolidated  basis). 

8. 

Member  States  may  fully  or  partially  exempt  the  following  exposures 

from  the application of  paragraphs  1, 2 and  3: 

a) 

asset  items constituting  claims on  Zone A central  governments  and 

central  banks; 

b) 

asset  items constituting  claims on  the European  Communities; 

c) 

asset  items  constituting  claims  carrying  the  explicit  guarantees 

of  Zone A  central  governments  and  central  banks  or  of  the 

European Commun 11 i es ; 

-  31  -

d) 

other  exposures  attributable  to, or  guaranteed  by,  Zone A  central 

governments  and  central  banks or  the European  Communities; 

e) 

asset  items which  constitute  claims on  Zone B central  governments 

and  central  banks,  and  which  are  denominated  and  funded  in  the 

national  currencies of  the borrowers-, 

f) 

asset  items  secured,  to  the  satisfaction  of  the  competent 

authorities,  by  collateral 

in  the  form  of  Zone A  central 

government  or  central  bank  securities or  securities  issued  by  the 

European  Commun i t i es ; 

g) 

asset  items  secured,  to  the  satisfaction  of  the  competent 

authorities,  by  collateral  in  the  form  of  cash  deposits  placed 

with  the  lending  institution  or  with  a  credit  institution  which 

is the parent  undertaking  of  the  lending  institution-, 

h) 

asset  items  secured,  to  the  satisfaction  of  the  competent 

authorities,  by  collateral  in  the  form  of  certificates  of 

deposits  Issued  by  and  lodged  with  the  lending  institution; 

i)  asset  items  constituting  claims  and  other  exposures  on  credit 

institutions,  with  a  maturity  of  one  year  or  less,  but  not 

constituting  such 

institutions'  own  funds  as  defined  in 

Directive  89/299/EEC; 

J) 

bills  of  trade  and  other  bills,  with  a  maturity  of  one  year  or 

less,  bearing  the  signature  of  another  credit  institution  and 

accepted  for  refinancing  by  a central  bank-, 

k) 

bonds  defined  in Article  22(4) of  Council  Directive  85/611/EEC1; 

1 

OJ  No L 375, 31.12.1985, p. 3. 

-  32 -

I)  asset  items  constituting  claims  on  regional  or  central  credit 

institutions with  which  the  lending  institution  is associated  as 

part  of  a network  by  virtue  of  legal  or  statutory  provisions  and 

which  are  responsible,  in  accordance  with  those  provisions,  for 

cash  clearing  operations  within  the  network. 

9. 

Member  States  may,  for  the  purposes  of  paragraphs  1,  2 and  3, apply  a 

weighting  of  20%  to  asset  items  constituting  claims  on  regional  and 

local  authorities  in  the Member  States  and  to other  exposures  to  such 

authorities or  guaranteed  by  them;  however,  subject  to  the  conditions 

laid  down  in  Article 7  of  Directive 89/647/EEC,  Member  States  may 

reduce  this rate  to 0% . 

10.  Where  an  exposure  to  a  client  is  guaranteed,  to  the  satisfaction  of 

the  competent  authorities,  by  a  third  party,  Member  States  may  deem 

the exposure  to have  been  incurred  to  that  third  party  and  not  to  the 

cllent. 

-  33 -

Article g 

Supervision on a consolidated or unconsolidated basis 

1. 

If  the  credit  institution  is  neither  a  parent  undertaking  nor  a 

subsidiary, compliance with  the obligations set out  in Articles 3 and 

4 shall be supervised on an unconsolidated basis. 

2. 

If the credit  institution  is a parent undertaking, compliance with  the 

obligations  set  out  in  Articles 3  and  4  shall  be  supervised  on  a 

consolidated  basis  in accordance  with  Directive 

(supervision  on 

a consolidated basis). 

3.  The  competent  authorities  responsible  for  authorizing  and  supervising 

a  credit  institution  which  is a  parent  undertaking  may  also  require 

the credit  institution, together  with  any of  its subsidiaries  subject 

to  authorization  and  supervision  by  them,  to  comply  with  the 

obligations  set  out  in  Articles 3  and  4  on  a  subconsol idated  or 

unconsolidated  basis.  Where  such  monitoring  of  the  satisfactory 

allocation of  risks within  a banking  group  is not  carried  out, other 

measures shall be taken to that end. 

4.  Where  the  subsidiary  of  a  parent  undertaking  which  is  a  credit 

institution has been authorized  in another Member  State, the competent 

authorities  which  granted  that  authorization shall  require  compliance 

with  the obligations  set out  in Articles 3 and 4 on  an unconsolidated 

basis or,  if appropriate, subconsolidated. 

