Opinion of the European Monetary Institute Consultation from the Council of the European Union under Article 109f (6) of the Treaty establishing the European Community (the “Treaty”) on a Commission Proposal for a European Parliament and Council Directive (EC) amending Council Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions (CON/97/14)
Date: 1997-10-07
Institutions: European Monetary Institute
Subjects: credit institution, financial requirements, financial stability, investment company

OPINION OF THE EUROPEAN MONETARY INSTITUTE

Consultation from the Council of the European Union under Article 109f (6) of the Treaty

establishing the European Community (the “Treaty”)

on a Commission Proposal for a European Parliament and Council Directive (EC)

amending Council Directive 93/6/EEC

on the capital adequacy of investment firms and credit institutions

CON/97/14

1. 

On  4  July  1997  the  EMI  received  from  the  Council  of  the  European  Union  the  request  for  an

opinion  on  a  Commission  Proposal  for  a  European  Parliament  and  Council  Directive  (EC)

amending  Council  Directive  93/6/EEC  on  the  capital  adequacy  of  investment  firms  and  credit

institutions.  The  Council  of  the  European  Union  transmitted  for  this  purpose  document

COM(97) 71 final, containing the text of the proposal and the explanatory memorandum.

2. 

The  EMI  considers  that  this  consultation  is  not  optional  as  it  was  stated  by  the  Council.  The

present  proposal  relates  to  the  field  of  competence  of  the  EMI.  It  concerns  inter  alia  the

supervision of credit institutions and investment firms, an area which falls within the competence

of  a  number  of  national  central  banks.  This  activity  could  have  a  potential  impact  upon  the

stability of financial institutions and financial markets.

3. 

The EMI notes the objective of the proposal to allow the use of internal risk management models

for the calculation of capital requirements for market risks and the inclusion of a framework for

specific  capital  requirements  for  market  risks  inherent  in  commodity  trading  and  commodity

derivatives business. It is also noted that by the proposed amendments to Directive 93/6/EEC the

Commission  has  discharged  its  obligation  laid  down  in  Article  13  of  that  Directive  to  submit  to

the  Council  proposals  for  the  capital  requirements  in  respect  of  commodities  trading  and

commodity derivatives. In line with Article 14 of Directive 93/6/EEC, the Commission proposes

to  reflect  in  the  European  legislation  amendments  to  the  Basle  Capital  Accord  of  1988  which

have  been  issued  by  the  Basle  Committee  on  Banking  Supervision  in  January  1996  and  which
will come into effect by end of 1997.1 The EMI takes note of the other minor proposed changes
aiming at clarification of certain provisions of the Directive.

1  See  “Overview  of  the  Amendment  to  the  Capital  Accord  to  incorporate  market  risks”,  “Amendment  to  the
Capital  Accord  to  incorporate  market  risks”,  and  “Supervisory  framework  for  the  use  of  ‘backtesting’  in

 
 
                                                                
- 2 -

4. 

The EMI welcomes the proposal. The EMI hopes that the positive effects on the stability of the

financial system which are expected to be triggered by the proposal will materialise. The use of

results  of  institutions’  internal  models  for  the  calculation  of  supervisory  capital  requirements

should  give  institutions  an  incentive  to  employ  accurate  risk  measurement  and  management

methods. The regular backtesting of these results will ideally prove to turn out to be an efficient

procedure  for  the  on-going  re-assessment  of  the  performance  of  the  internal  models  and  will

contribute  to  their  upgrade  and  development.  The  inclusion  of  a  specific  framework  of  capital

requirements for commodity business carried out by credit institutions and investment firms into

the Directive 93/6/EEC is welcomed by the EMI.

 The  EMI  welcomes  the  fact  that  the  draft  will  bring  EU  legislation  in  line  with  the  amended  Basle

Capital  Accord  of  1988  and  will  thus  maintain  a  level  regulatory  playing  field  in  a  wider

international context. The EMI recognises the competitive aspects of the regulatory framework

to which reference is made in the fourth whereas clause of the draft proposal and the ensuing

need for a rapid adoption of the proposed legislation. In this context, the EMI wishes to point out

that many of the proposed amendments are of technical nature and that further amendments of

the Basle Capital Accord cannot be ruled out for the future. It will therefore be of importance

for the EU financial sector that changes to technical details of the Directive can be made flexibly

and  speedily.  In  order  to  provide  for  this,  the  EMI  recommends  that  the  Council  considers  the

appropriateness  of  wording  which  specifies  areas  of  the  Directive  which  could  be  changed  by

conferring implementation powers on the Commission (comitology). Moreover, in case that such

amendments to the Basle Capital Accord will be decided upon at a time where the adoption of

this  draft  directive  is  still  pending,  the  EMI  wishes  to  encourage  the  Council  to  work  towards

taking  account  of  such  developments  still  in  this  legislative  procedure,  whenever  this  is

procedurally possible.

5. 

Apart from these general observations the following specific aspects may be considered by the

Council.  First,  the  EMI  notes  that  Article  7  of  Directive  93/6/EEC  in  combination  with  the

amended Article 4 of Directive 93/6/EEC will govern the supervision on a consolidated basis of

capital requirements for market risk. The interplay between the use of internal models according

to the new Annex VIII and the application of capital requirements on a consolidated basis may

usefully be studied in more detail in the future on the basis of experience gained in the practice.

Similarly, there may be merit in studying and clarifying the interplay between the use of internal

models and the application of the large exposure rules set out in the Capital Adequacy Directive.

Second, the definition of “stock financing” may be clarified. Distinguishing between the practice

conjunction  with  the  internal  models  approach  to  market  risk  capital  requirements”,  Basle  Committee  on
Banking Supervision, Bank for International Settlements, Basle 1996

 
 
 
                                                                                                                                                                                                          
- 3 -

of stock financing and the resulting positions could be helpful. Notwithstanding the eighth recital

of the draft Directive that refers to the specific case of certain investment firms dealing primarily

in commodities and commodity derivatives, the EMI, lastly, notes that the transitional rule under

Article 12a, that applies to investment firms only, might give rise to the question of justifying the

different treatment.

6. 

This opinion will be published in the Official Journal of the European Communities.

      7 October 1997