Proposal for a European Parliament and Council Directive amending Council Directive 89/647/EEC on a solvency ratio for credit institutions
Date: 1996-01-24
Institutions: European Commission
Subjects: clearing agreement, competition, credit institution, exchange rate, financial solvency, interest

COMMISSION OF THE EUROPEAN COMMUNITIES 

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Brussels,  24.01.1996 
COM(95)  709  final 

96/0003  (COD) 

Proposal  for a 
EUROPEAN  PARLIAMENT  AND  COUNCIL  DIRECTIVE 

amending  Council  Directive  89/647/EEC on  a solvency  ratio 
for  credit institutions 

(presented by the  Commission) 

EXPLANATORY  MEMORANDUM 

h 

INTRODUCTION 

The purpose of this proposal  is to amend Directive  89/647/EEC on a solvency  ratio for  credit 
institutions. 

tt 

EXAMINATION  OF THE ARTICLES  OF THE PROPOSAL FOR A  DIRECTIVE 

Article  1: new  subparagraph  in  Article  6(l)(c)(l) 

This  allows  mortgage-backed  securities  to be treated  in  the  same  way  as the  mortgage  loans 
referred  to in Articles  6 and  11 from  the point of view of the risk  weighting. As the Directive 
stands at present, the risk on these  securities is weighted  at  100% and it is desirable 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. 

Article  2:  new  wording  of  Article  11(4) 

The  existing  provision  allows  only  four  Member  States  (Denmark,  Germany,  Greece  and 
Austria) to weight  certain  commercial  mortgage loans at  50% (instead of  100%) and to do so 
until  Î  January  1996:  the  amendment  extends  this  possibility  to  all  Member  States  for  a 
further  five  years,  until  1 January  2001. During  this  period,  an  improvement  is  desirable  in 
the  statistics  relating  to  rates of  default  and rates of  losses on  loans secured by  mortgages on 
residential  and non-residential  immovable  property,  so that the  situation  can be reassessed  at 
the  end  of  the  period  and  if  necessary  a definitive  solution  can  be  found. 

The  property  must  be  situated  within  the  territory  of  the  Member  States  which  accord  the 
more favourable  weighting of  50%, in order to limit possible distortions of competition  which 
might  arise  in  the  Member  States that  do  not  apply  this  weighting.  Certain  conditions  of  a 
prudential  nature  have been  added  to  ensure that  the  mortgage  loan  is repaid  and  to  rule  out 
loans to property  developers:  in particular  the property  must be  either  actively  used  or  let by 
the  owner,  and,  in  the  latter  case, the  rental  income  must  be  secured  so  that  it  is  always  in 
keeping  with  the  value  attributed  to  the  property  in  order  to  operate  the  weighting. 

The  extension  is  justified  on  the  grounds  that  the  ending  of  the  favourable  weighting  of 
commercial  mortgage  loans  on  1 January  1996  would  have  adverse  macroeconomic 
consequences  in the four  countries  concerned,  with  prices  increasing  by  an  estimated  0.25%. 
The  equality  of  conditions  of  competition  is  a  reason  for  allowing  all  Member  States  to 
weight  the  credits  in question  at  50%, but  the competent  authorities  are not  obliged  to  apply 
the  said  weighting  if they  do not  consider  it necessary.  The national  authorities  may  always 
be  stricter  than  is  envisaged  by  the  Directive  on  the  solvency  ratio,  as  amended  by  this 
proposal. 

