European Parliament resolution on the evaluation of Directive 89/299/EEC on the own funds of banks (2000/2207(INI))
Date: 2000-11-17
Institutions: European Parliament
Subjects: bank, banking, banking supervision, credit institution, financial solvency, management audit, share capital

8.8.2001

EN

Official Journal of the European Communities

C 223/361

TEXTS ADOPTED

Friday 17 November 2000

1. Own funds of banks

A5-0282/2000

European Parliament resolution on the evaluation of Directive 89/299/EEC on the own funds of
banks (2000/2207(INI))

The European Parliament,

(cid:1) having regard to the first Commission report to the European Parliament and the Council on the

implementation of the own funds Directive (89/299/EEC) (COM(2000) 74),

(cid:1) having regard to the Commission consultation document, A Review of Regulatory Capital Require-

ments for EU Credit Institutions and Investment Firms (1),

(cid:1) having regard to the consultative paper issued by the Basel Committee on Banking Supervision, A New

Capital Adequacy Framework,

(cid:1) having regard to Rules 47(2) and 163 of its Rules of Procedure,

(cid:1) having regard to the report of the Committee on Economic and Monetary Affairs (A5-0282/2000),

A. whereas the Commission is currently engaged in consultations with interested parties on the revision
of the regulatory capital framework applying to credit institutions and investment firms, in view of the
ongoing discussions in the Basel Committee on Banking Supervision to further revise the 1988 Capital
Accord,

B. whereas the Commission’s consultation document is a first stage in setting out the issues and options
to be considered, and the Basel Committee is expected to bring forward further proposals in early
2001,

C. whereas the Commission’s report on the implementation of the own funds Directive seeks to describe
and assess the way in which the provisions of Directive 89/299/EEC have been implemented by Mem-
ber States, and presents possible measures to be taken at European level in order to achieve a more
harmonised definition of own funds,

D. whereas the own funds of an institution serve to absorb losses which are not matched by a sufficient
volume of profits, enable supervisory authorities to assess the solvency of the institution, ensure the
continuity of the institution and protect savings; while the own funds Directive concerns the quality
and composition of capital, the focus of the Basel review is currently the amount of capital which
credit institutions should hold, which may have implications for the composition of capital,

E. whereas while there are clearly issues which have arisen in the ten years since the adoption of the
own funds Directive, notably due to innovation in the financial services sector and the development of
new and more cost-effective capital instruments, it seems advisable in view of the ongoing Basel dis-
cussions to wait for the results of the regulatory capital review before considering any changes to the
framework for own funds,

F. whereas it is also important to strive for consistency between the definitions of own funds used in the
EU and internationally, in order to preserve the competitive position of EU credit institutions; when
making the European provisions, it should also be considered that these are binding for all credit
institutions including specialised institutions, while the Basel regulations are only aimed at the inter-
nationally working commercial banks and only as recommendations,

(1) MARKT/1123/99, 22.11.1999.

C 223/362

Official Journal of the European Communities

EN

8.8.2001

Friday 17 November 2000

G. whereas the aim of prudent capital adequacy provision is to ensure that credit institutions and invest-
ment firms hold capital that is proportionate to the nature and scale of the risks that they undertake;
there is a growing consensus that the present framework fails adequately to capture the full extent of
the risks that some institutions are undertaking, does not sufficiently recognise or encourage new risk
management techniques and may even lead to a misallocation of resources,

H. whereas the Commission consultation document and the Basel review therefore seek to create a reg-
ulatory capital framework which more accurately reflects the real risks undertaken by credit institu-
tions, based on the three pillar approach of minimum regulatory capital requirements, supervisory
review and market discipline,

I. whereas a failure to align capital requirements more clearly with risks will set up an artificial regula-
tory incentive for borrowers with well-recognised creditworthiness to avoid the banking system alto-
gether, and to borrow directly from the financial markets, thereby leaving banks exposed dispropor-
tionately to poor risks,

