Proposal for a Directive of the European Parliament and of the Council amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management {SEC(2008) 2532} {SEC(2008) 2533}
Date: 2008-10-01
Institutions: European Commission
Subjects: credit guarantee, credit institution, financial instrument, financial solvency, investment company, management audit, provision of services

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 1.10.2008 
COM(2008) 602 final 

2008/0191 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  

amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central 
institutions, certain own funds items, large exposures, supervisory arrangements, and 
crisis management  

{SEC(2008) 2532} 
{SEC(2008) 2533} 

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

A single financial market in the EU is a key factor in promoting the competitiveness of the 
European economy and the lowering of the capital cost to companies. The Financial Services 
Action Plan 1999-2005 (FSAP) aimed at laying the foundations for a strong financial market 
in the EU by pursuing three strategic objectives:  

•  ensuring a Single Market for wholesale financial services;  

•  open and secure retail markets and  

•  state-of-the-art prudential rules and supervision; 

In this context, based on the 'Basel II' G-10 agreement, a new capital requirements framework 
was  adopted  in  June  2006  as  the  Capital  Requirements  Directive  (CRD);  this  comprises 
Directives  2006/48/EC  and  2006/49/EC.  The  overarching  goal  of  the  current  proposal  is  to 
ensure that the effectiveness of the Capital Requirements Directive is not compromised. The 
revision relates to: 

•  Revisions  of  rules  that  were  brought  forward  from  previous  directives,  such  as  the  large 

exposures regime and derogations for bank networks from prudential requirements; 

•  Establishing principles and rules that had not been formalised at the EU level such as the 

treatment of hybrid capital instruments within original own funds; 

•  Clarifying the supervisory framework for crisis management and establishing colleges for 

enhancing both efficiency and effectiveness of supervision. 

The revision of certain other areas has been prompted by the financial market turbulence that 
started in 2007 and is aimed at ensuring adequate protection of creditor interests and overall 
financial stability.  

Inconsistencies that have been identified during the transposition phase of the CRD need to be 
addressed  to  ensure  that  the  effectiveness  of  the  underlying  goals  of  the  CRD  is  not 
compromised.  The  majority  of  these  are  of  a  technical  nature  and  have  been  covered  by 
separate comitology measures. 

2. 

CONSULTATION OF INTERESTED PARTIES 

An  open  Internet  consultation  was  conducted  from  16  April  to  17  June  2008.  The 
Commission received 118 responses. With the exception of those declared confidential by the 
respondents, all responses are available under: 

http://circa.europa.eu/Public/irc/markt/markt_consultations/library?l=/financial_services/cross
-sector_issues&vm=detailed&sb=Title 

Three issues have been raised by many respondents and therefore merit particular attention. 

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2.1. 

Large inter-bank exposures 

The Commission believes that inter-bank exposures are not risk-free and should be prudently 
managed. The Commission proposes to limit all inter-bank exposures to 25% of own funds or 
an alternative threshold of EUR 150 million, whichever is higher. 

2.2. 

Capital Requirements for Securitisation 

The consultation paper included a requirement that originators must hold a certain percentage 
of  capital  for  the  exposures  that  they  securitize.  In  response  to  the  consultation,  it  is  now 
proposed to require that originators and sponsors retain a share of the risks and that investors 
ensure  that  this  has  indeed  been  respected.  Considering  the  responses  to  a  further  public 
consultation,  the  Commission  maintains  its  imperative  for  a  demonstrable  measure  of  due 
diligence and rigour in the case of the 'originate to distribute' business model. 

2.3. 

Colleges of Supervisors 

The consultation paper introduced the need to establish 'colleges' of supervisors for all cross-
border banks and required supervisors participating in those colleges to discuss and agree on 
specific  issues  with  a  non-binding  mediation  mechanism  via  the  Committee  of  European 
Banking  Supervisors  (CEBS)  without  changing  the  allocation  of  responsibilities  between 
home and host supervisors.  

This proposal was seen as unsatisfactory by most stakeholders for different reasons.  

It  is  key  that  colleges  remain  effective  and  efficient  for  the  supervision  of  banking  groups. 
Therefore,  the  Commission  considers  that  the  increased  information  flows  should  be 
accompanied by the eventual decision for two key aspects being entrusted to the consolidating 
supervisor (Pillar 2 capital requirements and reporting requirements).  

2.4. 

Expertise  

From 2005 to 2007, the Commission issued several calls for advice to CEBS on hybrid capital 
instruments and large exposures. As to hybrid capital instruments, CEBS proposed conditions 
that any hybrid instrument should meet in order to be considered to be eligible Tier 1 capital 
in the EU. Concerning large exposures, CEBS made suggestions on definitions, the scope of 
application  of  the  large  exposures  regime,  exposure  limits  and  the  calculation  of  exposure 
values.  The  principles  set  out  in  their  responses  were  broadly  taken  into  account.  CEBS' 
advice is published on the following web site: 

http://www.c-ebs.org/Advice/advice.htm 

The Commission services also established a working group with members nominated by the 
EBC,  which  in  2007  and  2008  conducted  meetings  that  stretched  over  nine  days.  The  EBC 
endorsed a draft of this proposal at its meeting on 20 June 2008. 

3. 

IMPACT ASSESSMENT 

The impact assessment report is accessible on the following web site: 

http://ec.europa.eu/internal_market/bank/regcapital/index_en.htm#capitalrequire 

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Altogether,  over  60  different  policy  options  have  been  assessed.  The  below  summary 
describes  the  preferred  policy  options  in  each  of  the  six  issue  areas  covered  by  the  impact 
assessment and their expected impact on key stakeholders.  

3.1. 

Large exposures 

An  amended  limit-based  backstop  regime  is  considered  to  be  most  effective  as  it  is 
specifically  tailored  to  respond  to  the  identified  shortcomings  of  the  current  regime. 
Furthermore,  the  distribution  of  costs  and  benefits  among  stakeholder  groups  under  this 
option  is  the  most  consistent.  Banking  industry  is  expected  to  see  savings  in  administrative 
burden  brought  about  by  a  more  harmonized  regime  and  its  closer  alignment  with  the 
solvency  regime.  Certain  types  of  investment  firms  will  be  exempted  from  the  scope  of  the 
regime.  Importantly,  financial  stability  will  be  enhanced  by  the  certainty  that  a  maximum 
exposure of a given credit institution to a third party is limited. 

3.2. 

Hybrid capital instruments  

A  common  regulatory  European  framework  would  address  the  shortcomings  of  the  current 
situation  by  facilitating  convergence  between  Member  States  and  sectors,  consequently 
contributing  to  stronger  level  playing  field  conditions  within  the  single  market.  Clear  EU 
regulation  will  improve  the  quality  of  capital  from  an  industry  and  supervisory  perspective, 
while providing more choice and liquidity to investors. 

3.3. 

Home-host issues and crisis management arrangements 

Colleges  comprising  authorities  supervising  group  entities  in  different  Member  States  will 
address potential conflict and supervisory overlap. This will be aided by reinforced powers of 
the  consolidating  supervisor.  In  crisis  situations,  stakeholders  will  benefit  from  enhanced 
supervisory  cooperation  and  a  clearer  allocation  of  responsibilities.  Mediation  mechanisms 
will  ensure  conflict  resolution  while  regular  exchanges  will  allow  for  early  detection  of 
financial stress. 

3.4. 

Derogations for bank networks from certain prudential requirements 

It is appropriate to "regularize" the situation in the Member States that have implemented the 
derogations under Article 3 of the CRD in their legal systems after the time limits. For other 
Member  States,  this  may  open  a  possibility  for  EU  bank  networks  with  assets  over  €  331 
billion and representing more than 5 million members to qualify for the supervisory treatment 
under the article. Such networks typically consist of cooperative banks even though Article 3 
is not limited to them. 

3.5. 

Treatment  of  Collective  Investment  Undertakings  (CIUs)  under  the  Internal 
Ratings Based (IRB) Approach 

Applying more targeted increases to the Standardized risk-weights would provide for a sound 
and risk-sensitive alternative treatment of exposures in CIUs, whereby the percentage increase 
in  risk  weights  would  be  lower  for  well-rated  exposures  and  higher  for  lower-rated  and 
unrated exposures. 

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3.6. 

Capital requirements and risk management for securitization positions 

Potential  conflicts  of  interest  in  the  'originate  to  distribute'  model  should  be  addressed  by 
making sure originators and sponsors of credit risk transfer retain some share of the risks they 
have  underwritten.  For  this  reason,  investors  will  be  required  to  ensure  that  originators  and 
sponsors retain a material share of the risks and in any event not less than 5 per cent of the 
total so that effectively, equally originators and sponsors that are regulated by the CRD and 
those that are not regulated by it will have to retain a share of the risks. A stronger and more 
rigorous  securitization  framework  including  more  rigorous  due  diligence  should  contribute 
towards more responsible underwriting and avoidance of a repeat of the enormous costs that 
have been borne by investors and financial institutions over the past 18 months. 

4. 

LEGAL ELEMENTS OF THE PROPOSAL 

A Directive amending the current directives is the most appropriate instrument. The proposal 
is based on Article 47(2) of the Treaty, which is the legal basis to adopt Community measures 
aimed at achieving the Internal Market in financial services.  

In accordance with the principles of subsidiarity and proportionality as set out in Article 5 EC, 
the objectives of the proposed action, cannot be sufficiently achieved by the Member States 
and can therefore be better achieved by the Community. Its provisions do not go beyond what 
it is necessary to achieve the objectives pursued. 

Only  Community  legislation  can  ensure  that  credit  institutions  and  groups  of  credit 
institutions operating in more than one Member State are subject to the same requirements of 
prudential  supervision,  which  ensures  a  level  playing-field,  avoids  unwarranted  compliance 
costs  for  cross-border  activities  and  thereby  promotes  further  single  market  integration. 
Community action also ensures a high level of financial stability within the EU.  

This  proposal  does  not  increase  administrative  burden  for  Member  States  or  economic 
operators. On the contrary, the large exposure regime is simplified and reporting requirements 
reduced.  The  harmonisation  of  the  treatment  of  hybrid  capital  instruments  also  leads  to  a 
simplification and therefore to a reduction of administrative burden for banks operating cross-
border. 

5. 

BUDGETARY IMPLICATION 

The proposal has no implication for the Community budget. 

6. 

DETAILED EXPLANATION OF THE PROPOSAL 

6.1. 

Hybrid capital (Chapter 2 Section 1 of Directive 2006/48/EC) 

Hybrid  capital  instruments  (hybrids)  are  securities  that  contain  features  of  both  equity  and 
debt.  The  purpose  of  issuing  such  instruments  is  to  cover  capital  needs  of  banks  while 
appealing  to  an  investor  class  who  is  willing  to  take  more  risk  than  in  fixed  income  (debt) 
products and who therefore also expect higher returns. These instruments are usually designed 
in a way aiming at ensuring their qualification as 'original own funds' for regulatory purposes. 

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The  lack  of  legislation  at  EU  level  has  lead  to  diverging  eligibility  criteria  and  limits 
throughout  the  EU.  This  results  in  the  lack  of  a  level  playing  field  and  the  possibility  of 
regulatory  arbitrage  for  banks  operating  within  the  single  market  area  as  the  differences  in 
treatment between Member States impact the issuance costs of hybrid capital instruments.  

6.1.1.  Distinction between the "core" component of banks' own funds and hybrids eligible 
in banks' original own funds (Article 57 points (a) and (ca) of Directive 2006/48/EC) 

To  date,  there  is  no  clear  terminology  for  describing  hybrid  instruments  eligible  as  banks' 
original own funds ('tier 1 capital'). Since a list of specific instruments in the Directive would 
quickly  be  outdated  because  of  constant  innovation,  principles  have  been  developed,  which 
define hybrids eligible for original own funds. 