Proposal  for  a 
EUROPEAN  PARLIAMENT  AND  COUNCIL  DIRECTIVE 

amending  Council  Directive  89/647/EEC  on  a solvency  ratio 
for  credit  institutions 

(Text  with  EEA  Relevance) 

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  57(2)  thereof, 

Having  regard  to  the  proposal  from  the  Commission0) , 

Having  regard  to  the  opinion  of  the  Economic  and  Social  Committee(2), 

Acting  in  accordance  with  the  procedure  referred  to  in  Article  189b of  the  Treaty(3), 

Whereas  mortgage-backed  securities  may  be 
in 
Article  6(l)(c)(l)  and  Article  11(4)  of  Council  Directive  89/647/EEC(4)  if  the  competent 
authorities consider that they are entirely  equivalent  in the light of the credit risk; whereas the 
issuer  of  such  securities  must  be  legally  and  economically  independent  in  relation  to  the 
original  mortgage  lender; 

loans  referred 

treated  as 

the 

to 

Whereas  Article  11(4)  of  Directive  89/647/EEC  provides  for  a  derogation,  on  certain 
conditions,  for  four  Member  States,  from  Article  6(l)(c)(l),  as  regards  the  weighting  to  be 
applied  to assets secured  by  mortgages on offices  or  on multi-purpose  commercial  premises, 
whereas  this  derogation  expired  on  1 January  1996; 

Whereas when Directive  89/647/EEC was adopted, the Commission undertook to examine this 
transitional  provision  to  determine  whether,  in  the  light  of  its  findings  and  of  international 
developments  and  in view of  the  need  to  avoid  distortions  of  competition,  it  considered  that 
there was a case for  amending this provision  and, if so, to put forward  appropriate  proposals, 
whereas the results of the study  relating to this provision, although  not absolutely  conclusive, 
show  that  there  is  no  significant  difference  between  the  rates  of  losses  recorded  in  the 
Member  States covered by the derogation  and in those not so covered; whereas, therefore,  this 
derogation  can  be  extended  to  all  Member  States  which  so  wish  for  a  period  of  five  years; 
whereas  the property  to  which  the  mortgage  relates  must  be  subject  to  rigorous  assessment; 
whereas the property  must be either occupied  or  let by the owner;  whereas  in the latter  case, 
the  rental  income  must  be  secured  to  the  satisfaction  of  the  competent  authorities;  whereas 
loans  for  property  development  are  excluded  from  this  provision; 

Whereas  this  Directive  is the  most  appropriate  means of  attaining  the  objectives  sought  and 
is  limited  to  the  minimum  required  to  attain  those  objectives  and  does  not  exceed  what  is 
necessary  for  this  purpose; 

(i) 

(2) 

(3) 

(4) 

OJ  No C 
OJ No  C 
Opinion  of the European  Parliament of 
of 
the  Council  of 
European  Parliament  of 
OJ  No  L  386, 30.12.1989,  p.  14, as last  amended  by  Directive  ...  (contractual  netting). 

), common  position 
the 

)  and  Decision  of 

(OJ  No  C 

(OJ  No  C 

(OJ  No  C 

). 

, 

, 

, 

Whereas  this  Directive  concerns  the  European  Economic  Area  (EEA)  and  the  procedure  of 
Article  99  of  the  EEA  Agreement  has  been  complied  with; 

Whereas  the  Banking  Advisory  Committee  has  been  consulted  on  the  adoption  of 
this  Directive, 

HAVE  ADOPTED  THIS  DIRECTIVE: 

Article 1 

Directive  89/647/EEC  is  amended  as  follows: 

1. 

The  following  subparagraphs  are  added  to  Article  6(l)(c)(l): 

"mortgage-backed  securities  which  may  be  treated  as  the  loans  referred  to  in  the 
first  subparagraph of this point or in Article  11(4), if th£ competent authorities  consider, 
given the legal framework  in force  in each Member  State, that they are equivalent in the 
light  of  the  credit  risk. 