J. whereas with regard to the first pillar the Commission proposes to refine the existing approach in a
more risk-sensitive direction by a combination of the use of internal risk assessment systems of insti-
tutions and a modified risk weighting approach using external credit assessment institutions, modifica-
tions to consolidation requirements, greater recognition of risk mitigation techniques, and the devel-
opment of a capital requirement for other risks,

K. whereas, under the Commission’s proposals, subject to appropriate recognition by supervisory autho-
rities, all banks will be able to use risk mitigation techniques to reduce their capital charges, regardless
of whether they opt for the internal ratings approach or the modified standardised approach,

L. whereas with regard to the second pillar, the Commission takes the view that supervisory authorities
must have the power to require individual institutions to hold capital in excess of the basic minimum
requirement, and institutions must have in place a strategy for maintaining capital adequacy,

M. whereas with regard to the third pillar, the Commission argues that appropriate levels of information
disclosure enable market participants to make a better judgement of an institution’s performance,
which leads to better market discipline,

N. whereas the Commission’s consultation document concentrates almost entirely on banks, with invest-
ment firms mentioned only as an afterthought; this attitude is surprising, given that thousands of
investment firms and asset managers are covered by EU capital adequacy rules; it is vital that the
characteristics and requirements of non-banks, such as investment firms and asset managers, are
taken into account in the review of capital adequacy,

O. whereas there are concerns among small and medium-sized enterprises (SMEs), which are reliant on
bank finance for a very significant proportion of their financing, about the effect of the adoption of
new capital adequacy rules on the ability of SMEs to obtain loan finance due to potentially increased
capital charges for higher risk ventures; they fear that they are only considered risky because they have
no external rating; the widespread use of internal ratings is the main practical way to ensure that SMEs
can obtain the benefit of a more risk-sensitive framework, since such enterprises are highly unlikely to
be externally rated,

P. whereas the European Financial Services industry is fundamentally different from that of the United
States, where existing non-competitive practices (i.e. government guarantees to government sponsored
enterprises allowing lower funding costs) put European credit institutions at a disadvantage in their
effort to access global capital markets,

Q. whereas the European financial services industry is concerned to ensure that the European Union
should implement legislative changes required by a revised Capital Accord on a similar time-scale to
the United States, in order to ensure consistent rules and avoid placing the EU at a competitive dis-
advantage,

8.8.2001

EN

Official Journal of the European Communities

C 223/363

Friday 17 November 2000

R. whereas capital adequacy rules impose significant costs on banks and investment firms and, in moving
to a more complex and risk sensitive framework, the EU should make every effort to ensure that the
rules are as simple as possible for banks and firms to implement and operate and that cost burdens are
not imposed unless they are genuinely necessary in order to achieve the twin goals of depositor pro-
tection and/or enhanced systemic stability,

S. whereas the Commission consultation offers the Parliament an ideal opportunity to debate thoroughly
the principles and issues of the regulatory capital review while the Basel process is still ongoing, so that
the implementing legislation when it is published can be adopted in good time,

Believes that the implementation of the own funds Directive has been broadly satisfactory; calls on
1.
the Commission to bring forward, in light of the results of the Basel review, proposals for an interpretative
communication or a revised directive taking into account the development of new and more cost-effective
capital instruments and ensuring consistency between the definitions of own funds used in the EU and
internationally;

2.
Believes that the EU’s capital adequacy rules should be amended to match capital charges more clo-
sely with risk; points out that while the Basel proposals are designed only for large, internationally active
banks, the EU has a diverse banking and investment sector, and the new rules should reflect this; welcomes
the Commission’s recognition of this in contemplating, in line with the Basel discussions, a more extensive
role for internal ratings than foreseen in the Basel consultative paper;

Urges the Commission to make internal ratings the centrepiece of the new regulatory capital frame-
3.
work and to ensure that internal ratings can be used as widely as possible, and that the relevant minimum
criteria for recognition of an internal rating can also be met by smaller institutions, in order to avoid, in
this way, giving an undue competitive advantage to large sophisticated banks, provided that the institu-
tions concerned meet the required standards; these standards should require sound, objective and transpar-
ent assessments of the probability of a loan default and loss to the lender, and should be easy to compare
across all Member States, so that no banking system has an artificial regulatory advantage over another;

