COMMON POSITION (EC) No 20/98 adopted by the Council on 9 March 1998 with a view to adopting European Parliament and Council Directive 98/.../EC of ..., amending, as regards in particular mortgages, Council Directive 89/647/EEC on a solvency ratio for credit institutions
Date: 1998-03-09
Institutions: Council of the European Union
Subjects: clearing agreement, competition, credit institution, exchange rate, financial solvency, interest

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I

(Information)

COUNCIL

COMMON  POSITION  (EC)  No  20/98

adopted  by  the  Council  on  9  March  1998

with  a  view  to  adopting  European  Parliament  and  Council  Directive  98/. . ./EC  of  . . .,
amending,  as  regards  in  particular  mortgages,  Council  Directive  89/647/EEC  on  a  solvency
ratio  for  credit  institutions

(98/C  135/01)

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  Commission (1),

is  therefore  desirable  that  the  Commission  should
examine  with  the  Member  States  the  prudential
treatment  of  asset-backed  securities  and  put
forward,  within  a  year  from  the  adoption  of  this
Directive,  proposals  aimed  at  adapting  existing
legislation 
in  order  to  define  an  appropriate
prudential  treatment  for  asset-backed  securities;

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),

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

(1)  Whereas it is appropriate to treat mortgage-backed
securities  as  loans  referred  to  in  Article  6(1)(c)(1)
of  Council  Directive
and  Article 
89/647/EEC (4) 
competent  authorities
consider that they are equivalent in the light of the
credit risk; whereas the market for securitisation is
it
undergoing 

rapid  development;  whereas 

11(4) 
if 

the 

(1)  OJ  C  114,  19.4.1996,  p.  9.
(2)  OJ  C  30,  30.1.1997,  p.  99.
(3)  Opinion  of  the  European  Parliament  of  17  September  1996
(OJ C 320, 28.10.1996, p. 26), Council Common Position of
9  March  1998  and  Decision  of  the  European  Parliament
. . .(not  yet  published  in  the  Official  Journal).

(4)  OJ  L  386,  30.12.1989,  p.  14.  Directive  as  last  amended  by

Directive  96/10/EC  (OJ  L  85,  3.4.1996,  p.  17).

the  need 

to  examine 

(3)  Whereas when Directive 89/647/EEC was adopted,
the  Commission  undertook 
this
derogation to determine whether, in the light of its
findings  and  of  international  developments  and  in
view  of 
to  avoid  distortions  of
competition,  there  was  a  case  for  amending  this
provision  and,  if  so,  to  put  forward  appropriate
proposals; whereas the results of the study relating
this  provision,  although  not  absolutely
to 
conclusive,  show  that  there 
is  no  significant
difference  between  the  rates  of  losses  recorded  in
the  Member  States  covered  by  the  derogation  and

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in  those  not  covered;  whereas,  therefore,  this
derogation  can  be  extended  to  all  Member  States
which  so  wish  until  31  December  2006;

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

(4)  Whereas  the  property  to  which  the  mortgage
relates  must  be  subject  to  rigorous  assessment
criteria  and  regular  revaluation  to  take  account  of
the  developments 
in  the  commercial  property
market;  whereas  the  property  must  be  either
occupied  or  let  by  the  owner;  whereas  loans  for
property  development  are  excluded  from  this
provision;

(5)  Whereas  this  Directive  is  the  most  appropriate
means for attaining the objectives sought and does
not  go  beyond  what  is  necessary  to  achieve  these
objectives,

HAVE  ADOPTED  THIS  DIRECTIVE:

Article  1

Directive  89/647/EEC  is  amended  as  follows:

1.  In  Article  6(1)(c)(1)  the  following  subparagraph  shall

be  added:

‘“mortgage-backed  securities”  which  may  be  treated
as  loans  referred  to  in  the  first  subparagraph  or  in
Article  11(4),  if  the  competent  authorities  consider,
having regard to the legal framework in force in each
Member State, that they are equivalent in the light of
the  credit  risk.  Without  prejudice  to  the  types  of
securities  which  may  be  included  in  and  are  capable
this  point  1,
fulfilling 
of 
“mortgage-backed 
include
may 
instruments within the meaning of Section B(1)(a) and
(b)  of  the  Annex  to  Council  Directive  93/22/EEC  of
10  May  1993  on  investment  services  in  the  securities
field (*). The competent authorities must in particular
be  satisfied  that:

the  conditions 

securities” 

in 

(i)  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  or  in
Article  11(4)  and  are  fully  performing  when  the
mortgage-backed  securities  are  created;

(ii) an  acceptable  high-priority  charge  on 

the
underlying  mortgage  asset  items  is  held  either
directly by investors in mortgage-backed securities
or  on  their  behalf  by  a  trustee  or  mandated
representative  in  the  same  proportion  to  the
securities  which  they  hold.