-  34 -

5. 

Notwithstanding paragraph  4, the competent  authorities responsible  for 

authorizing  the subsidiary of a parent  undertaking  situated  in another 

Member  State  may,  by  way  of  a  bilateral  agreement,  delegate 

responsibility  for supervising  compliance with  the obi I gat ions set out 

In Articles 3 and 4 to the competent  authorities which  have  authorized 

and  which  supervise  the  parent  undertaking.  The  Commission  and  the 

Banking  Advisory  Committee  shall  be  kept  informed  of  the  content  of 

such agreements. 

- 35 -

Article  S 

Transitional provisions relating to exposures 

in excess of the limits 

1.  Where,  at  the  time  of  the  publication  of  this  Directive  in  the 

Official Journal of the European Communities, a credit  institution has 

already  incurred an exposure or  exposures exceeding either  the  large 

exposure  limit or  the aggregate  large exposure  limits, as referred to 

In  Article 4,  the  competent  authorities  shall  require  the  credit 

institution  to  take  steps  to  have  the exposure  or  exposures  of  the 

credit  institutions concerned brought  into line with the provisions of 

this Directive. 

2.  The  process  of  having  the  exposure  or  exposures  brought  into  line 

shall be devised, adopted, implemented and completed within the period 

deemed  by  the  competent  authorities  to  be  consistent  with  the 

principle of sound administration and fair competition.  The competent 

authorities  shall  inform  the  Commission  and  the  Banking  Advisory 

Committee of the schedule for the general process adopted. 

3.  Credit  institutions may only take advantage of the period specified in 

paragraph  2  to  the  extent  that  it  does  not  take  any  measure  which 

would cause the exposures to exceed the  level existing at the date of 

the  publication  of  the  Directive  in  the  Official  Journal  of  the 

European Communities. 

4.  The period  applicable under  paragraph 2 may not exceed  five years as 

from 1 January  1993.  However, loans with a  longer maturity for which 

the  lending  credit  institution  is bound  to  respect  the  contractual 

terms, may be continued until their maturity. 

-  36  -

5. 

For  a  period  not  exceeding  five years  starting  from  1  January  1993, 

Member  States  may  increase  the  limit  laid  down  in Article  4(1)  to 40% 

in  the  case  of  credit  institutions  belonging  to  the  particular 

categories  referred  to  in  Article  4(2)  of  Directive  89/646/EEC.  In 

such  cases,  the  period  referred  to  in paragraph  4  shall  be  reduced  to 

three  years  and  shall  commence  on  expiry  of  the  period  referred  to  in 

this  paragraph.  The  Member  States  concerned  shall 

notify 

the 

Commission  and  the  Banking  Advisory  Committee  of  the  reasons  which 

have  led  them  to  make  use  of  this  option  and  of  the  steps  they  have 

taken  to  bring  the  excess  exposures  into  line  with  the  limits  laid 

down. 

-  37 -

Article 7 

Subsequent  amendments 

1.  Technical  amendments  to  the  following  points  shall  be  adopted  in 

accordance with the procedure set out  in paragraph 2: 

adaptation  of  definitions  to  take  account  of  developments  on 

financial markets; 

clarification  of  definitions  to  ensure  uniform  application  of 

this Directive; 

alignment  of  the  terminology  and  of  the  wording  of  the 

definitions  on  those  contained 

in  subsequent 

instruments 

concerning credit  institutions and related matters; 

the frequency  referred  to  in Article 3(1); 

clarification  or  extension  of  the  exemptions  provided  for  in 

Article 4(5) to (9); 

the period  referred  to  in Article 6(4). 

2. 

The Commission  shall  be assisted  by  the committee  provided  for  in the 

first subparagraph of Article 22(2) of Directive 89/646/EEC. 

-  38 -

The  representative of  the Commission  shall  submit  to  the  committee  a draft 

of  the  measures  to  be  taken.  The  committee  shall  deliver  its opinion  on 

the  draft  within  a  time  limit  which  the  chairman  may  lay down  according  to 

the urgency  of  the matter.  The opinion  shall  be  delivered  by  the majority 

laid  down  in Article  148(2) of  the  Treaty  in  the  case  of  decisions  which 

the  Council  is  required  to  adopt  on  a  proposal  from  the  Commission.  The 

votes  of  the  representatives  of  the  Member  States  within  the  committee 

shall  be  weighted  In  the  mannner  set  out  in  that  Article.  The  chairman 

shalI  not  vote. 