4.
Calls on the Commission, in view of the diversity of the banking and investment sector in the Eur-
opean Union, to bring forward legislative proposals transposing the Basel Accord in a way that faithfully
reflects the particular requirements of the EU Member States as a whole; notes that while the Basel Accord
was primarily designed to apply to large international banks, EU rules on regulatory own funds apply to a
much wider range of banking, credit and investment institutions, and calls for this diversity to be given
priority attention in the new EU rules;

5.
Calls on the Commission to ensure that both external and internal ratings systems are recognised as
well as authorised by the banking supervisory authorities, and that no discrimination occurs between
them;

6.
Demands that the new rules provide a clear road map for banks enabling them to move gradually
towards internal ratings as they develop the appropriate systems, enabling them to adopt internal ratings
for parts of their loan portfolios and the modified standard approach for the remainder; further calls on
the Commission and Member States to seek agreement on a sufficiently long transitional period in the
Basel Committee to allow as wide a range as possible of banks to put in place the systems required for
an internal ratings approach;

7.
Takes the view that decentralised sectors, such as federated or cooperative banks,should be allowed
to have an appropriate system which fulfils the criteria called for developed by a central body, so that it
can be used by every bank in that sector;

8.
Emphasises the need for further work on devising objective criteria for the use of internal ratings by
institutions and the method of linking them to capital charges; hopes that the risk reduction potential of
assessing loans in their context as part of a portfolio will be acknowledged; suggests a spectrum approach
to internal ratings, allowing the recognition of a range of internal ratings systems with different degrees of
sophistication;

C 223/364

Official Journal of the European Communities

EN

8.8.2001

Friday 17 November 2000

9.
Urges the Commission to recognise the special characteristics of retail portfolios of loans; notes that
the banking sector has been considerably successful in managing retail portfolios and has extensive and
sophisticated data, both on default probabilities, and on loss rates for such portfolios; urges both the Basel
Committee and the Commission, in formulating the new rules, to take account of this successful record
and extensive data and to give due recognition to the potential to reduce risk by proper and prudent
management of a portfolio of similar small retail loans; in particular, the Commission and the Basel Com-
mittee should consider whether banks should be permitted, by the new rules, to set an overall internal
rating for a portfolio instead of for each individual loan within it;

10.
Calls for every effort to made to ensure that the enforcement and implementation of the rules on
internal ratings are as consistent as possible throughout the EU, whilst allowing a limited degree of flex-
ibility to take account of particular local conditions and market practice;

11.
Observes that, while methods of full portfolio credit risk modelling are currently at too early a stage
of development for use in internal ratings, the Commission and the Basel Committee should keep them
under review with a view to adopting such methods in future;

12.
Observes that since it will never be possible for all banks to use internal ratings, an alternative
modified standardised approach is necessary, and that the Commission proposes to use the assessments
of external rating agencies to refine the standardised approach; takes the view that since external ratings
are comparatively unusual for non-financial companies in Europe, and can be costly for SMEs, their use
should be as limited as possible;

Notes the existence of credit registers in some Member States and anticipates that such registers

13.
should play a role in the new capital adequacy framework;

Believes that the range of risk buckets in a standardised approach needs to be extended, and cau-
14.
tiously accepts the limited role for external ratings proposed by the Commission; however, in view of the
concerns regarding external ratings, urges the Commission, the Basel Committee and the banking industry
to explore alternative additional ways in which a more graduated system of risk buckets can be developed
for this standardised approach; this general framework should be dynamic and flexible and take account
inter alia of the additional guarantees that can be offered by SMEs seeking financing; at any event, a further
refinement of the standard approach should form part of a new regulatory capital framework which also
guarantees the real and practicable possibility of internal ratings being applied by a significantly wide range
of both large and small credit institutions, so long as objective standards and proper prudential safeguards
are met;