Core capital within banks' original own funds includes all instruments that are referred to in 
the  national  definition  of  equity  capital,  fully  absorb  losses  on  a  going  concern  basis  and 
represent the most subordinated claim during liquidation. More particularly, these instruments 
should  represent  the  "last  line  of  defence"  for  any  bank  both  during  normal  times  and 
liquidation. Usually these instruments are common  shares and  corresponding premiums but, 
more  generally,  any  type  of  instrument  not  providing  preferential  rights  in  case  of  negative 
economic performance. 

However,  there  are  also  instruments  not  falling  within  this  scope  such  as  preference  shares 
that create preferential rights for dividend payments and liquidation, which thus are included 
in the category of hybrids.  

6.1.2.  Eligibility criteria (Article 63a of Directive 2006/48/EC) 

For  hybrids  to  be  recognised  as  'original  own  funds',  they  need  to  absorb  losses,  permit  the 
cancellation of payment in times of stress, be deeply subordinated during liquidation and must 
be  permanently  available  so  that  there  is  no  doubt  that  it  can  support  depositors  and  other 
creditors in times of stress. These criteria were agreed at the G10 level and announced in a 
Press  Release  in  1998  but  they  have  not  been  transposed  into  EU  legislation.  Eligible 
instruments meet the  permanence test if  they are  either undated  or their  original maturity is 
longer  than  30  years.  They  can  however  be  callable  earlier  but  only  at  the  initiative  of  the 
issuer,  with  supervisory  approval  and  if  they  are  replaced  with  capital  of  the  same  quality, 
unless  the  supervisor  determines  that  there  is  adequate  capital.  Supervisors  should  also  be 
empowered to suspend the redemption of dated instruments depending on the solvency of the 
bank. 

Eligible  instruments  should  also  allow  to  cancel  payments  or  to  redeem  them  so  long  as 
minimum  capital  requirements  are  complied  with.  Eligible  instruments  must  not  be 
cumulative,  i.e.  any  unpaid  amount  should  be  forfeited  and  no  longer  due  and  payable. 
However, an alternative payment in kind mechanism should be allowed (e.g. by issuing new 
shares)  under  strict  conditions  set  by  supervisors  (the  relevant  costs  being  borne  by 
shareholders through dilution of their stakes)  

Eligible  instruments  should  absorb  losses  during  liquidation  but  also  help  the  institution  to 
continue operations on a going concern basis and they should not hinder the recapitalisation 
of  the  issuer.  Thus,  hybrids  should  be  senior  only  to  ordinary  share  capital  and  junior  to 
hybrids included in bank's additional own funds. 

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6.1.3.  Quantitative limits (Article 66 of Directive 2006/48/EC) 

Banks and investment firms should not extensively rely on hybrid capital instruments to the 
detriment  of  "core"  components  indicated  in  Article  57  (a).  To  this  end,  the  Commission 
proposes a limit structure allowing for different categories.  

The main criterion for distinction between categories, the convertibility of hybrids in case of 
need,  provides  an  incentive  to  develop  hybrids  that  lead  to  higher  quality  of  capital  during 
crises (i.e. by a higher share of core capital). Supervisory authorities may temporarily waive 
the limits in emergency situations.  

The  most  subordinated  instruments  of  a  credit  institution  that  does  not  have  proprietors  or 
shareholders under national law, such as the members' certificates of some cooperative banks, 
should  be  treated  like  convertible  hybrids  insofar  as  the  respective  capital  has  been  paid  up 
and ranks after all other claims. 

6.1.4.  Transitional provisions (Article 154 paragraphs 8 and 9 of Directive 2006/48/EC) 

The Commission acknowledges the importance of hybrids as a major source of funding and 
the need to limit the impact of the new regulation. To this end, the proposal allows firms not 
complying with the new set of quantitative limits to gradually adjust to the new rules over a 
period of 30 years.  

6.1.5.  Disclosure  provisions  (Annex  XII,  Part  2,  points  3  (a)  and  (b)  of  Directive 

2006/48/EC) 

Following  the  establishment  of  criteria  for  hybrid  capital  instruments  to  be  eligible  for 
original  own  funds,  Annex  XII  needs  to  be  amended  accordingly.  These  changes  shall  be 
included  in  this  proposal.  Banks  are  required  to  disclose  specific  information  on  hybrids, 
particularly on those eligible only within the transitional period.  

6.2. 

Large exposures 

The  current  CRD  provisions  are  based  on  the  general  assumption  that  banks  spread  their 
exposures to their clients. However despite this, institutions could still be exposed to the same 
client or a group of connected clients. In extreme situations, this can lead to the loss of the full 
exposure or of its part. The aim of the large exposures regime is to prevent an institution from 
incurring disproportionately large losses as a result of the failure of an individual client (or a 
group of connected clients) due to the occurrence of unforeseen events. To address this, the 
European Commission issued a recommendation1 in 1987, followed by a directive2 in 1992. 
Given their limited number and extent of changes made at the time of the CRD adoption, the 
large exposures regime has not been reviewed for 16 years. In recognition of this fact, Article 
119  of  2006/48/EC  and  Article  28(3)  of  2006/49/EC  require  a  more  in-depth  review  of  the 
existing  requirements  "together  with  any  appropriate  proposals"  to  be  submitted  to  the 
European Parliament and to the Council. 

The current CRD provisions show several shortcomings: high costs for the industry including 
unwarranted compliance costs for certain types of investment firms, lack of clarity and a level 

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Recommendation 87/62/EEC on monitoring and controlling large exposures of credit institutions. 
Directive on the monitoring and control of large exposures of credit institutions 92/121/EEC. 

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playing  field.  In  addition,  the  current  regime  does  not  effectively  address  market  failure 
pertaining to certain exposure types (e.g. exposures to institutions), implying a higher burden 
for  taxpayers  and  capital  inefficiencies.  These  shortcomings  are  addressed  by  deleting 
national  discretions  where  possible,  exempting  certain  types  of  investment  firms  from  the 
regime,  aligning  applied  methods  closer  to  methods  applied  for  capital  adequacy  purposes, 
strengthening  legal  certainty  by  clarifying  definitions  and  adjusting  the  treatment  of  certain 
types of exposures, (e.g. exposures to institutions). 

6.2.1.  Definitions (Article 4 point 45 and article 106 of Directive 2006/48/EC) 

As  to  the  concept  of  connected  clients  defined  in  Article  4,  until  now,  the  supervisory 
authorities have focused only on the asset side of the entities in question in order to identify 
whether one entity may encounter repayment difficulties because of the financial problems of 
the other entity. The recent market developments have shown that two or more undertakings 
can be financially dependant (and pose significant risks) because they are funded by the same 
vehicle.  As  a  result,  this  proposal  takes  into  account  not  only  the  risk  that  derives  from  the 
business and assets of two entities but also from their liability or funding side.  

6.2.2. 

Simplification  of  the  large  exposures  regime  (Chapter  2  Section  5  of  Directive 
2006/48/EC) 

Reporting requirements in Article 110 have been simplified and harmonised. This was one of 
the major industry complaints about the current regime. The requirement for interim reporting 
has  been  removed  and  institutions  making  use  of  the  IRB  approach  have  to  report  their  20 
largest, not exempted, exposures on a consolidated basis.  

The current limits for large exposures are manifold. This structure is simplified in Article 111 
into a single limit of 25%.  

The  list  of  exemptions  in  Article  113  is  currently  long  and  creates  burdensome  differences 
across member states and the lack of a level playing field. The only exemptions which remain 
are exposures  to  sovereigns  and  regional governments and local authorities, those reflecting 
the typical nature of cooperative banks, intra-group exposures if exempted under the solvency 
regime,  exposures  secured  by  certain  collateral  and  exposures  arising  from  undrawn  credit 
facilities provided that the credit facility actually drawn does not exceed the prescribed limit. 

The  current  use  of  different  calculation  methods  and  risk  mitigation  methods  has  not 
enhanced  the  transparency  of  the  results  to  be  assessed  by  financial  firms  and  their 
supervisors.  In  Articles  114,  115  and  117  the  methods  are  clarified  and  aligned  as  much  as 
possible  to  the  methods  applied  for  the  capital  adequacy  regime.  In  order  to  increase  firms' 
flexibility,  the  current  national  discretions  to  apply  the  respective  methods  have  been 
transformed into options for the institutions themselves. 

6.2.3. 

Interbank exposures (Article 111 of Directive 2006/48/EC) 

Inter-bank exposures pose a significant risk as banks, although regulated, can fail. A failure of 
one institution can cause a failure of other institutions with the possibility of causing systemic 
crisis.  For  this  reason,  large  inter-bank  exposures  require  very  prudent  management.  As  a 
traumatic loss from an exposure to an institution can be as severe as from any other exposure, 
the  Commission  has  concluded  that  the  current  regime,  based  on  a  complex  mix  of  risk 
weights and differentiation on maturity, is not sufficiently prudent. Against this background, 

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the  Commission,  having  reflected  on  the  outcome  of  the  analysis  investigating  costs  and 
benefits of several available regulatory approaches, has concluded that there is a merit to treat 
inter-bank  exposures  as  any  other  exposures,  regardless  of  their  maturity.  The  Commission 
has addressed specific concerns by allowing an alternative threshold of EUR 150 million and 
waivers for banks operating in networks, savings banks under certain conditions and certain 
types of exposures related to clearing and settlement transactions. 

6.2.4.  Waiver for certain investment firms (Article 28 of Directive 2006/49/EC) 

The  current  regime  imposes  unwarranted  compliance  cost  burdens  on  investment  firms 
without  delivering  any  apparent  societal  benefits.  Therefore,  it  is  proposed  to  waive 
investment firms 'with limited license' and 'limited activities' from the large exposure regime 
in Directive 2006/49/EC. 

6.3. 

Supervisory arrangements 

6.3.1. 

Information  exchange  and  cooperation  –  Articles  40,  42a,  42b,  49  and  50  of 
Directive 2006/48 

In  emergency  situations,  smooth  and  unfettered  multilateral  exchange  of  information  is  of 
particular relevance. This is why it is proposed to improve information rights of host country 
supervisors of systemically relevant branches in Article 42a and to specify in Article 49 and 
50 the legal framework for transmitting information to ministries of finance and central banks.  

The  proposal  provides  for  a  definition  of  'systemically  relevant  branches'  in  Article  42a. 
Access  to  relevant  information  would  be  facilitated  by  the  involvement  of  supervisors  of 
systemically  relevant  branches  in  colleges  of  supervisors.  This  participation  will  be  decided 
by the consolidating supervisor depending on the issues to be discussed.  

By requesting authorities to have regard to the implication of their decisions on the financial 
stability in other Member States, Article 40(3) outlines a European dimension in supervisory 
decisions which is key to underpinning cooperation between authorities.  

6.3.2.  Colleges of supervisors - Articles 42a, 129 and 131a (new) of Directive 2006/48 

The suggested amendments aim at reinforcing the efficiency and effectiveness of supervision 
of cross-border banking groups by requiring: 

•  the  establishment  of  colleges  of  supervisors  to  facilitate  the  tasks  of  the  consolidating 

supervisor and host supervisors,  

•  a  joint  decision  on  two  key  supervisory  aspects  for  group  supervision  (Pillar  2  and 
reporting  requirements)  with  a  last  say  for  the  consolidating  supervisors.  This  is  coupled 
with a mediation mechanism in case of disagreement.  

•  the  competent  authorities  involved  in  the  supervision  of  a  group  to  consistently  apply 

within a banking group the prudential requirements under the Directive.  

The consolidating supervisors will be required to inform CEBS on the activities of colleges to 
develop consistent approaches across colleges. Colleges will also be required for supervisors 
overseeing cross-border entities that do not have subsidiaries in other Member States but that 
do have systemically important branches.  

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6.4. 

Technical amendments 

6.4.1.  Derogations  for  credit  institutions  affiliated  to  a  central  institution  (Article  3  of 

Directive 2006/48/EC) 

In  Article  3  of  Directive  2006/48/EC,  it  is  proposed  to  delete  the  time  limits  (dates  of  15 
December 1977 and of 15 December 1979) that restrict its application. The recent accession 
of new Member States revealed the need to make the derogations in this Article available to 
all Member States and not only to those that have joined the EU three decades ago. 