/ 

The  authorities  must  in  oarticular  be  satisfied  that: 

(i) 

(ii) 

such  securities  are fully  and  directly  backed  by a pool  of mortgages  which  are of 
the  same  nature  as  those  defined  in  the  first  subparagraph  of  this  point  or  in 
Article  11(4)  md  are  fully  performing  when  the  mortgage-backed  securities  are 
created; 

^ 

a  first  charge  on  the  underlying  mortgage  assets  is  held  directly  by  investors  in 
mortgage-backed  securities,  or  in their  name  by  a trustee, in the same  proportion 
as theirjhpldings  bear  to  the  securities  they  hold;  when  the  trustee  exercises  the 
first  charge, he  does  so  on  behalf  of  these  investors;" 

2.  Article  11(4) is  replaced  by  the  following: 

"4.  Until  1  January  2001  the  competent  authorities  of  the  Member  States  may 
authorize their  credit  institutions to apply  a 50% risk  weighting to loans fully  and 
completely  secured  to  their  satisfaction  by  mortgages  on  offices  or  on  multi 
purpose commercial  premises situated  within the territory  of those Member  States 
that  allow the  50% risk weighting.  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,  and the property  must  be 
either  used or let by the owner;  in the latter  case, the rental  value must be secured 
to  the satisfaction  of  the  competent  authorities  at  least  at a level  envisaged  in  the 
assessment  of  the  value  of  the  property. 

The  first  sentence  of  the  first  subparagraph  does  not  exclude  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." 

Article  2 

1.  Member  States shall bring into force the laws, regulations  and administrative  provisions 
necessary  for  them  to  comply  with  this  Directive  by  31  December  1997.  They  shall 
immediately  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  text  of  the  provisions  of 

national  law  which  they  adopt  in the  field  covered  by  this  Directive. 

Article 3 

This Directive shall enter into force  on the day of its publication  in the Official  Journal  of the 
European  Communities. 

This  Directive  is  addressed  to  the  Member  States. 

Article 4 

Done  at  Brussels, 

For  the  European  Parliament 
The President 

For  the  Council 
The  President 

IMPACT ASSESSMENT  FORM THE IMPACT OF THE PROPOSAL ON 
COMPETITIVENESS  AND  EMPLOYMENT 

I.  What  is  the  main justification  for  the  measure? 

It  reduces the  credit  risk  weighting  to  be  applied  to  certain  assets,  where  the  risk  does 
not  correspond  to  the  present  weighting. 

II.  Characteristics  of  the  enterprises  concerned 

The  enterprises  concerned  by  this  Directive  are  the  credit  institutions  of  the 
European  Union. 

III.  What  are the  obligations  imposed  directly  on  enterprises? 

The  proposal  imposes  no  new  obligation  on  enterprises. 

IV.  What  are  the  obligations  likelv  to  be  imposed  indirectlv  on  enterprises  by  the  local 

authorities? 

None. 

V.  Are  there  special  measures  for  SMEs?  If  so, what  kind  of  measures? 

None. 

VI.  What  is the  foreseeable  effect 

(a) 

on  the  competitiveness  of  firms? 

(b)  on  employment? 

(a)  The  aim  of  certain  articles  of  the  proposal  is  to  grant  more  favourable 
treatment  to  certain  asset  items  constituting  claims  in  relation  to  the 
solvency  ratio.  Since  the  own  fund  requirements  are  lower,  for  the  same 
balance  sheet,  the  hope  is that  the  capital  liberated  in this  way  can be  used 
to  increase  credits  to  enterprises  and  to  reduce  their  refinancing  costs. 

In  addition,  the  extension  of  Article  11(4) to  all  Member  States  and  for  an 
additional transitional period  may favour  economic growth, in that  mortgage 
loans  on  property  for  office  and/or  commercial  use  can  be  made  at  lower 
interest  rates. 

(b)  The  effects  on  employment  are  confined  to  the  consequences  on  the 
increased  capacity  to  grant  additional  loans  which  may  result  from  the 
proposed  measures. 

VII.  Have  the  social  partners  been  consulted?  What  is  their  opinion? 

No.  The  proposed  measures  have  a  direct  effect  only  on  the  prudential  legislation  of 
credit  institutions,  which  are  not  required  to  consult  the  social  partners. 

ISSN 0254-1475 

COM(95) 709  final 

DOCUMENTS 

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Catalogue number  :  CB-CO-95-776-EN-C 

ISBN 92-77-99231-X 

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