(*) OJ  L  141,  11.6.1993,  p.  27.  Directive  as  last
amended  by  Directive  95/26/EC  (OJ  L  168,
18.7.1995,  p.  7)’.

the 

competent
‘4. Until  31  December  2006, 
authorities  of  the  Member  States  may  authorise  their
credit  institutions  to  apply  a  50 %  risk  weighting  to
loans fully and completely secured to their satisfaction
by  mortgages  on  offices  or  on  multipurpose
commercial  premises  situated  within  the  territory  of
those  Member  States  that  allow  the  50 %  risk
weighting,  subject  to  the  following  conditions:

(i)  the 50 % risk weighting applies to the part of the
loan  that  does  not  exceed  a  limit  calculated
according  to  either  (a)  or  (b):

(a)  50 %  of  the  market  value  of  the  property  in

question.

The  market  value  of  the  property  must  be
calculated  by  two  independent  valuers  making
independent assessments at the time the loan is
made. The loan must be based on the lower of
the  two  valuations.

The  property  shall  be  revalued  at  least  once  a
year  by  one  valuer.  For  loans  not  exceeding
ECU  1  million  and  5 %  of  the  own  funds  of
the  credit  institution,  the  property  shall  be
revalued  at  least  every  three  years  by  one
valuer;

(b) 50 %  of  the  market  value  of  the  property  or
60 %  of 
lending  value,
the  mortgage 
whichever  is  lower,  in  those  Member  States
that  have  laid  down  rigorous  criteria  for  the
assessment  of  the  mortgage  lending  value  in
statutory  or  regulatory  provisions.

The  mortgage  lending  value  shall  mean  the
value  of  the  property  as  determined  by  a
valuer  making  a  prudent  assessment  of  the
future  marketability  of  the  property  by  taking
into  account  long-term  sustainable  aspects  of
the  property,  the  normal  and  local  market
conditions,  the  current  use  and  alternative
appropriate  uses  of  the  property.  Speculative
elements shall not be taken into account in the
assessment of the mortgage lending value. The
mortgage lending value shall be documented in
a  transparent  and  clear  manner.

At least every three years or if the market falls
by  more  than  10 %,  the  mortgage  lending
value  and 
the  underlying
assumptions  concerning  the  development  of
the  relevant  market,  shall  be  reassessed.

in  particular 

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In both (a) and (b) “market value” shall mean the
price  at  which  the  property  could  be  sold  under
private  contract  between  a  willing  seller  and  an
arm’s  length  buyer  on  the  date  of  valuation,  it
is  publicly
being  assumed  that  the  property 
exposed  to  the  market,  that  market  conditions
permit  orderly  disposal  and  that  a  normal  period,
having  regard  to  the  nature  of  the  property,  is
available  for  the  negotiation  of  the  sale;

(ii) the  100 %  risk  weighting  applies  to  the  part  of
the  loan  that  exceeds  the  limits  set  out  in  (i);

(iii) the  property  must  be  either  used  or  let  by  the

owner.

first 

subparagraph 

shall  not  prevent 

The 
the
competent  authorities  of  a  Member  State,  which
applies  a  higher  risk  weighting  in  its  territory,  from
allowing,  under  the  conditions  defined  above,  the
50 %  risk  weighting  to  apply  for  this  type  of  lending
in  the  territories  of  those  Member  States  that  allow
the  50 %  risk  weighting.

to 

The  competent  authorities  of  the  Member  States  may
allow  their  credit  institutions  to  apply  a  50 %  risk
. . . (*)
weighting 
provided  that  the  conditions  listed  in  this  paragraph
are  fulfilled.  In  this  case  the  property  shall  be  valued
according  to  the  assessment  criteria  laid  down  above
not  later  than  . . . (**).

loans  outstanding  on 

the 

For  loans  granted  before  31  December  2006,  the
50 %  risk  weighting  remains  applicable  until  their
maturity,  if  the  credit  institution  is  bound  to  observe
the  contractual  terms.

Until 31 December 2006, the competent authorities of
the  Member  State  may  also  authorise  their  credit
institutions to apply a 50 % risk weighting to the part
of  the  loans  fully  and  completely  secured  to  their
satisfaction  by  shares  in  Finnish  housing  companies
operating  in  accordance  with  the  Finnish  Housing
Company  Act  of  1991  or  subsequent  equivalent
legislation,  provided  that  the  conditions  laid  down  in
this  paragraph  are  fulfilled.

Member  States  shall  inform  the  Commission  of  the
use  they  make  of  this  paragraph.