6.4.2.  Capital requirements for investments in Collective Investment Undertakings (Article 

87 of Directive 2006/48/EC) 

Credit institutions felt that the capital requirements for investments in Collective Investment 
Undertakings  (CIU)  such  as  mutual  funds  were  too  strict  under  the  IRB  approach  in  those 
cases where banks cannot or do not want to provide internal rating for the exposure held by 
the CIU. The proposal considerably lowers the capital requirements for less risky assets held 
by  the  CIU  but  maintains  high  capital  charges  where  the  assets  are  either  high  risk  or  the 
actual risk is not known. This also continues to provide a disincentive to hide unknown risks 
on a bank's balance sheet behind investments in CIU without adequate capital requirements. 

6.4.3. 

Securitisation (new Article 122a of Directive 2006/48/EC) 

Potential  conflicts  of  interest  in  the  "originate  to  distribute"  model  must  be  addressed  by 
making sure that originators and sponsors of the more opaque credit risk transfer instruments 
retain a proportion of the risk that is being transferred to investors. For this reason, it should 
be required from investors to make sure that originators and sponsors retain a material share 
(not less than 5 per cent) of the risks so that effectively, equally originators and sponsors that 
are regulated by this directive and those that are not regulated by this directive will have to 
retain a share of the risks for their own account. This requirement should be complemented by 
ensuring that investors have a thorough understanding of the underlying risks and the complex 
structural  features  of  what  they  are  buying.  To  enable  informed  decisions,  detailed 
information has to be available to investors. 

6.4.4.  Counterparty credit risk (Annex III and Article 150 of Directive 2006/48/EC 

This  Annex  lays  out  the  details  of  the  methods  to  calculate  capital  requirements  for 
counterparty credit risk. The technical amendments proposed aim at ironing out a number of 
difficulties  identified  during  the  transposition  phase  of  the  CRD.  The  changes  do  not 
materially alter the content of the annex but clarify and streamline its application. 

Future  technical  amendments  of  Annex  III  should  be  adopted  under  the  comitology 
procedure. Currently, the powers of execution do not explicitly refer to this annex. 

6.4.5.  Liquidity risk (Annexes V and XI of Directive 2006/48/EC) 

The current market turmoil has highlighted the fact that liquidity is a key determinant of the 
soundness of the banking sector.  

The proposed changes implement the work conducted by CEBS and the Basel Committee on 
Banking  Supervision  to  develop  sound  principles  for  liquidity  risk  management.  The 
proposed  changes  to  Annex  V  highlight  the  need  for  the  board  of  directors  to  set  an 

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appropriate  level  of  liquidity  risk  tolerance.  The  proposed  changes  to  Annex  XI  aim  at 
ensuring  a  proper  incentive  for  banks  to  better  understand  their  liquidity  risk  profile.  It 
requires national supervisors to facilitate firms' understanding of their liquidity risk profiles, 
and does not exclude the possibility of relying to some extent on internal methodologies for 
supervisory purposes. 

Given the significant changes introduced by these modifications, it is appropriate to include 
these amendments in this proposal. 

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2008/0191 (COD) 

Proposal for a 

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  

amending Directives 2006/48/EC and 2006/49/EC as regards banks affiliated to central 
institutions, certain own funds items, large exposures, supervisory arrangements, and 
crisis management  

(Text with EEA relevance) 

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, and in particular Article 
47(2) thereof, 

Having regard to the proposal from the Commission3, 

Having regard to the opinion of the European Economic and Social Committee4, 

Having regard to the opinion of the European Central Bank5, 

Having regard to the opinion of the Committee of the Regions6, 

Acting in accordance with the procedure laid down in Article 251 of the Treaty7, 

Whereas: 

(1) 

Article 3 of Directive 2006/48/EC of the European Parliament and of the Council of 
14 June 2006 relating to the taking up and pursuit of the business of credit institutions8 
allows Member States to provide for special prudential regimes for credit institutions 
which are permanently affiliated to a central body since 15 December 1977, provided 
that those regimes were introduced in national laws no later than 15 December 1979. 
Those time limits prevent Member States, especially those which have acceded to the 
European Union since 1980, to introduce the same regimes for similar affiliations of 
credit  institutions  which  have  been  set  up  later  on  their  territories.  It  is  therefore 
appropriate  to  remove  the  time  limits  set  out  in  Article  3,  in  order  to  ensure  equal 
conditions  for  competition  between  credit  institutions  in  Member  States.  The 
Committee  of  European  Banking  Supervisors  should  provide  for  non-binding 
guidelines in order to enhance the convergence of supervisory practices in this regard. 

3 
4 
5 
6 
7 
8 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 
OJ L 177, 30.6.2006, p. 1. 

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(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

Hybrid capital instruments play an important role in the ongoing capital management 
of  credit  institutions.  Those  instruments  allow  credit  institutions  to  achieve  a 
diversified  capital  structure  and  to  access  a  wide  range  of  financial  investors.  On  28 
October 1998, the Basel Committee on Banking Supervision adopted an agreement on 
both  the  eligibility  criteria  and  limits  to  inclusion  of  certain  types  of  hybrid  capital 
instruments into original own funds of credit institutions.  

Therefore,  it  is  important  to  lay  down  criteria  for  those  capital  instruments  to  be 
eligible  for  original  own  funds  of  credit  institutions  and  to  align  the  provisions  in 
Directive 2006/48/EC to that agreement. The amendments to Annex XII to Directive 
2006/48/EC  result  directly  from  the  establishment  of  those  criteria.  The  eligibility 
criteria  should  refer  to  the  most  subordinated  instruments  of  a  credit  institution  that 
does not have proprietors or shareholders under national law, such as certain members' 
certificates of cooperative banks, insofar as the respective capital has been paid up and 
ranks after all other claims. 

In  order  to  avoid  disruption  of  markets  and  to  ensure  continuity  in  overall  levels  of 
own  funds  it  is  appropriate  to  provide  for  specific  transitional  arrangements  for  the 
new regime on hybrid capital instruments. 

For the purpose of strengthening the crisis management framework of the Community, 
it is essential that competent authorities coordinate their actions with other competent 
authorities  and  where  appropriate  with  central  banks  in  an  efficient  way.  In  order  to 
strengthen  the  efficiency  of  prudential  supervision  of  parent  credit  institutions 
authorised in the Community and to allow competent authorities to better carry out the 
supervision of a banking group on a consolidated basis, supervisory activities should 
be coordinated in a more effective manner. Therefore, Colleges of Supervisors should 
be  established.  The  establishment  of  colleges  should  not  affect  the  rights  and 
responsibilities  of  the  competent  authorities  under  Directive  2006/48/EC.  Their 
establishment  should  be  an  instrument  for  stronger  cooperation  whereby  competent 
authorities  reach  agreement  on  key  supervisory  tasks.  The  colleges  should  facilitate 
the  handling  of  ongoing  supervision  and  emergency  situations.  The  consolidating 
supervisor  may,  in  association  with  the  other  members  of  the  college,  decide  to 
organise meetings or activities that are not of general interest and therefore streamline 
the attendance as appropriate.  

The  mandates  of  competent  authorities  should  take  into  account  a  Community 
dimension. Competent authorities should therefore take into account the effect of their 
decisions on the stability of the financial system in all other Member States. 

Competent  authorities  should  be  able  to  participate  in  colleges  established  for  the 
supervision  of  credit  institutions  the  parent  institution  of  which  is  situated  in  a  third 
country.  The  Committee  of  European  Banking  Supervisors  should  provide,  where 
necessary,  for  non-binding  guidelines  and  recommendations  in  order  to  enhance  the 
convergence of supervisory practices pursuant to Directive 2006/48/EC.  

Information deficits between the home and the host competent authorities may prove 
detrimental to the financial stability in host Member states. The information rights of 
host  supervisors,  in  particular  in  a  crisis  of  systemically  relevant  branches,  should 
therefore  be  reinforced.  For  that  purpose,  systemically  relevant  branches  should  be 
defined. Competent authorities should transmit information which is essential for the 

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pursuance  of  tasks  of  central  banks  and  of  Ministries  of  Finance  with  respect  to 
financial crises.  

(9) 

Excessive concentration of exposures to a single client or group of connected clients 
may  result  in  an  unacceptable  risk  of  loss.  Such  a  situation  can  be  considered 
prejudicial to the solvency of a credit institution. The monitoring and control of large 
exposures of credit institution should therefore be an integral part of its supervision. 

(10)  The  current  large  exposure  regime  dates  back  to  1992.  Therefore,  the  existing 
requirements  on  large  exposure  set  out  in  Directive  2006/48/EC  and  Directive 
2006/49/EC  of  the  European  Parliament  and  of  the  Council  of  14  June  2006  on  the 
capital adequacy of investment firms and credit institutions9 should be reviewed. 

(11)  Since credit  institutions in the internal market are engaged in direct competition, the 
essential  rules  for  monitoring  and  control  of  large  exposures  of  credit  institutions 
should  be  further  harmonised.  In  order  to  reduce  administrative  burden  for  credit 
institutions  the  number  of  options  for  Members  States  as  far  as  large  exposures  are 
concerned should be reduced.  

(12) 

In  determining  the  existence  of  a  group  of  connected  clients  and  thus  exposures 
constituting a single risk, it is important to take into account also risks arising from a 
common source of significant funding provided by the credit institution or investment 
firm itself, its financial group or its connected parties.  

(13)  While it is desirable to base the calculation of the exposure value on that provided for 
the purposes of minimum own funds requirements, it is appropriate to adopt rules for 
the monitoring of large exposures without applying risk weightings or degrees of risk. 
Moreover,  the  credit  risk  mitigation  techniques  applied  in  the  solvency  regime  were 
designed  with  the  assumption  of  a  well-diversified  credit  risk.  In  case  of  large 
exposures,  dealing  with  single  name  concentration  risk,  credit  risk  is  not  well-
diversified.  Therefore  effects  of  those  techniques  should  be  subject  to  prudential 
safeguards. In this context, it is necessary to provide for an effective recovery of the 
credit protection for the purposes of large exposures. 

(14)  Since a loss arising from an exposure to a credit institutions or an investment firm can 
be as severe as a loss from any other exposure, such exposures should be treated and 
reported as any other exposures. 

(15) 

It is important to remove misalignment between the interest of firms that 're-package' 
loans  into  tradable  securities  and  other  financial  instruments  (originators)  and  firms 
that  invest  in  these  securities  or  instruments  (investors).  It  is  therefore  important  for 
originators to retain exposure to the risk of the loans in question. In particular where 
credit risk is transferred by securitisation, investors should make their decisions only 
after  conducting  thorough  due  diligence,  for  which  they  need  adequate  information 
about the securitisations. 

(16)  Annex  III  to  Directive  2006/48/EC  should  be  adapted  in  order  to  clarify  certain 

provisions with a view to enhance convergence of supervisory practices. 

9 

OJ L 177, 30.6.2006, p. 201. 

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(17)  Recent market developments have highlighted the fact that liquidity risk management 
is  a  key  determinant  of  the  soundness  of  credit  institutions.  The  criteria  set  out  in 
Annex V and XI to Directive 2006/48/EC should be reinforced in order to align those 
provisions to the work conducted by the Committee of European Banking Supervisors 
and the Basel Committee on Banking Supervision. 

(18)  The  measures  necessary  for  the  implementation  of  Directive  2006/48/EC  should  be 
adopted  in  accordance  with  Council  Decision  1999/468/EC  of  28  June  1999  laying 
down  the  procedures  for  the  exercise  of  implementing  powers  conferred  on  the 
Commission10. 

(19) 

In particular the Commission should be empowered to amend Annex III of Directive 
2006/48/EC  in  order  to  take  account  of  developments  on  financial  markets  or  in 
accounting standards or requirements which take account of Community legislation, or 
with  regard  to  convergence  of  supervisory  practice  and  to  alter  the  percentage 
specified  in  Article  111(1)  of  that  Directive  to  take  account  of  developments  on 
financial  markets.  Since  those  measures  are  of  general  scope  and  are  designed  to 
amend  non-essential  elements  of  Directive  2006/48/EC,  they  must  be  adopted  in 
accordance with the regulatory procedure with scrutiny provided for in Article 5a of 
Decision 1999/468/EC.  