15.
Notes that the use of external ratings in expanding the range of collateral will potentially benefit
non-rated as well as rated enterprises; the new risk mitigation proposals will involve reduced regulatory
capital charges where businesses (whether rated or not) offer bonds in rated companies as collateral;

Emphasises the importance of establishing a framework to ‘rate the raters’, setting out minimum

16.
criteria for the accreditation of external rating agencies to ensure their credibility and transparency;

17. Welcomes the Commission’s proposals to enhance the recognition of credit risk mitigation techni-
ques, which are insufficiently encouraged in the current framework; recognises the risk mitigating impact
of mortgage collateral and consequently calls for a thorough empirical analysis to determine the fair
weighting of mortgage loans; calls for the recognition of the risk-reducing potential of collateral recognised
by banks and the banking industry as mitigating risks and notes here in particular the importance of
traditional
loan-securing methods such as mortgages, which are the main form of collateral used by
other smaller credit institutions in particular, in risk mitigation; demands that where banks and investment
firms outsource risks, for example by insurance or the use of clearing methods, the resulting transfer of
risk should be reflected in reduced capital charges;

18.
Calls for the new capital adequacy rules to set out general minimum criteria which must be satisfied
before a risk mitigation technique may be recognised for the purposes of capital adequacy rules; this hori-

8.8.2001

EN

Official Journal of the European Communities

C 223/365

zontal approach is preferable to attempting to formulate individual
legislative provisions for each risk
mitigation technique and encourages more prudent risk management whilst at the same time enabling
the legislation and the regulators to adapt to market developments;

Friday 17 November 2000

19.
Believes that each sovereign government in the euro-area should be assessed by the financial mar-
kets on the basis of its own creditworthiness in line with the commitments entered into in the ‘no bail-out’
clauses of the Maastricht Treaty (Articles 101-103); therefore finds that the capital charges required by
banking supervisors on purchases of euro-area governments’ debt should be in line with the normal reg-
ulatory provisions depending on whatever objective assessment of creditworthiness is adopted, and should
not benefit from any competitive distortion providing for no capital charge on the purchase of any euro-
area sovereign government’s debt;

20.
Believes that the introduction of a more risk-sensitive regulatory capital regime means that other
risks will have to be considered more closely, as the capital buffers which exist in current capital charges
may be reduced; while a sensibly constructed charge to cover ‘other risks’ could play a role in encouraging
prudent risk management, techniques for assessing such risks are still in their infancy; until an accurate
method of measuring ‘other risks’ can be developed, regulation of such risks should continue to be carried
out qualitatively, through prudential supervision, rather than quantitatively, through new charges;

21.
Opposes proposals to calculate a capital charge for other risks based on crude indicators such as
size of firm, income, turnover, etc, as such measurements are inappropriate proxies which bear no obvious
relationship with ‘other risks’; believes that a charge based on such proxies would penalise successful com-
panies and encourage banks to manage the capital charge rather than manage risk; is particularly con-
low-risk investment businesses such as index
cerned at the impact of such a charge on high-volume,
funds; believes that, in the event that a charge for other risks is introduced, transitional provisions should
be devised to ensure that banks which cannot immediately take advantage of the more risk sensitive inter-
nal ratings approach are not penalised with a heavy additional charge for ‘other risks’;

22.
Supports the retention of the waiver of capital requirements on a sub-consolidated and/or solo basis
(currently set out in Article 3(7) of the Directive on the Supervision of Credit Institutions on a Consoli-
dated Basis and Article 7(7) of the Capital Adequacy Directive) but calls for the introduction of harmonised
criteria for the use of this waiver;

23.
Calls on the Commission to give closer attention to the requirements and characteristics of invest-
ment firms and asset managers; the capital charges for such firms should be limited to the risks which they
incur, namely ‘other risks’ such as operational risk; investment firms are already subject to a capital charge
for ‘other risks’, which should be reviewed if the Commission introduces a generally applicable charge for
other risks in future;