(*)  Two  years  from  the  date  of  the  entry  into  force

of  this  Directive.

(**) Five  years  from  the  date  of  the  entry  into  force

of  this  Directive’.

3.  Article  11(5)  shall  be  replaced  by  the  following:

‘5. Member  States  may  apply  a  50 %  risk  weighting
to  property  leasing  transactions  concluded  before  31
December  2006  and  concerning  assets  for  business
use  situated  in  the  country  of  the  head  office  and
governed  by  statutory  provisions  whereby  the  lessor
retains  full  ownership  of  the  rented  asset  until  the
tenant  exercises  his  option  to  purchase.  Member
States  shall  inform  the  Commission  of  the  use  they
make  of  this  paragraph’.

Article  2

1. Member  States  shall  bring  into  force  the  laws,
regulations  and  administrative  provisions  necessary  to
comply with this Directive not later than 24 months after
its  entry  into  force.  They  shall  forthwith  inform  the
Commission  thereof.

When  Member  States  adopt  these  measures,  they  shall
contain  a  reference  to  this  Directive  or  shall  be
accompanied  by  such  reference  on  the  occasion  of  their
official  publication.  The  methods  of  making  such
reference  shall  be  laid  down  by  Member  States.

2. Member States shall communicate to the Commission
the  text  of  the  main  provisions  of  domestic  law  which
they  adopt  in  the  filed  governed  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.

Article  4

This  Directive  is  addressed  to  the  Member  States.

Done  at  . . .

For  the  European  Parliament

For  the  Council

The  President

The  President

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STATEMENT  OF  THE  COUNCIL’S  REASONS

I. 

INTRODUCTION

1.  On  28  February  1996  the  Commission  forwarded  to  the  Council  a  proposal  for  a
Directive  amending  Council  Directive  89/647/EEC  on  a  solvency  ratio  for  credit
institutions,  based  on  Article  57(2)  of  the  EC  Treaty.

The  Economic  and  Social  Committee  and  the  European  Parliament  delivered  their
opinions  on  26  September  1996  and  17  September  1996  respectively.  The  European
Monetary  Institute  gave  its  opinion  on  25  September  1996.

2.  On 9 March 1998, the Council adopted its common position pursuant to Article 189b

of  the  Treaty.

II.  OBJECTIVE

The Directive amends some provisions of the basic Directive with regard to risk weighting
of  certain  categories  of  assets  when  calculating  the  solvency  ratio  of  a  credit  institution.
The Directive allows mortgage-backed securities to be treated as the underlying loans, if the
competent  authorities  consider  that  they  are  equivalent  in  the  light  of  the  credit  risk.  It
further  introduces  some  optional  provisions  which,  until  31  December  2006,

—  extend  to  all  Member  States  the  possibility  of  weighting  mortgages  on  commercial

property  at  50 %,  subject  to  certain  conditions,

—  allow  the  competent  authorities  of  the  Member  States  to  authorise  their  credit
institutions  to  apply  a  50 %  risk  weighting  to  the  portion  of  loans  to  commercial
properties  secured  by  shares  in  Finnish  housing  companies,

—  allow  Member  States  to  continue  the  derogation  permitting  a  50 %  weighting  on

certain  property  leasing  transactions.

III.  ANALYSIS  OF  THE  COMMON  POSITION

A.  General remarks

As  a  result  of  its  first  reading  the  European  Parliament  delivered  a  favourable  opinion
on  the  Commission  proposal  without  proposing  any  amendments.  The  common
position follows the objectives and spirit of the Commission proposal. The amendments
introduced  by  the  Council  primarily  aim  at  increasing  the  level  of  security  by
introducing  rigorous  assessment  and  revaluation  criteria  for  commercial  mortgages  in
order  to  allow  them  to  be  weighted  at  50 %.

By  introducing  a  transitional  period  lasting  until  31  December  2006  for  the  optional
provisions  in  the  Directive,  the  common  position  aims  at  making  it  possible  to  allow
credit institutions in Member States which make use of these provisions to operate for a
reasonable  period  of  time  with  certainty  regarding  the  applicable  legislation.

B.  Mortage-backed  securities  (Article  1(1)  amending  Article  6(1)(c)(1))

Compared  to  the  Commission  proposal,  the  common  position  makes  it  clear  that
transferable  securities  and  units  in  collective  investment  undertakings  (referred  to  in
Section  B(1)(a)  and  (b)  of  the  Annex  to  Directive  93/22/EEC)  can  be  considered

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instruments covered by this provision. The drafting of (ii) has been made slightly more
flexible by referring to an acceptable high charge, rather than a first charge, and certain
minor  changes  have  been  introduced  to  make  the  text  clearer  without  changing  the
substance.