(20)  Since  the  objectives  of  the  proposed  action,  namely  the  introduction  of  rules 
concerning  the  taking  up  and  pursuit  of  the  business  of  credit  institutions,  and  their 
prudential supervision, cannot be sufficiently achieved by the Member States because 
it  requires  the  harmonisation  of  a  multitude  of  different  rules  existing  in  the  legal 
systems  of  the  various  Member  States  and  can  therefore  be  better  achieved  at 
Community  level,  the  Community  may  adopt  measures,  in  accordance  with  the 
principle  of subsidiarity  as  set  out  in  Article 5 of the Treaty.  In accordance with the 
principle  of  proportionality,  as  set  out  in  that  Article,  this  Directive  does  not  go 
beyond what is necessary in order to achieve those objectives. 

(21)  Directives 2006/48/EC and 2006/49/EC should therefore be amended accordingly, 

HAVE ADOPTED THIS DIRECTIVE: 

Article 1  

Amendments to Directive 2006/48/EC 

Directive 2006/48/EC is amended as follows: 

1. 

(a) 

Article 3(1) is amended as follows: 

The introductory phrase in the first subparagraph is replaced by the following: 

"One  or  more  credit  institutions  situated  in  the  same  Member  State  and  which  are 
permanently  affiliated  to  a  central  body  which  supervises  them  and  which  is  

10 

OJ L184, 17.7.1999, p. 23. 

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15 

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established  in  the  same  Member  State,  may  be  exempted  from  the  requirements  of 
Articles 7 and 11(1) if national law provides that:" 

(b) 

2. 

(a) 

The second and third subparagraphs are deleted.  

Article 4 is amended as follows: 

Point (6) is replaced by the following: 

"(6) 

'institutions'  for  the  purposes  of  Sections  2,  3  and  5  of  Title  V,  Chapter  2, 
means institutions as defined in Article 3(1)(c) of Directive 2006/49/EC;" 

(b) 

Point (45)(b) is replaced by the following: 

"(b)  two or more natural or legal persons between whom there is no relationship of 
control as set out in point (a) but who are to be regarded as constituting a single 
risk because they are so interconnected that, if one of them were to experience 
financial problems, in particular funding or repayment difficulties, the other or 
all  of  the  others  would  be  likely  to  encounter  funding  or  repayment 
difficulties."  

(c) 

Point (48) is added: 

"(48) 'consolidating  supervisor'  means  the  competent  authority  responsible  for  the 
exercise of supervision on a consolidated basis of EU parent credit institutions 
and credit institutions controlled by EU parent financial holding companies." 

3. 

In Article 40 the following paragraph 3 is added: 

"3.  The  competent  authorities  in  one  Member  State  shall  take  into  account  to  the 
potential impact of their decisions on the stability of the financial system in all other 
Member States concerned and, in particular, in emergency situations." 

4. 

The following Article 42a is inserted: 

"Article 42a 

1.  The  competent  authorities  of  a  host  Member  State  may  make  a  request  to  the 
consolidating supervisor where Article 129 (1) applies or to the competent authorities 
of  the  home  Member  State,  for  a  branch  of  a  credit  institution  to  be  considered  as 
systemically relevant.  

The  request  shall  provide  reasons  for  considering  the  branch  to  be  systemically 
relevant with particular regard to the following:  

(a)  whether  the  market  share  of  the  branch  of  a  credit  institution  in  terms  of 

deposit exceeds 2% in the host Member State; 

(b) 

the  likely  impact  of  a  suspension  or  closure  of  the  operations  of  the  credit 
institution  on  the  payment  and  clearing  and  settlement  systems  in  the  host 
Member State;  

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(c) 

the size and the importance of the branch in terms of number of clients within 
the context of banking or financial system of the host Member State. 

The  competent  authorities  of  the  home  and  the  host  Member  State,  and  the 
consolidating  supervisor  where  Article  129(1)  applies,  shall  do  everything  within 
their  power  to  reach  a  joint  decision  on  the  designation  of  branches  as  being 
systemically relevant.  

If  no  joint  decision  is  reached  within  two  months  of  receipt  of  a  request  under  the 
first  subparagraph,  the  competent  authorities  of  the  host  Member  State  shall  take 
their  own  decision  within  a  further  period  of  two  months  on  whether  the  branch  is 
systemically relevant. In taking its decision, it shall take into account any views and 
reservations of the consolidating supervisor or the competent authorities of the home 
Member State. 

The  decisions  referred  to  in  the  third  and  fourth  subparagraph  shall  be  set  out  in  a 
document  containing  the  fully  reasoned  decision,  transmitted  to  the  competent 
authorities  concerned,  recognised  as  determinative  and  applied  by  the  competent 
authorities in the Member States concerned. 

The designation of a branch as being systemically relevant shall not affect the rights 
and responsibilities of the competent authorities under this Directive.  

2.  The  competent  authorities  of  the  home  Member  State  shall  communicate  to  the 
competent authorities of a host Member State where a systemically relevant branch is 
established the information referred to in Article 132(1)(c) and (d) and carry out the 
tasks referred to in Article 129(1)(c) in cooperation with the competent authorities of 
the host Member State.  

If a competent authority of a home Member State becomes aware of an emergency 
situation  within  a  credit  institution  as  referred  to  in  Article  130(1),  it  shall  alert  as 
soon  as  practicable  the  authorities  referred  to  in  the  fourth  paragraph  of  Article  49 
and in Article 50. 

3. Where Article 131a does not apply, the competent authorities supervising a credit 
institution with systemically relevant branches in other Member States shall establish 
and chair a college of supervisors to facilitate the cooperation under Article 42 and 
paragraph 2 of this Article. The establishment and functioning of the college shall be 
based  on  written  arrangements  determined,  after  consultation  with  competent 
authorities concerned, by the competent authorities of the home Member State." 

5. 

The following Article 42b is inserted: 

"Article 42b 

1.  In  the  exercise  of  their  duties,  competent  authorities  shall  take  into  account  the 
convergence  in  respect  of  supervisory  tools  and  supervisory  practices  in  the 
application  of  the  laws,  regulations  and  administrative  requirements  adopted 
pursuant  to  this  Directive.  For  that  purpose,  Member  States  shall  ensure  that  the 
competent  authorities  participate  in  the  activities  of  the  Committee  of  European 

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Banking  Supervisors  and  take  into  account  its  non-binding  guidelines  and 
recommendations. 

2. The Committee of European Banking Supervisors shall report to the Council, the 
European  Parliament  and  the  European  Commission  on  the  progress  made  towards 
supervisory convergence every three years starting from 31 December 2010."  

6.  Article 49 is amended as follows: 

(a) 

In the first paragraph, point (a) is replaced by the following: 

"(a)  central  banks  and  other  bodies  with  a  similar  function  in  their  capacity  as 
monetary  authorities  when  this  information  is  relevant  for  the  exercise  of  their 
respective statutory tasks, including the conduct of monetary policy, the oversight of 
payments  and  securities  settlement  systems,  and  the  safeguarding  of  financial 
stability ; and" 

(b) 

The following paragraph is added: 

"In  an  emergency  situation  as  referred  to  in  Article  130(1),  Member  States  shall 
allow  competent  authorities  to  communicate  information  to  central  banks  in  the 
Community  when  this  information  is  relevant  for  the  exercise  of  their  respective 
statutory tasks, including the conduct of monetary policy, the oversight of payments 
and securities settlement systems, and the safeguarding of financial stability." 

7. 

In Article 50, the following paragraph is added: 

"In  an  emergency  situation  as  referred  to  in  Article  130(1),  Member  States  shall 
allow competent authorities to disclose information to the departments referred to in 
the first paragraph in all Member States concerned." 

8. 

(a) 

Article 57 is amended as follows: 

Point (a) is replaced by the following: 

"(a)  capital within the meaning of Article 22 of Directive 86/635/EEC, in so far as 
it has been paid up, plus the related share premium  accounts, it  fully absorbs 
losses in going concern situations, and in the event of bankruptcy or liquidation 
ranks after all other claims." 

(b) 

The following point (ca) is inserted: 

"(ca)  "instruments  other  than  those  referred  to  in  point  (a),  which  meet  the 
requirements  set  out  in  points  (a),  (c),  (d)  and  (e)  of  Article  63  (2)  and  in 
Article 63a;" 

9. 

The first paragraph of Article 61 is replaced by the following: 

"The concept of own funds as defined in points (a) to (h) of Article 57 embodies a 
maximum number of  items and amounts.  Member  States may decide  on  the  use of 
those items and on the deduction of items other than those listed in points (i) to (r) of 
Article 57." 

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10. 

In Article 63(2), the following subparagraph is added: 

"Instruments  referred  to  in  point  (ca)  of  Article  57  shall  comply  with  the 
requirements set out in points (a), (c), (d) and (e) of this Article."  

11. 

The following Article 63a is inserted: 

"Article 63a 

"1.  Instruments  referred  to  in  point  (ca)  of  Article  57  shall  comply  with  the 
requirements set out in paragraph 2 to 5 of this Article. 

2. 
The  instruments  shall  be  undated  or  have  an  original  maturity  of  at  least  30 
years. Those instruments may include one or more call options at the sole discretion 
of the issuer, but they shall not be redeemed before five years after the date of issue. 
If the statutory or contractual provisions governing undated instruments provide for a 
moderate  incentive  for  the  credit  institution  to  redeem  as  determined  by  the 
competent authorities, such incentive shall not occur before ten years after the date of 
issue.  

Dated  and  undated  instruments  may  be  called  or  redeemed  only  with  the  prior 
consent  of  the  competent  authorities.  The  competent  authorities  may  grant 
permission provided the request is made at the initiative of the credit institution and 
either  financial  or  solvency  conditions  of  the  credit  institution  are  not  unduly 
affected. The competent authorities may require institutions to replace the instrument 
by items of the same or better quality referred to in point (ca) of Article 57.  

The  competent  authorities  shall  require  the  suspension  of  the  redemption  for  dated 
instruments if the credit institution does not comply with the capital requirements set 
out in Article 75. 

The competent authority may grant permission at any time for an early redemption of 
dated and undated instruments in the event that there is a change in the applicable tax 
treatment or regulatory classification which was unforeseen at the date of issue." 

3.  The  statutory  or  contractual  provisions  governing  the  instrument  shall  allow  the 
credit institution to cancel, when necessary, the payment of interest or dividends for 
an unlimited period of time, on a non-cumulative basis.  

However, the credit institution shall cancel such payments if it does not comply with 
the capital requirements set out in Article 75. 

The  competent  authorities  may  require  the  cancellation  of  such  payments  based  on 
the financial and solvency situation of the credit institution. Such cancellation shall 
not prejudice the right of the credit institution to substitute the payment of interest or 
dividend by a payment in the form of an instrument referred to in point (a) of Article 
57,  provided  that  any  such  mechanism  allows  the  credit  institution  to  preserve 
financial  resources.  Such  substitution  may  be  subject  to  specific  conditions 
established by the competent authorities. 

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4. The statutory or contractual provisions governing the instrument shall provide for 
principal, unpaid interest or dividend to be such as to absorb losses and to not hinder 
the recapitalisation of the credit institution.  

5.  In  the  event  of  the  bankruptcy  or  liquidation  of  the  credit  institution,  the 
instruments shall rank after the items referred to in Article 63(2). 

6.  The  Committee  of  European  Banking  Supervisors  shall  elaborate  guidelines  for 
the convergence of supervisory practices with regard to the instruments referred to in 
paragraph  1  and  shall  monitor  their  application.  By  January  2012,  the  Commission 
shall review the application of this Article and shall report to the Parliament and the 
Council." 

12. 