The Commission  shall  adopt  the measures envisaged  if they  are  in accordance 

with  the opinion of  the  committee. 

If  the  measures  envisaged  are  not  in  accordance  with  the  opinion  of  the 

committee,  or  if  no  opinion  is  delivered,  the  Commission  shall,  without 

delay,  submit  to  the  Council  a  proposal  relating  to  the  measures  to  be 

taken.  The Council  shall  act  by a qualified majority. 

If, on  the expiry of  three months  from  the date of  referral  to the Council, 

the  Council  has  not  acted,  the  proposed  measures  sha11  be  adopted  by  the 

Commission. 

-  39 -

Article  9 

Final  provisions 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and 

administrative  provisions  necessary  to  comply  with  the  provisions  of 

this  Directive  on  1 January  1993.  They  shall  forthwith  inform  the 

Commission  thereof. 

When  Member  States  adopt  these  provisions,  these  shall  contain  a 

reference  to  this  Directive  or  shall  be  accompanied  by  such  reference 

at  the  time  of  their  official  publication.  The  procedure  for  such 

reference  shall  be adopted  by Member  States. 

2. 

Member  States  shall  communicate  to  the  Commission  the  texts  of  the 

main  provisions of  national  law which  they  adopt  in the  field  governed 

by  this Directive. 

- 40 -

Article  9 

This Directive  is addressed  to the Member  States 

Done at Brussels, 

For  the Council 
The President 

-  41  -

FINANCIAL  STATEMENT 

The  proposal  will  not  entail  any  costs  for  the  European  Communities' 

budget. 

- 42 -

COMPETITIVENESS AND EMPLOYMENT  IMPACT STATEMENT 

I.  What  is the main reason for  Introducing the measure? 

The main reason for  introducing the measure  is to improve and reinforce the 

supervision  of  credit  institutions  in  the  Community  as  regards  risk 

concentration. 

II.  Features of the businesses  In Question 

The  proposal  concerns  credit  institutions,  i.e.  a  regulated  category  of 

enterprises. 

Given  the  minimum  initial  capital  and  own  funds  amounts  laid  down  in 

Articles 4 and 10 of Directive 89/646/EEC, it is doubtful whether there are 

many SMEs among the credit  institutions concerned. 

There  is no regional concentration. 

III. What direct obligations does this measure  impose on businesses? 

The  proposal  imposes  on  the  enterprises  concerned,  namely  credit 

institutions,  the  obligation  to  report  their  large  exposures  to  the 

competent  authorities  and  to  limit  those  large  exposures  to  a  given 

proportion of  their  own  funds  (25% for  an  individual  exposure, 800% for 

their aggregate  large exposures). 

IV.  What  indirect  obligations  are  local  authorities  likely  to  Impose on 

businesses? 

No  obligations  are  likely  to  be  imposed  by  local  authorities  on  the 

businesses concerned. 

-  43 -

V. 

Are  there any special  measures  in respect  of  SMEs? 

The  proposal  seeks  to  improve  the  supervision  of  a  regulated  category  of 

enterprise  (credit  institutions);  it  does  not  therefore  involve  SMEs  in 

any  way.  Furthermore,  as  the  proposal  is  designed  to  limit  the  large 

exposures  of  credit  institutions,  it  is  unlikely  that  it  will  have  the 

effect  of  limiting  the exposures  incurred  by credit  institutions  to SMEs. 

VI.  What  Is the  likely effect  on: 

(a)  the competitiveness of  businesses? 

(b)  employment? 

(a)  As  the  proposal  is  designed  to  introduce  fuller  supervision  of  the 

activities  of  credit  institutions,  the  danger  of  such  institutions 

failing  should  be  reduced,  which  can  have only  a beneficial  impact  on 

their  performance  and  on  the  stability  of  economic  and  financial 

activity  in general. 

(b)  No effect  on employment  is anticipated. 

VII. Have  employers'  and  employees'  representatives  been  consulted?  What 

are  their  views? 

Employees'  representatives  were  informed  of  the  Commission's  intention  to 

draw up  this proposal, which will  have no  impact  on  their  situation. 

As  far  as  the  business  sector  is  concerned,  informal  consultations  have 

been  held  with  the  Banking  Federation  of  the  European  Community,  the 

Savings  Banks Group  of  the  European  Economic  Community,  the Association of 

Cooperative Banks of  the EC and  the European Community  Mortgage  Federation. 

These  trade  associations  generally  accept  the  principle  of  legislation 

governing  large exposures. 

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