C.  Credit  weighting  of  commercial  mortgages  (Article  1(2)  amending  Article  11(4))

The common position follows the substance of the Commission proposal which aims at
extending to all Member States the option to weight certain commercial mortgage loans
at 50 %, which up until 1 January 1996 applied only to four Member States (Denmark,
Germany,  Greece  and  Austria).

Compared  to  the  Commission  proposal  the  common  position  introduces,  however,
rigorous assessment and revaluation criteria for commercial mortgages in order to allow
a  portion  of  the  loans  to  be  weighted  at  50 %,  when  calculating  the  solvency  ratio.

The  common  position  introduces  two  alternative  methods  to  determine  the  portion  of
the loan which can be weighed at 50 %, one based on the market value of the property
and  one  based  on  a  combination  of  the  market  value  and  the  mortgage  lending
value.

According to the first method the 50 % weighting applies to 50 % of the market value
of  the  property.  The  market  value  must  be  calculated  by  two  independent  valuers
before  the  loan  is  made,  and  the  market  value  of  the  property  must  be  based  on  the
lower of the two valuations. For large loans (over ECU 1 million) the property must be
revalued  at  least  once  a  year  by  one  valuer,  for  smaller  loans  at  least  every  three
years.

The  second  method  applies  only  to  Member  States  which  have  laid  down  rigorous
criteria  for  the  assessment  of  the  mortgage  lending  value  in  statutory  or  regulatory
provisions. According to this method the 50 % weighting applies to either 50 % of the
market  value  of  the  property  or  60 %  of  the  mortgage  lending  value,  whichever  is
lower.

In  both  cases  the  remaining  portion  of  the  loan  must  be  weighted  at  100 %.

The  common  position  stipulates  in  a  precise  manner  how  the  mortgage  lending  value
and the market value are determined. It further lays down provisions concerning loans
outstanding  at  the  time  of  implementation  of  the  Directive  as  well  as  loans  granted
before  the  expiry  of  the  option.

In  order  to  ensure  consistency  with  the  Act  of  Accession  of  Finland  to  the  European
Union, the common position includes an option for Member States to allow their credit
institutions  to  apply  a  50 %  weighting  to  the  portion  of  loans  for  commercial
properties  which  is  fully  and  completely  secured  by  shares  in  Finnish  housing
companies  operating  in  accordance  with  the  Finnish  Housing  Company  Act  of  1991.

For the reason set out above the expiry date of the option has been set at 31 December
2006  rather  than  1  January  2001  as  proposed  by  the  Commission.

In order to ensure that the Commission has sufficient information on which to base its
decision  on  future  legislation  in  this  sector,  Member  States  must  inform  the
Commission  of  the  use  they  make  of  this  option.

D.  Property  leasing  transactions  (Article  1(3)  amending  Article  11(5))

In  order  to  ensure  consistency  between  the  options  laid  down  in  the  Directive,  the
common  position  extends  until  31  December  2006  the  option  set  out  in  Article  11(5),

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originally  lasting  until  1  January  2001,  which  allows  the  Member  States  to  apply  a
50 %  risk  weighting  to  certain  property  leasing  transactions.

E.  Implementation  (Article  2)

As compared with the Commission proposal, Article 2 of the common position sets the
date  of  implementation  by  reference  to  the  date  of  entry  into  force  of  the  Directive  as
24  months  after  that  date.

F.  The  recitals

The  recitals  have  been  adapted  following  the  changes  made  to  the  Commission
proposal.

It  is  stressed  in  recital  1  that  there  is  a  need  for  the  Commission  to  examine  the
prudential treatment of asset-backed securities and to put forward, within a year of the
adoption  of  the  Directive,  proposals  to  define  an  appropriate  treatment.  This  is
included  in  order  to  emphasise  the  need  for  consistency  in  the  treatment  of
mortgage-backed  securities  and  other  asset-backed  securities.

The  last  two  recitals  of  the  Commission  proposal  have  been  deleted  as  unnecessary
from  a  legal  point  of  view.

G.  Conclusion

The  Council  considers  that  all  amendments  to  the  Commission  proposal  are  in
accordance  with  the  aims  of  the  Directive,  namely  to  take  account  of  recent  market
developments  and  to  prevent  undue  distortion  of  competition  between  the  credit
institutions  of  Member  States.  The  changes  to  the  text  aim  primarily  at  ensuring  the
prudent  valuation  of  commercial  properties  in  order  to  justify  the  lower  weighting  in
calculating  the  solvency  ration  of  a  credit  institution  and  do  not  change  the  essential
thrust  of  the  Commission  proposal.