In Article 65(1), point (a) is replaced by the following: 

"(a)  any  minority  interests  within  the  meaning  of  Article  21  of  Directive 
83/349/EEC,  where  the  global  integration  method  is  used.  Any  instruments 
referred to in point (ca) of Article 57, which give rise to minority interests shall 
meet the requirements under Articles 63a, 66, and points (a), (c), (d) and (e) of 
Article 63(2);" 

13. 

(a) 

Article 66 is amended as follows: 

Paragraph 1 is replaced by the following: 

"1.  The  items  referred  to  in  points  (d)  to  (h)  of  Article  57  shall  be  subject  to  the 
following limits: 

(a) 

(b) 

the  total  of  the  items  in  points  (d)  to  (h)  of  Article  57  may  not  exceed  a 
maximum of 100 % of the items in points (a) to (ca) minus (i), (j) and (k) that 
Article; and 

the  total  of  the  items  in  points  (g)  to  (h)  of  Article  57  may  not  exceed  a 
maximum of 50 % of the items in points (a) to (ca) minus (i), (j) and (k) of that 
Article." 

(b) 

The following paragraph 1a is inserted: 

"1a.  Notwithstanding  paragraph  1,  the  total  of  the  items  in  point  (ca)  of  Article  57 
shall be subject to the following limits: 

(a) 

instruments  that  must  be  converted  during  emergency  situations  into  items 
referred to in point (a) of Article 57 within a pre-determined range, and capital 
that has been paid up, fully absorbs losses in going concern situations, and in 
the event of bankruptcy or liquidation ranks after all other claims shall in total 
not exceed a maximum of 50% of the items in points (a) to (ca) minus (i), (j) 
and (k) of Article 57; 

(b)  within the limit referred to in point (a) of this paragraph, all other instruments 
shall not exceed a maximum of 35% of the items in points (a) to (ca) minus (i), 
(j) and (k) of Article 57;  

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(c)  within  the  limits  referred  to  in  points  (a)  and  (b)  of  this  paragraph,  dated 
instruments  and  any  instrument,  whose  statutory  or  contractual  provisions 
provide for an incentive for the credit institution to redeem shall not exceed a 
maximum  of  15%  of  the  items  in  points  (a)  to  (ca)  minus  (i),  (j)  and  (k)  of 
Article 57. 

(d) 

the amount of items exceeding the limits set out in points (a), (b) and (c) shall 
be subject to the limit set out in paragraph 1." 

(c) 

Paragraph 2 is replaced by the following: 

"2. The total of the items in points (l) to (r) of Article 57 shall be deducted half from 
the total of the items (a) to (ca) minus (i), (j) and (k) of that Article, and half from the 
total of the items (d) to (h) of that Article, after application of the limits laid down in 
paragraph 1 of this Article. To the extent that half of the total of the items (l) to (r) of 
Article 57 exceeds the total of the items (d) to (h) of that Article, the excess shall be 
deducted from the total of the items (a) to (ca) minus (i), (j) and (k) of that Article. 
Items in point (r) of Article 57 shall not be deducted if they have been included in the 
calculation  of  risk-weighted  exposure  amounts  for  the  purposes  of  Article  75  as 
referred to in Annex IX, Part 4." 

(d) 

Paragraph 4 is replaced by the following: 

"4.  The  competent  authorities  may  authorise  credit  institutions  to  exceed  the  limits 
laid down in paragraphs 1 and 1a temporarily during emergency situations."  

14. 

(a) 

Article 87 is amended as follows: 

Paragraph 11 is replaced by the following: 

"11. Where exposures in the form of a collective investment undertaking (CIU) meet 
the criteria set out in Annex VI, Part 1, points 77 and 78 and the credit institution is 
aware  of  all  or  parts  of  the  underlying  exposures  of  the  CIU,  the  credit  institution 
shall look through to those underlying exposures in order to calculate risk-weighted 
exposure amounts and expected loss amounts in accordance with the methods set out 
in this Subsection. Paragraph 12 shall apply to the part of the underlying exposures 
of the CIU the credit institution is not aware of and could not reasonably be aware of. 

Where  the  credit  institution  does  not  meet the conditions for using the methods set 
out  in  this  Subsection  for  all  or  parts  of  the  underlying  exposures  of  the  CIU,  risk 
weighted  exposure  amounts  and  expected  loss  amounts  shall  be  calculated  in 
accordance with the following approaches: 

(a) 

(b) 

for exposures belonging to the exposure class referred to in point (e) of Article 
86(1), the approach set out in Annex VII, Part 1, points 19 to 21.  

for  all  other  underlying  exposures,  the  approach  set  out  in  Articles  78  to  83, 
subject to the following modifications: 

(i) 

for  exposures  subject  to  a  specific  risk  weight  for  unrated  exposures  or 
subject  to  the  highest  credit  quality  step  for  a  given  exposure  class,  the 

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risk weight shall be multiplied by a factor of 2 but cannot be higher than 
1250%; 

(ii) 

for all other exposures, the risk weight shall be multiplied by a factor of 
1.1 and subject to a minimum of 5%." 

If,  for  the  purposes  of  point  (a),  the  credit  institution  is  unable  to  differentiate 
between private equity, exchange-traded and other equity exposures, it shall treat the 
exposures  concerned  as  other  equity  exposures.  Where  these  exposures,  taken 
together  with  the  credit  institution's  direct  exposures  in  this  exposure  class,  are  not 
material  within  the  meaning  of  Article  89(2),  Paragraph  1  of  that  Article  may  be 
applied subject to the approval of the competent authorities." 

(b) 

In paragraph 12, the second subparagraph is replaced by the following: 

"Alternatively  to  the  method  described  in  the  first  subparagraph,  credit  institutions 
may  calculate  themselves  or  may  rely  on  a  third  party  to  calculate  and  report  the 
average risk weighted exposure amounts based on the CIU's underlying exposures in 
accordance  with  the  approaches  referred  to  in  points  (a)  and  (b)  of  paragraph  11, 
provided that the correctness of the calculation and the report is adequately ensured." 

15. 

In Article 89, the introductory phrase of point (d) is replaced by the following: 

"(d)  exposures  to  central  governments  of  the  Member  States  and  their  regional 
governments, local authorities and administrative bodies provided that" 

16. 

(a) 

Article 106 is amended as follows: 

Paragraph 2 is replaced by the following: 

"2. Exposures shall not include any of the following:  

(a) 

(b) 

(c) 

in the case of foreign exchange transactions, exposures incurred in the ordinary 
course of settlement during the 48 hours following payment;  

in  the  case  of  transactions  for  the  purchase  or  sale  of  securities,  exposures 
incurred  in  the  ordinary  course  of  settlement  during  the  five  working  days 
following payment or delivery of the securities, whichever is the earlier; or 

in  the  case  of  the  provision  of  money  transmission  or  securities  clearing  and 
settlement services to clients, delayed receipts in funding and other exposures 
arising  from  client  activity,  which  do  not  last  longer  than  the  following 
business day."  

(b) 

Paragraph 3 is added:  

"3. In order to determine the existence of a group of connected clients, in respect of 
exposures  referred  to  in  points  (m),  (o)  and  (p)  of  Article  79(1),  where  there  is  an 
exposure  to  underlying  assets,  a  credit  institution  shall  assess  the  scheme  and  its 
underlying  exposures.  For  that  purpose,  a  credit  institution  shall  evaluate  the 
economic substance and the risks inherent in the structure of the transaction." 

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17. 

Article 107 is replaced by the following: 

"Article 107 

For  the  purposes  of  calculating  the  value  of  exposures  in  accordance  with  this 
Section,  the  term  'credit  institution'  shall  also  cover  any  private  or  public 
undertaking, including its branches, which meets the definition of 'credit institution' 
and has been authorised in a third country."  

18. 

Article 110 is replaced by the following: 

"Article 110 

1.  A  credit  institution  shall  report  the  following  information  about  every  large 
exposure to the competent authorities, including large exposures exempted from the 
application of Article 111(1):  

(a) 

(b) 

the  identification  of  the  client  or  the  group  of  connected  clients  to  which  a 
credit institution has a large exposure; 

the  exposure  value  before  taking  into  account  the  effect  of  the  credit  risk 
mitigation, to the extent possible; 

(c)  where used, the type of funded or unfunded credit protection; 

(d) 

the  exposure  value  after  taking  into  account  the  effect  of  the  credit  risk 
mitigation calculated for the purpose of Article 111(1). 

If  a  credit  institution  is  subject  to  Articles  84  to  89,  its  20  largest  exposures  on  a 
consolidated basis, excluding those exempted from the application of Article 111(1), 
shall be made available to the competent authorities. 

2. Member States shall provide that reporting is to be carried out at least twice a year. 

3.  Member  States  shall  require  credit  institutions  to  analyse,  to  the  extent  possible, 
their  exposures  to  collateral  issuers  and  providers  of  unfunded  credit  protection  for 
possible concentrations and where appropriate take action and report any significant 
findings to their competent authority." 

19. 

(a) 

Article 111 is amended as follows: 

Paragraph 1 is replaced by the following: 

"1. A credit institution may not incur an exposure, after taking into account the effect 
of  the  credit  risk  mitigation  in  accordance  with  Articles  112  to  117,  to  a  client  or 
group of connected clients the value of which exceeds 25% of its own funds.  

Where that client is an institution or where a group of connected clients includes one 
or  more  institutions,  this  value  may  not  exceed  25%  of  the  credit  institution's  own 
funds or the amount of EUR 150 million, whichever is higher, provided that the sum 
of exposure values, after taking into account the effect of the credit risk mitigation in 

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accordance with Articles 112 to 117, to all connected clients that are not institutions 
does not exceed 25% of the credit institution's own funds. 

Member  States  may  set  a  lower  limit  than  EUR  150  million  and  shall  inform  the 
Commission." 

(b) 

(c) 

Paragraphs 2 and 3 are deleted.  

Paragraph 4 is replaced by the following: 

"4. A credit institution shall at all times comply with the limit laid down in paragraph 
1.  If  in  an  exceptional  case  exposures  exceed  this  limit,  the  value  of  the  exposure 
shall  be  reported  without  delay  to  the  competent  authorities  which  may,  where  the 
circumstances warrant it, allow the credit institution a limited period of time in which 
to comply with the limit." 

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20. 

(a) 

Article 112 is amended as follows: 

Paragraph 2 is replaced by the following: 

"2.  Subject  to  paragraph  3,  where,  under  Articles  113  to  117,  the  recognition  of 
funded or unfunded credit protection is permitted, this shall be subject to compliance 
with the eligibility requirements and other minimum requirements, set out in Articles 
90 to 93." 

(b) 

The following paragraph 4 is added: 

"4. For the purpose of this Section, a credit institution shall not take into account the 
collateral referred to in Annex VIII, Part 1, points 20 to 22, unless permitted under 
Article 115." 

21. 

Article 113 is amended as follows: 

(a) 

(b) 

(i) 

Paragraphs 1 and 2 are deleted. 

Paragraph 3 is amended as follows: 

The introductory phrase is replaced by the following: 

"3.  The  following  exposures  shall  be  exempted  from  the  application  of  Article 
111(1):" 

(ii) 

Points (e) and (f) are replaced by the following: 

"(e)  asset items constituting claims on regional governments and local authorities of 
Member States where those claims would be assigned a 0 % risk weight under 
Articles  78  to  83  and  other  exposures  to  or  guaranteed  by  such  governments 
and  authorities  claims  on  which  would  be  assigned  a  0  %  risk  weight  under 
Articles 78 to 83. 

(f) 

exposures to counterparties referred to in paragraph 7 or paragraph 8 of Article 
80  if  they  would  be  assigned  a  0%  risk  weight  under  Articles  78  to  83; 
exposures  that  do  not  meet  these  criteria,  whether  exempted  from  Article 
111(1) or not, shall be treated as exposures to a third party." 

