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 amending: Article 12 of Council Directive 77/780/EEC on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions; Articles 2, 6, 7 and 8 and Annexes II and III of Council Directive 89/647/EEC on a solvency ratio for credit institutions; and, Article 2 and Annex II of Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions (CON/96/08)
Date: 1996-09-24
Institutions: European Monetary Institute
Subjects: credit institution, exchange of information, financial solvency, financial stability, financial supervision

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 amending:

Article  12  of  Council  Directive  77/780/EEC  on  the  co-ordination  of  laws,  regulations  and

administrative  provisions  relating  to  the  taking  up  and  pursuit  of  the  business  of  credit

institutions;

Articles 2, 6, 7 and 8 and Annexes II and III of Council Directive 89/647/EEC on a solvency

ratio for credit institutions; and,

Article 2 and Annex II of Council Directive 93/6/EEC on the capital  adequacy  of  investment

firms and credit institutions.

CON/96/08

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  (96)  183  final/2)  and  communicated  to  the  Council  of  the

European Union by means of a letter dated 30th April 1996.

References  in  this  opinion  to  the  text  of  the  proposal  refer  to  document  reference  COM  (96)

183 final/2.

2.

The purposes of the proposal are to introduce a number of amendments to Council Directives

77/780/EEC,  89/647/EEC  and  93/6/EEC,  either  to  take  account  of  recent  developments  or  to

remedy  perceived  shortcomings  to  those  Directives,  and  to  reflect  refinements  of  the

supervisory  treatment  of  over-the-counter  derivative  instruments  already  contemplated  by  the

Basle Committee on Banking Supervision.

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

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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

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

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

4.

The EMI welcomes, in broad terms, the package of proposals contained in this draft directive.

There follow a number of comments on specific provisions in the proposal.  No comments will

be offered on Articles 2, 3, 7, or 10 to 14 as these  are either very technical in nature or only

relate to very minor changes in relevant provisions of the Directives to be amended.

5.

The EMI welcomes Article 1 of the  proposal,  representing  an  amendment  to  Article  12(3)  of

Directive 77/780/EEC.  This amendment will allow Member States to conclude agreements for

the  exchange  of  information  with  non-banking  supervisory  authorities  of  third  countries.    As

currently drafted, Article 12(3) only allows for such agreements to be concluded with banking

supervisory authorities of third countries.

The EMI considers that effective lines of communication between competent authorities on an

international  level  are  highly  desirable  and  that  an  extension  of  the  scope  of  Article  12(3)  to

cover co-operation agreements with non-banking supervisory  authorities  is  a  further  welcome

development in this area.  Additionally, the EMI notes that a number of parallel articles exist in

other directives which also deal with the topic of arrangements with supervisory authorities in

third countries (e.g. Article 25  (3)  of  Council  Directive  93/22/EEC  on  investment  services  in

the  securities  field,  Article  16  (3)  of  Council  Directive  92/29/EEC  (third  non-life  insurance

Directive), Article 15 (3) of Council Directive 92/96/EEC (third life assurance Directive) and

Article  50  (4)  of  Council  Directive  85/611/EEC  relating  to  UCITS)  and  assumes  that  care  is

taken  to  ensure  consistency  and  clarity  of  approach  when  new  provisions  are  adopted  in  this

area,  noting  that  this  is  likely  to  prove  helpful,  particularly  in  the  field  of  supervision  of

financial conglomerates, in relation to which, several of these provisions may be relevant.

6.

The  EMI  notes  that  Article  4  of  the  draft  directive  allows  for  the  weighting  of  the  unpaid

portion of capital subscribed to the European Investment Fund at 20%.  The EMI assumes that

this allowance is considered appropriate on the basis of the unique character and structure  of

the European Investment Fund.

7.

The provisions in Articles 5 and 9 relating to determining the scope of the credit risk treatment

for  off-balance  sheet  contracts  are  welcomed  by  the  EMI.    The  new  Annex  III  to  the  SRD,

which  is  proposed  by  Article  9,  would  allow  for  a  wider  range  of  derivative  contracts  to  be

included within the treatment set out in Annex II of Council Directive 89/647/EEC.  The EMI

in particular notes with approval that, by allowing for the inclusion of contracts which relate to

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additional reference items (e.g. equities and commodities), rather than, as hitherto, limiting the

scope  of  these  provisions  to  an  exclusive  lists  of  types  of  contracts  the  proposed  amendment

would  allow  for  a  more  flexible  approach,  in  particular  allowing  for  account  to  be  taken  of

innovation through new derivative products.

8. With reference to Article 6 of the proposal, the EMI notes that the Article of Council Directive

89/647/EEC to be amended (Article 6) is also to be amended by Article 1 of the proposal for an

amendment  of  Council  Directive  89/647/EEC  relating  to  mortgage  backed  lending  and

securities (reference COM (95) 709 final - see EMI CON/96/07).  For the avoidance of doubt

the reference in the proposed amendment to Article 6 (4) of Council Directive 89/647/EEC to

Article 6 (1) (c) (1) of the same directive should clarify whether reference is only being made to

loans covered by mortgage or to both these loans and to mortgage backed assets, as included

within the other proposal for amendment to Council Directive 89/647/EEC.

9.

The amendments to Annex II of Council Directive 89/647/EEC, as contemplated by Article 8 of

the proposal, are welcomed by the EMI.  The EMI notes that, following these amendments, EU

legislation will  reflect  amendments  to  the  Basle  Accord  which  have  already  been  adopted  by

the Basle Committee on Banking Supervision and which became effective by the end of 1995.

The EMI considers that the measures introduced through Article 8 represent a positive effort to

improve  the  supervisory  treatment  of  over  the  counter  derivatives  and,  in  particular,  the  EMI

welcomes the following features of the proposals for amendment of Annex II:

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the  expansion  of  the  table  of  multiplication  factors  (table  1)  and  also  the  tightening  of  the

provisions whereby those contracts not falling within one of the specified categories would be

accorded the most rigid calculation factors;

the obligation for larger institutions to use method 1, the so-called current exposure method;

the fact that the proposal aims at according to credit institutions which have their head office

and  registered  office  in  the  EU  an  equally  favourable  treatment  with  respect  to  the  risk

reduction effects of netting on the calculation of the potential future exposure in comparison to

third country institutions covered by the Basle Accord.

10.

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

24th September 1996