Opinion of the European Monetary Institute on a consultation from the Council of the European Union under Article 109f (6) of the Treaty establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI; on a Commission proposal for a European Parliament and Council Directive to amend Council Directive 89/647/EEC on a solvency ratio for credit institutions (the “SRD”) (CON/96/07)
Date: 1996-09-24
Institutions: European Monetary Institute
Subjects: credit institution, financial solvency, mortgage

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  from  the  Council  of  the  European  Union  under  Article  109f  (6)  of  the  Treaty

establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI;

on  a  Commission  proposal  for  a  European  Parliament  and  Council  Directive  to  amend  Council

Directive 89/647/EEC on a solvency ratio for credit institutions (the “SRD”).

CON/96/07

1.

The  present  consultation  was  initiated  by  means  of  a  letter  sent  on  behalf  of  the  Secretary

General  of  the  Council  of  the  European  Union,  addressed  to  the  President  of  the  EMI  and

received  on  15th  July  1996,  and  relates  to  the  proposal  for  a  directive,  prepared  by  the

Commission (reference COM (95) 709 final) and communicated to the Council of the European

Union by means of a letter dated 28th February 1996.

References  in  this  opinion  to  the  text  of  the  proposal  refer  to  document  reference  COM  (95)

709 final.

2.

The  EMI  notes  that  the  purposes  of  the  proposal  are  twofold.    First,  to  allow  competent

authorities to treat mortgage backed securities in the same way as loans secured by mortgage

against  residential  property  from  the  point  of  view  of  risk  weighting  for  capital  adequacy

purposes  (amendment  to  Article  6,  paragraph  1  (c),  item  1  of  the  SRD).    Second,  to  permit

competent  authorities  to  risk  weight  certain  commercial  mortgage  loans  at  50%  rather  than

100% for the period until 1st January 2001 (previously competent authorities were required to

risk  weight  such  loans  at  100%,  apart  from  the  competent  authorities  of  Denmark,  Germany,

Greece and Austria which had been permitted, until 1st January 1996, to apply a risk weighting

of 50% to loans secured against commercial property situated in one of those countries - Article

11 (4) of the SRD).  The EMI also notes that there is no compulsion placed on Member States

to adopt either of the amendments represented by the proposal.

3.

The EMI considers that it is competent to give an opinion in relation to the proposal.  Article

109f (6) of the Treaty and Article 5.3 of the EMI Statute provide for consultation of the EMI by

the Council on any proposed Community act within the field of competence of the EMI.  The

present proposal relates to the field of competence of the EMI: it concerns the supervision of

credit  institutions,  being  an  area  which  falls  within  the  competence  of  a  number  of  national

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central banks, and it will have a potential impact upon the stability of financial institutions and

financial markets (Article 4.1, fourth indent of the EMI Statute).

4.

The EMI notes the two proposed amendments referred to in paragraph 2 above and the fact that

they  will  each  have  the  effect  of  reducing  the  minimum  requirements  for  the  maintenance  of

capital  against  certain  assets,  compared  with  the  SRD  as  presently  in  effect.    The  EMI  also

notes  that  the  Commission  considers  that  the  amended  capital  requirements  represented  by

these  proposals  will  reflect  the  real  risk  represented  by  the  assets  involved  and  has  therefore

presented  the  proposal  to  the  EU  Council.    The  EMI  wishes  to  inform  the  Council  that  a

number  of  national  central  banks  consider  that  the  proposed  capital  requirements  for

commercial mortgage loans insufficiently reflect the underlying risks and maintain that further

work  is  needed  to  assess  the  risks  involved  with  such  assets.    Other  national  central  banks

concur with the Commission view, holding that the proposed rule on capital requirements for

commercial property mortgage loans well reflects the lower risk of such operations, keeping in

mind the strict assessment criteria for determining  relevant  values  and  the  60%  loan  to  value

ratio, and point out the transitory and optional nature of this provision.

5.

The EMI agrees that this opinion may be made public by the consulting authority.

24th September 1996