(iii) 

Point (i) is replaced by the following: 

"(i)  exposures arising from undrawn credit facilities that are classified as low risk 
off-balance sheet items in Annex II and provided that an  agreement has been 
concluded with the client or group of connected clients under which the facility 
may  be  drawn  only  if  it  has  been  ascertained  that  it  will  not  cause  the  limit 
applicable under Article 111(1) to be exceeded." 

(iv) 

Points (j) to (t) are deleted. 

(c) 

The third, fourth and fifth subparagraphs are deleted. 

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(d) 

The following paragraph 4 is added: 

"4.  Member  States  may  fully  or  partially  exempt  the  following  exposures  from  the 
application of Article 111(1): 

(a) 

(b) 

(c) 

(d) 

(e) 

(f) 

covered bonds falling within the terms of Annex VI, Part 1, points 68, 69 and 
70; 

asset items constituting claims on regional governments and local authorities of 
Member States where those claims would be assigned a 20% risk weight under 
Articles  78  to  83  and  other  exposures  to  or  guaranteed  by  such  governments 
and  authorities  claims  on  which  would  be  assigned  a  20%  risk  weight  under 
Articles 78 to 83; 

notwithstanding point (f) of paragraph 1 of this Article, exposures incurred by 
a credit institution to its parent undertaking, to other subsidiaries of that parent 
undertaking  or  to  its  own  subsidiaries,  in  so  far  as  those  undertakings  are 
covered  by  the  supervision  on  a  consolidated  basis  to  which  the  credit 
institution itself is subject, in accordance with this Directive or with equivalent 
standards in force in a third country; exposures that do not meet these criteria, 
where exempted from Article 111(1) or not, shall be treated as exposures to a 
third party; 

asset items constituting exposures to or participations or other kind of holdings 
in regional or central credit institutions with which the lending credit institution 
is associated in a network in accordance with legal or statutory provisions and 
which  are  responsible,  under  those  provisions,  for  cash-clearing  operations 
within the network; 

asset  items  constituting  claims  on  and  other  exposures  to  credit  institutions 
incurred  by  credit  institutions  operating  on  a  non-competitive  basis  providing 
loans  under  legislative  programmes  or  their  statutes  to  promote  specified 
sectors  of  the  economy  under  some  form  of  government  oversight  and 
restrictions on the use of the loans provided that the respective exposures arise 
from  such  loans  that  are  passed  on  to  the  beneficiaries  via  other  credit 
institutions. 

asset items constituting claims on and other exposures to institutions, provided 
that these exposures do not constitute such institutions' own funds, do not last 
longer  than  the  following  business  day  and  are  denominated  in  a  currency  of 
the Member State exercising this option, provided that such currency is not the 
euro." 

22. 

(a) 

Article 114 is amended as follows: 

Paragraph 1 is replaced by the following: 

"1. Subject to paragraph 3, for the purposes of calculating the value of exposures for 
the  purposes  of  Article  111(1)  a  credit  institution  may  use  the  'fully  adjusted 
exposure value' as calculated under Articles 90 to 93, taking into account the credit 
risk mitigation, volatility adjustments, and any maturity mismatch (E*)." 

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(b) 

(i) 

Paragraph 2 is amended as follows: 

The first subparagraph is replaced by the following:  

"Subject to paragraph 3, a credit institution permitted to use own estimates of LGDs 
and  conversion  factors  for  an  exposure  class  under  Articles  84  to  89  shall  be 
permitted, where it is able to the satisfaction of the competent authorities to estimate 
the  effects  of  financial  collateral  on  their  exposures  separately  from  other  LGD-
relevant  aspects,  to  recognise  such  effects  in  calculating  the  value  of  exposures  for 
the purposes of Article 111(1)." 

(ii) 

The fourth subparagraph is replaced by the following: 

"Credit institutions permitted to use own estimates of LGDs and conversion factors 
for an exposure class under Articles 84 to 89 which do not calculate the value of their 
exposures  using  the  method  referred  to  in  the  first  subparagraph  may  use  the 
Financial  Collateral  Comprehensive  Method  or  the  approach  set  out  in  Article 
117(1)(b) for calculating the value of exposures." 

(c) 

(i) 

Paragraph 3 is amended as follows: 

The first subparagraph is replaced by the following:  

"A  credit  institution  that  makes  use  of  the  Financial  Collateral  Comprehensive 
Method or is permitted to use the method described in paragraph 2 in calculating the 
value  of  exposures  for  the  purposes  of  Article  111(1),  shall  conduct  periodic  stress 
tests of their credit-risk concentrations, including in relation to the realisable value of 
any collateral taken." 

(ii) 

The fourth subparagraph is replaced by the following:  

"In  the  event  that  such  a  stress  test  indicates  a  lower  realisable  value  of  collateral 
taken  than  would  be  permitted  to  be  taken  into  account  while  making  use  of  the 
Financial Collateral Comprehensive Method or the method described in paragraph 2 
as  appropriate,  the  value  of  collateral  permitted  to  be  recognised  in  calculating  the 
value of exposures for the purposes of Article 111(1) shall be reduced accordingly." 

(iii) 

In the fifth subparagraph, point (b) is replaced by the following: 

"(b)  policies  and  procedures  in  the  event  that  a  stress  test  indicates  a  lower 
realisable value of collateral than taken into account while making  use of the 
Financial  Collateral  Comprehensive  Method  or  the  method  described  in 
paragraph 2; and" 

(d) 

Paragraph 4 is deleted. 

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23. 

Article 115 is replaced by the following: 

"Article 115 

1. For the purpose of this Section, a credit institution may reduce the exposure value 
by  up  to  50%  of  the  value  of  the  residential  property  concerned,  if  either  of  the 
following conditions is met: 

(a) 

(b) 

the  exposure  is  secured,  by  mortgages  on  residential  property  or  by  shares  in 
Finnish  residential  housing  companies,  operating  in  accordance  with  the 
Finnish Housing Company Act of 1991 or subsequent equivalent legislation; 

the exposure relates to a leasing transaction under which the lessor retains full 
ownership  of  the  residential  property  leased  for  as  long  as  the  lessee  has  not 
exercised his option to purchase.  

The  value  of  the  property  shall  be  calculated,  to  the  satisfaction  of  the  competent 
authorities, on the basis of strict valuation standards laid down by law, regulation or 
administrative provisions. Valuation shall be carried out at least once a year.  

Residential property shall mean a residence to be occupied or let by the owner. 

2. For the purpose of this Section, a credit institution may reduce the exposure value 
by  up  to  50%  of  the  value  of  the  commercial  property  concerned,  only  if  the 
following exposures would receive a 50% risk weight under Articles 78 to 83:  

(a) 

exposures  secured  by  mortgages  on  offices  or  other  commercial  premises,  or 
by  shares  in  Finnish  housing  companies,  operating  in  accordance  with  the 
Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in 
respect of offices or other commercial premises; or 

(b) 

exposures  related  to  property  leasing  transactions  concerning  offices  or  other 
commercial premises.  

Commercial property shall be fully constructed, fully leased and produce appropriate 
rental income." 

24. 

25. 

(a) 

Article 116 is deleted. 

Article 117 is amended as follows:  

Paragraph 1 is replaced by the following: 

"1.  Where  an  exposure  to  a  client  is  guaranteed  by  a  third  party,  or  secured  by 
collateral issued by a third party, a credit institution may: 

(a) 

treat the portion of the exposure which is guaranteed as having been incurred to 
the guarantor rather than to the client provided that the unsecured exposure to 
the  guarantor  would  be  assigned  an  equal  or  lower  risk  weight  than  a  risk 
weight of the unsecured exposure to the client under Articles 78 to 83; 

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(b) 

treat  the  portion  of  the  exposure  collateralised  by  the  market  value  of 
recognised  collateral  as  having  been  incurred  to  the  third  party  rather  than  to 
the  client,  if  the  exposure  is  secured  by  collateral  and  provided  that  the 
collateralised portion of the exposure would be assigned an equal or lower risk 
weight than a risk weight of the unsecured exposure to the client under Articles 
78 to 83.  

The approach referred to in point (b) shall not be used by a credit institution where 
there  is  a  mismatch  between  the  maturity  of  the  exposure  and  the  maturity  of  the 
protection.  

For  the  purpose  of  this  Section,  a  credit  institution  may  use  both  the  Financial 
Collateral Comprehensive Method and the treatment provided for in point (b) of the 
first  subparagraph  only  where  it  is  permitted  to  use  both  the  Financial  Collateral 
Comprehensive Method and the Financial Collateral Simple Method for the purposes 
of Article 75(a)." 

(b) 

In paragraph 2, the introductory phrase is replaced by the following: 

"Where a credit institution applies point (a) of paragraph 1:" 

26. 

27. 

Article 119 is deleted. 

The following Section 7 is added to Chapter 2: 

"Section 7 

Exposures to transferred credit risk 

Article 122a 

1.  A  credit  institution  shall  only  be  exposed  to  the  credit  risk  of  an  obligation  or 
potential obligation or a pool of obligations or potential obligations where it was not 
involved in directly negotiating, structuring and documenting the original agreement 
which created the obligations or potential obligations, if: 

(a) 

the persons or entities that directly negotiated, structured and documented the 
original  agreement  with  the  obligor  or  potential  obligor;  or  alternatively  and 
where applicable, 

(b) 

the persons or entities that manage and purchase such obligations or potential 
obligations directly or indirectly on behalf of the credit institution, 

have  issued  an  explicit  commitment  to  the  credit  institution  to  maintain,  on  an 
ongoing basis, a material net economic interest and in any event not less than 5 per 
cent in positions having the same risk profile as the one that the credit institution is 
exposed to. 

2. Paragraph 1 shall not apply to obligations or potential obligations that constitute 
claims or contingent claims on or guaranteed by: 

(a) 

central governments or central banks; 

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(b) 

institutions  to  which  a  credit  quality  step  of  3  or  better  applies  according  to 
Annex VI, Part 1, point 29; and 

(c)  multilateral development banks. 

Paragraph 1 shall not apply either to syndicated loans or credit default swaps where 
these instruments are not used to package and/or hedge an obligation that is covered 
by paragraph 1 

3. Paragraphs 1 and 2 shall apply to exposures incurred by the credit institution after 
1  January  2011.  Competent  authorities  may  decide  to  temporarily  suspend  the 
requirements during periods of general market liquidity stress. 

4.  Before  investing  and  on  an  ongoing  basis,  credit  institutions  shall  be  able  to 
demonstrate  at  all  times  to  the  competent  authorities  for  each  of  their  individual 
securitisation positions that they have a comprehensive and thorough understanding 
of  and  have  implemented  formal  policies  and  procedures  for  analysing  and 
recording, in writing: 

(a) 

the commitment, under paragraph 1, of originators and/or sponsors to maintain 
a  net  economic  interest  in  the  securitisation  and  the  period  for  which  such 
commitment is given; 

(b) 

the risk characteristics of the individual securitisation position; 

(c) 

the risk characteristics of the exposures underlying the securitisation position; 

(d) 

(e) 

the reputation and loss experience in earlier securitisations of the originators in 
the relevant exposure classes underlying the securitization position; 

the  statements  made  by  the  originators  and  sponsors  about  the  due  diligence 
undertaken  by  them  on  the  obligors  and,  where  applicable,  on  the  collateral 
quality of the exposures underlying the securitization position; 

(f)  where  applicable,  the  methodologies  and  concepts  on  which  the  valuation  of 
collateral  supporting  the  exposures  underlying  the  securitization  position  is 
based and the policies adopted by the originators to ensure the independence of 
the valuer; and 

(g) 

all  the  structural  features  of  the  securitisation  that  can  materially  impact  the 
performance of the credit institution's securitisation position. To this end, credit 
institutions shall prior to investing and regularly thereafter perform and record 
appropriate stress tests, such stress tests to be conducted independently of the 
ECAI  or  ECAIs  who  have  rated  the  securitisation  and  to  be  based  on  all 
relevant information provided by the originator for this purpose. 