24.
Believes that while supervisors should not seek to become shadow bank managers, they should seek
to assess an institution’s actual handling of risk rather than merely checking compliance with formal rules;
national supervisory authorities should have the power to require institutions to hold capital in excess of
the basic minimum requirement; however, this should be only one of a range of tools used in prudential
supervision and should not be used unless there is good reason to do so;

Supports the voluntary publication by banks of their capital ratio, or their major financial risks and
25.
their risk management techniques, as a contribution to enhancing market discipline; however, institutions
should not be asked to disclose publicly the individual minimum capital requirements set by supervisors,
as to do so would risk the target ratio becoming seen effectively as a supervisory rating, causing competi-
tive distortions;

26.
Calls on the Commission to make every effort to ensure that EU banks are not subjected to discri-
minatory treatment by US authorities under the Gramm-Leach-Bliley Act, and to seek a swift resolution of
the dispute between the US and the EU on this matter;

C 223/366

Official Journal of the European Communities

EN

8.8.2001

Friday 17 November 2000

27.
Takes the view that, for reasons of competitive equality, all credit institutions, regardless of their
legal form, must be allowed to procure original own funds via third parties, so long as the funds so
acquired are permanent, able to absorb losses and cannot be withdrawn by the third party;

Demands that every effort be made to ensure that the new rules do not make it more difficult for
28.
SMEs to obtain loan finance, whilst acknowledging that capital adequacy rules must be designed to protect
savers and minimise systemic risk and are therefore too blunt an instrument to deal directly or compre-
hensively with SME finance, which should be addressed through measures to promote risk capital; in any
event, believes that, while high risk ventures may in future be subject to a higher capital charge, which
may be reflected in the cost of loan finance, most low, medium or moderately high risk ventures (making
up a majority of SMEs) should find it easier to obtain finance through the new rules, notably through the
wider recognition of collateral (including mortgage collateral);

Recognises not only the vital importance of rapid implementation of the new regulatory capital
29.
framework, but also the need for flexibility and keeping the legislation up to date; is prepared to consider
proposals to review the legislative process to facilitate flexibility, rapid implementation and updating of
legislation on the new regulatory capital framework; recalls, in this respect, the joint declaration signed
by Parliament, Council and Commission on the codecision procedure, committing all three institutions to
cooperate in good faith with a view to reconciling their positions as far as possible so that wherever
possible acts can be adopted at first reading; is prepared to consider new proposals for a future revision
of this joint declaration in order to speed up further the codecision procedures in formulating and updat-
ing legislation;

30.
Calls upon Parliament, Commission and Council to cooperate and consult formally and informally
at the earliest stages of the legislative process, and show the political will to agree on the broad principles,
in order to enable the legislative changes required to be adopted as quickly as possible, preferably at first
reading;

31.
Emphasises the importance of maintaining competitive equality between the US and EU banking
and investment firms and urges the Commission and the Member States to press for a moratorium on
the implementation of the revised Accord for an agreed period of time, to allow Basel Committee members
time to adopt implementing legislation and enable the Accord to enter into force on the same day in all
countries;

32. Welcomes the Commission’s invitation to establish a ‘2005 Group’ of representatives of the Com-
mission, Parliament and Council in order to oversee and facilitate the timely implementation of the Finan-
cial Services Action Plan; calls on the Group to consider options for faster enactment of the Action Plan
including the new Basel Accord, and to present options to be considered by the European Parliament
within six months of the adoption of this resolution;

33.

Instructs its President to forward this resolution to the Council and Commission.

2. Ombudsman

A5-0293/2000

European Parliament resolution on the modification of the European Parliament’s decision of
9 March 1994 on the regulations and general conditions governing the performance of the
Ombudsman’s duties

The European Parliament,

(cid:1) having regard to the Treaty establishing the European Community and in particular Articles 21, 195
and 279 thereof, and also Article 20d of the ECSC Treaty and Article 107d of the EAEC Treaty,

(cid:1) having regard to its Decision 94/262/ECSC, EC, Euratom of 9 March 1994 on the regulations and

general conditions governing the performance of the Ombudsman’s duties (1),

(1) OJ L 113, 4.5.1994, p. 15.