5.  Credit  institutions  shall  establish  formal  procedures  to  monitor  on  an  ongoing 
basis and in a timely manner performance information on the exposures underlying 
their  securitisation  positions.  Where  relevant,  this  shall  include,  at  a  minimum:  the 
exposure  type,  the  length  of  time  the  exposures  have  been  held  by  the  originator 
including the percentage held by the originator for less than 2 years, the percentage 
of loans more than 30, 60 and 90 days past due, default rates, prepayment rates, loans 

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in foreclosure, collateral type and occupancy, frequency distribution of credit scores 
or  other  measures  of  credit  worthiness  across  underlying  exposures,  industry  and 
geographical diversification, frequency distribution of loan to value ratios with band 
widths  that  facilitate  adequate  sensitivity  analysis.  Where  the  underlying  exposures 
are  themselves  securitisation  positions,  the  requirements  to  monitor  and  be  able  to 
access  information  shall  apply  to  the  exposures  underlying  these  securitisation 
positions. Where the requirements in paragraph 4and in this paragraph are not met, 
credit institutions shall apply a risk weight of 1250% to these securitisation positions 
under Annex IX, part 4. 

6.  Sponsor  and  originator  credit  institutions  shall  apply  the  same  sound  and  well-
defined criteria for credit-granting in accordance with the requirements of Annex V, 
point 3 to exposures to be securitised as they apply to exposures to be held on their 
own  non-trading  book.  To  this  end  the  same  processes  for  approving  and,  where 
relevant,  amending,  renewing  and  re-financing  credits  shall  be  applied  by  the 
originator and sponsor credit institutions. Credit institutions shall also apply the same 
standards  of  analysis  to  participations  and/or  underwritings  in  securitization  issues 
purchased from third parties whether such participations and/or underwritings are to 
be held on their trading or non-trading book. 

7.  Sponsor  and  originator  credit  institutions  shall  disclose  to  investors  the  level  of 
their  commitment  under  paragraph  1  to  maintain  a  net  economic  interest  in  the 
securitisation. Sponsor and originator credit institutions shall ensure that prospective 
investors  have  readily  available  access  to  all  materially  relevant  data  on  the  credit 
quality  and  performance  of  the  individual  underlying  exposures,  cash  flows  and 
collateral  supporting  a  securitization  exposure  as  well  as  such  information  that  is 
necessary to conduct comprehensive and well informed stress tests on the cash flows 
and collateral values supporting the underlying exposures. Where these requirements 
and  those  in  paragraph  6  are  not  met,  Article  95  (1)  shall  not  be  applied  by  an 
originator  credit  institution  which  will  not  be  allowed  to  exclude  the  securitised 
exposures from the calculation of its capital requirements under this Directive. 

8.  Paragraphs  4  to  7  shall  apply  to  securitisations  issued  from  the  date  that  this 
Directive  comes  into  effect  and  to  existing  securitisations  where  new  underlying 
exposures are added or substituted after that date. 

9. Competent authorities shall disclose publicly at least annually: 

(a) 

the methodologies adopted to review the compliance with paragraphs 1 to 7; 

(b) 

(c) 

a  description  and  the  number  of  the  measures  undertaken  to  review  the 
compliance with paragraphs 1 to 7 during the past 12 months; and 

the  number  and  a  summary  description  of  the  cases  of  non-compliance  with 
paragraphs 1 to 7 identified during the past 12 months. 

This requirement is subject to the second subparagraph of Article 144.  

10.  The  Committee  of  European  Banking  Supervisors  will  report  annually  to  the 
Commission  about  the  compliance  by  competent  authorities  with  this  Article.  The 
Commission shall, no later than December 2014, report to the European Parliament 

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and  the  Council  on  the  application  and  effectiveness  of  this  Article  in  the  light  of 
market developments." 

28. 

Article 129 is amended as follows: 

(a) 

(i) 

Paragraph 1 is amended as follows: 

Point (b) is replaced by the following: 

"(b)  planning and coordination of supervisory activities in going concern situations, 
including  in  relation  to  the  activities  referred  to  in  Articles  123,  124,  136,  in 
Chapter  5  and  in  Annex  V,  in  cooperation  with  the  competent  authorities 
involved; 

(ii) 

The following point (c) is added: 

(c) 

planning  and  coordination  of  supervisory  activities  in  cooperation  with  the 
competent  authorities  involved,  and  if  necessary  with  central  banks,  in 
preparation  of  and  during  emergency  situations, 
including  adverse 
developments in credit institutions or in financial markets.  

The planning and coordination of supervisory activities referred to in point (c) 
includes exceptional measures referred to in Article 132(3)(b), the preparation 
implementation  of  contingency  plans  and 
the 
joint  assessments, 
of 
communication to the public." 

(b) 

The following paragraph 3 is added: 

"3.  The  consolidating  supervisor  and  the  competent  authorities  responsible  for  the 
supervision  of  subsidiaries  of  an  EU  parent  credit  institution  or  an  EU  parent 
financial holding company in a Member State shall do everything within their power 
to reach a joint decision: 

(a) 

on  the  application  of  Articles  123  and  124  to  determine  the  adequacy  of  the 
consolidated level of own funds held by the group with respect to its financial 
situation and risk profile and consequently, the required level of own funds for 
the application of Articles 136(2) to each entity within the banking group and 
on a consolidated basis;  

(b)  on  uniform  formats,  frequencies  and  dates  of  reporting  for  the  application  of 

Article 74(2) to all entities within the banking group.  

For  the  purposes  of  point  (a),  the  joint  decision  shall  be  reached  six  months  after 
submission by the consolidating supervisor of a report containing the risk assessment 
of the group in accordance with Articles 124 and 123 to the other relevant competent 
authorities.  

For the purposes of point (b), the joint decision shall be reached by 30 June 2011.  

The joint decision referred to in the first subparagraph shall be set out in a document 
containing  the  fully  reasoned  decision  which  shall  be  provided  to  the  EU  parent 
credit  institution  by  the  consolidating  supervisor.  In  case  of  disagreement,  the 

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consolidating supervisor shall at the request of any of the other competent authorities 
the  Committee  of  European  Banking  Supervisors.  The 
concerned  consult 
consolidating  supervisor  may  consult  the  Committee  of  European  Banking 
Supervisors on its own initiative. 

In the absence of such a joint decision between the competent authorities within six 
months, the consolidating supervisor shall make its own decision on the application 
of Articles 74(2), 123, 124 and 136(2). The decision shall be set out in a document 
containing  the  fully  reasoned  decision  and  shall  take  into  account  the  views  and 
reservations  of  the  other  competent  authorities  expressed  during  the  six  months 
period.  The  decision  shall  be  provided  to  the  other  competent  authorities  by  the 
consolidating supervisor. 

Where  the  Committee  of  European  Banking  Supervisors  has  been  consulted,  the 
consolidating  supervisor  shall  consider  such  advice,  and  explain  any  significant 
deviation there from. 

The joint decision referred to in the first subparagraph and the decision referred to in 
the  sixth  subparagraph  shall  be  recognised  as  determinative  and  applied  by  the 
competent authorities in the Member State concerned." 

29. 

Article 130 paragraph 1 is replaced by the following: 

"1.  Where  an  emergency  situation,  including  adverse  developments  in  financial 
markets, arises, which potentially jeopardises the stability of the financial system in 
any of the Member States where entities of a group have been authorised or where 
systemically  relevant  branches  as  referred  to  in  Article  42a  are  established,  the 
consolidating  supervisor  shall,  subject  to  Chapter  1,  Section  2,  alert  as  soon  as  is 
practicable, the authorities referred to in the fourth subparagraph of Article 49 and in 
Article 50, and shall communicate all information that is essential for the pursuance 
of  their  tasks.  These  obligations  shall  apply  to  all  competent  authorities  under 
Articles 125 and 126 and to the competent authority identified under Article 129(1).  

If the authority referred to in the fourth subparagraph of Article 49 becomes aware of 
a situation described in the first subparagraph of this paragraph, it shall alert as soon 
as is practicable the competent authorities referred to in Articles 125 and 126. 

Where  possible,  the  competent  authority  and  the  authority  referred  to  in  the  fourth 
subparagraph of Article 49 shall use existing defined channels of communication." 

30. 

The following Article 131a is inserted: 

"Article 131a 

1. The consolidating supervisor shall establish colleges of supervisors to facilitate the 
exercise of the tasks referred to in Articles 129 and 130(1).  

Colleges  of  supervisors  shall  provide  a  framework  for  the  consolidating  supervisor 
and the other competent authorities concerned to carry out the following tasks: 

(a) 

exchange information; 

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(b) 

agree on voluntary entrustment of tasks and delegation of responsibilities;  

(c) 

(d) 

(e) 

(f) 

determine supervisory examination programmes based on a risk assessment of 
the group in accordance with Article 124; 

increase the efficiency of supervision by removing unnecessary duplication of 
supervisory  requirements,  including  in  relation  to  the  information  requests 
referred to in Articles 130(2) and 132(2);  

consistently  apply  the  prudential  requirements  under  this  Directive  across  all 
entities within a banking group. 

apply  129(1)(c)  taking  into  account  the  work  of  other  forums  that  may  be 
established in this area.  

The competent authorities participating in the college of supervisors shall cooperate 
closely.  The  confidentiality  requirements  under  Chapter  1,  Section  2  shall  not 
prevent  competent  authorities  from  exchanging  confidential  information  within 
colleges of supervisors. The establishment of colleges of supervisors shall not affect 
the rights and responsibilities of the competent authorities under this Directive. 

2.  The  establishment  and  functioning  of  the  college  shall  be  based  on  written 
arrangements  referred  to  in  Article  131,  determined  after  consultation  with 
competent authorities concerned by the consolidating supervisor.  

The Committee of European Banking Supervisors shall elaborate guidelines for the 
operational functioning of colleges.  

The  competent  authorities  responsible  for  the  supervision  of  subsidiaries  of  an  EU 
parent  credit  institution  or  an  EU  parent  financial  holding  company  and  the 
competent  authorities  of  a  host  country  where  systemically  relevant  branches  as 
referred  to  in  Article  42a  are  established,  and  authorities  of  third  countries  where 
appropriate, may participate in colleges of supervisors.  

The consolidating supervisor shall chair the meetings of the college and shall decide 
which competent authorities participate in a meeting or in an activity of the college. 
The consolidating supervisor shall keep all members of the college fully informed of 
the  organisation  of  such  meetings  and  activities  and  decisions  taken  in  those 
meetings.  

The  decision  of  the  consolidating  supervisor  shall  take  account  of  the  relevance  of 
the  supervisory  activity  to  be  planned  or  coordinated  for  those  authorities,  and  the 
obligations referred to in Articles 40(3) and 42a(2).  

The  consolidating  supervisor,  subject  to  the  confidentiality  requirements  under 
Chapter 1, Section 2, shall inform the Committee of European Banking Supervisors 
of the activities of the college of supervisors, including in emergency situations, and 
communicate to that Committee all information that is of particular relevance for the 
purposes of supervisory convergence."  

31. 

Article 132 is amended as follows: 

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(a) 

(b) 

32. 

(a) 

(ii) 

In point (d) of paragraph 1 the reference to Article 136 is replaced by the reference to 
Article 136(1). 

In point (b) of paragraph 3 the reference to Article 136 is replaced by the reference to 
Article 136(1). 

Article 150 is amended as follows: 

Paragraph 1 is amended as follows: 

Points (k) and (l) are replaced by the following:  

"(k)  the list and classification of off-balance sheet items in Annexes II and IV;  

(l) 

adjustment  of  the  provisions  in  Annexes  III  and  V  to  XII  in  order  to  take 
account  of  developments  on  financial  markets  (in  particular  new  financial 
products)  or  in  accounting  standards  or  requirements  which  take  account  of 
Community legislation, or with regard to convergence of supervisory practice; 
or" 

(ii) 

the following point (m) is added: 

"(m)  alteration of the amount and the percentage specified in Article 111(1) to take 

account of developments on financial markets." 

(b) 

In paragraph 2, point (c) is replaced by the following: 

"(c)  clarifications of exemptions provided for in Article 113;" 

33. 

In Article 154, the following paragraphs 8 and 9 are added: 

"8. Credit institutions which do not comply by [the date referred to in Article 4 - to 
be inserted if known] with the limits set out in Article 66(1a) shall develop strategies 
and processes under Article 123 on the necessary measures to resolve this situation 
before the dates set out in paragraph 9.  

These measures shall be reviewed under Article 124. 

9. Instruments that by [the date referred to in Article 4 - to be inserted if known.] , 
according to national law were deemed equivalent to the items referred to in points 
(a), (b) and (c) of Article 57 but do not fall within point (a) of Article 57 or do not 
comply with the criteria set out in Article 63a, shall continue tobe deemed equivalent 
until [30 years after the date referred to in Article 4 - to be inserted if known] , for an 
amount up to: 

(a) 

20% of the sum of points (a) to (ca) of Article 57, less the sum of points (i), (j) 
and  (k)  of  Article  57  [between  10  and  20  years  after  the  date  referred  to  in 
Article 4 - to be inserted if known]; 

(b)  10% of the sum of points (a) to (ca) of Article 57, less the sum of points (i), (j) 
and  (k)  of  Article  57  [between  20  and  30  years  after  the  date  referred  to  in 
Article 4 - to be inserted if known];  

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34. 

(a) 

Annex III is amended as follows: 

In part 1, point 5, the following text is added: 

"Under  the  method  set  out  in  Part  6  of  this  Annex  (IMM),  all  netting  sets  with  a 
single counterparty may be treated as single netting set if negative simulated market 
values  of  the  individual  netting  sets  are  set  to  0  in  the  estimation  of  expected 
exposure (EE)." 

(b) 

In part 2, point 3 is replaced by the following: 

"3.  When a credit institution purchases credit derivative protection against a non-
trading book exposure, or against a CCR exposure, it may compute its capital 
requirement for the hedged asset in accordance with Annex VIII, Part 3, points 
83 to 92, or subject to the approval of the competent authorities, in accordance 
with Annex VII, Part 1, point 4 or Annex VII, Part 4, points 96 to 104.  

In  these  cases,  and  where  the  option  in  the  second  sentence  of  point  11  in 
Annex II of Directive 2006/49/EC is not applied, the exposure value for CCR 
for these credit derivatives is set to zero. 

However, an institution may choose to consistently include for the purposes of 
calculating  capital  requirements  for  counterparty  credit  risk  all  credit 
derivatives  not  included  in  the  trading  book  and  purchased  as  protection 
against  a  non-trading  book  exposure  or  against  a  CCR  exposure  where  the 
credit protection is recognised under this Directive."  

(c) 

In part 5, point 15 is replaced by the following: 

"15.  There  is  one  hedging  set  for  each  issuer  of  a  reference  debt  instrument  that 
underlies a credit default swap. 'Nth to default' basket credit default swaps shall 
be treated as follows: 

(a) 

(b) 

(c) 

the  size  of  a  risk  position  in  a  reference  debt  instrument  in  a  basket 
underlying an 'nth to default' credit default swap is the effective notional 
value  of  the  reference  debt  instrument,  multiplied  by  the  modified 
duration of the 'nth to default' derivative with respect to a change in the 
credit spread of the reference debt instrument; 

there  is  one  hedging  set  for  each  reference  debt  instrument  in  a  basket 
underlying a given 'nth to default' credit default swap; risk positions from 
different 'nth to default' credit default swaps shall not be included in the 
same hedging set; 

the CCR multiplier applicable to each hedging set created for one of the 
reference  debt  instruments  of  an  'nth  to  default'  derivative  is  0.3%  for 
reference  debt  instruments  that  have  a  credit  assessment  from  a 
recognised  ECAI  equivalent  to  credit  quality  step  1  to  3  and  0.6%  for 
other debt instruments." 

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35. 

(a) 

Annex V is amended as follows: 

Point 14 is replaced by the following: 

"14.  Robust  strategies,  policies,  processes  and  systems  shall  exist  for  the 
identification,  measurement  and  management  of  liquidity  risk  over  an 
appropriate set of time horizons, including intra-day, so as to ensure that credit 
institutions  maintain  adequate  levels  of  liquidity  buffers.  These  strategies, 
policies,  processes  and  systems  shall  be  tailored  to  business  lines,  currencies 
and  legal  entities  and  shall  include  adequate  liquidity  cost  allocation 
mechanisms." 

(e) 

The following point 14a is inserted: 

"14a. The strategies, policies, processes and systems referred to in point 14 shall be 
proportionate to the complexity, risk profile, scope of operation of the firm and 
risk  tolerance  set  by  the  management  body  and  reflect  the  credit  institution's 
systemic relevance in each Member State, in which it carries on business." 

(f) 

Point 15 is replaced by the following: 

"15.  Credit 

institutions  shall  develop  methodologies  for 

identification, 
measurement,  management  and  monitoring  of  funding  positions,  in  particular 
through a system of limits. These shall include cash-flows arising from assets, 
liabilities,  off-balance-sheet  items,  including  contingent  liabilities  and  the 
possible impact of reputational risk." 

the 

(g) 

The following points 16 to 22 are added:  

"16.  Credit institutions shall distinguish between pledged and unencumbered assets 
that are available at all times, in particular during emergency situations. They 
shall  also  take  into  account  the  legal  entity  in  which  assets  reside,  as  well  as 
their eligibility and timely mobilisation. 

17.  Credit  institutions  shall  also  have  regard  to  existing  legal,  regulatory  and 
operational  limitations  to  potential  transfers  of  liquidity  and  unencumbered 
assets amongst legal entities, both within and outside the EEA.  

18.  A  credit  institution  shall  consider  different  liquidity  risk  mitigation  tools, 
including liquidity buffers in order to be able to withstand a range of different 
stress  events  and  an  adequately  diversified  funding  structure  and  access  to 
funding sources. These arrangements shall be reviewed regularly. 

19.  Alternative  scenarios  on  liquidity  positions  and  on  risk  mitigants  shall  be 
considered  and  the  assumptions  underlying  decisions  concerning  the  funding 
position shall be  reviewed regularly. For these purposes, alternative scenarios 
shall  address,  in  particular,  off-balance  sheet  items  and  other  contingent 
liabilities,  including  those  of  SSPEs  or  other  special  purpose  entities,  in 
relation  to  which  the  credit  institution  acts  as  sponsor  or  provides  material 
liquidity support. 

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20.  Credit  institutions  shall  consider  the  potential  impact  of  institution-specific, 
market-wide  and  combined  alternative  scenarios.  Different  time  horizons  and 
varying degrees of stressed conditions shall be considered. 

21.  Credit  institutions  shall  adjust  their  strategies,  internal  policies  and  limits  on 
liquidity risk and develop effective contingency plans, taking into account the 
outcome of the alternative scenarios referred to in point 19. 

22. 

In  order  to  deal  with  liquidity  crises,  credit  institutions  shall  have  in  place 
contingency  plans  setting  out  adequate  strategies  and  proper  implementation 
measures in order to address possible liquidity shortfalls. These plans shall be 
regularly  tested,  updated  on  the  basis  of  the  outcome  of  the  alternative 
scenarios  set  out  in  point  16,  be  reported  to  and  approved  by  senior 
management,  so  that  internal  policies  and  processes  can  be  adjusted 
accordingly." 

36. 

(a) 

Annex XI is amended as follows: 

Point 1(e) is replaced by the following: 

"(e) 

the  exposure  to,  measurement  and  management  of  liquidity  risk  by  the  credit 
institutions,  including  the  development  of  alternative  scenario  analyses,  the 
management of risk mitigants (in particular the level, composition and quality 
of liquidity buffers) and effective contingency plans;  

(b) 

The following point 1a is inserted: 

institutions  and  promote 

"1a.  For the purposes  of point 1(e), the competent authorities shall regularly carry 
out  a  comprehensive  assessment  of  the  overall  liquidity  risk  management  by 
credit 
internal 
methodologies.  While  conducting  these  reviews,  the  competent  authorities 
shall  have  regard  to  the  role  played  by  credit  institutions  in  the  financial 
markets. The competent authorities in one Member State shall also have regard 
to the potential impact of their decisions on the stability of the financial system 
in all other Member States concerned."  

the  development  of  sound 

37. 

Annex XII, part 2, points 3 (a) and (b) are replaced by the following: 

"(a)  summary  information  on  the  terms  and  conditions  of  the  main  features  of  all 
own funds items and components thereof, including instruments referred to in 
point (ca) of Article 57, instruments the statutory or contractual provisions of 
which  provide  an  incentive  for  the  credit  institution  to  redeem  them,  and 
instruments subject to Article 154(9); 

(b) 

the  amount  of  the  original  own  funds,  with  separate disclosure  of all positive 
items  and  deductions;  the  overall  amount  of  instruments  referred  to  in  point 
(ca)  of  Article  57  and  instruments  the  statutory  or  contractual  provisions  of 
which provide an incentive for the credit institution to redeem them, shall also 
be  disclosed  separately;  those  disclosures  shall  each  specify  instruments 
subject to Article 154(9);" 

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Article 2 

Amendments to Directive 2006/49/EC 

Directive 2006/49/EC is amended as follows: 

(1) 

In Article 12, the first subparagraph is replaced by the following: 

"‘Original own funds’ means the sum of points (a) to (ca), less the sum of points (i), 
(j) and (k) of Article 57 of Directive 2006/48/EC. 

(2) 

(a) 

(b) 

(3) 

(4) 

(a) 

Article 28 is amended as follows: 

Paragraph 1 is replaced by the following: 

"1. Institutions, except investment firms that fulfil the criteria set out in paragraph (2) 
or (3) of Article 20 of this Directive, shall monitor and control their large exposures 
in accordance with Articles 106 to 118 of Directive 2006/48/EC." 

Paragraph 3 is deleted.  

Article 30(4) is deleted. 

Article 31 is amended as follows: 

In the first paragraph, points (a) and (b) are replaced by the following: 

"(a) 

the  exposure  on  the  non-trading  book  to  the  client  or  group  of  clients  in 
question  does  not  exceed  the  limit  laid  down  in  Article  111(1)  of  Directive 
2006/48/EC,  this  limit  being  calculated  with  reference  to  own  funds  as 
specified  in  that  Directive,  so  that  the  excess  arises  entirely  on  the  trading 
book; 

(b) 

the institution meets an additional capital requirement on the excess in respect 
of  the  limit  laid  down  in  Article  111(1)  of  Directive  2006/48/EC,  that 
additional capital requirement being calculated in accordance with Annex VI to 
this Directive;" 

(b) 

In the first paragraph, point (e) is replaced by the following: 

"(e) 

institutions  shall  report  to  the  competent  authorities  every  three  months  all 
cases where the limit laid down in Article 111(1) of Directive 2006/48/EC has 
been exceeded during the preceding three months." 

(c) 

The second paragraph is replaced by the following: 

"In  relation  to  point  (e),  in  each  case  in  which  the  limit  has  been  exceeded,  the 
amount of the excess and the name of the client concerned shall be reported." 

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(5) 

In Article 32(1), the first subparagraph is replaced by the following: 

"1. The competent authorities shall establish procedures to prevent institutions from 
deliberately  avoiding  the  additional  capital  requirements  that  they  would  otherwise 
incur,  on  exposures  exceeding  the  limit  laid  down  in  Article  111(1)  of  Directive 
2006/48/EC once those exposures have been maintained for more than  10 days,  by 
means  of  temporarily  transferring  the  exposures  in  question  to  another  company, 
whether within the same group or not, and/or by undertaking artificial transactions to 
close out the exposure during the 10-day period and create a new exposure." 

(6) 

In Article 38, the following paragraph is added: 

(7) 

(8) 

1. 

"3. Article 42a, with the exception of point (a) of Directive 2006/48/EC shall apply 
mutatis mutandis to the supervision of investment firms unless the investment firms 
fulfil the criteria set out in Article 20(2), 20(3) or 46(1) of this Directive. 

In Article 45(1) the date "31 December 2010" is replaced by "31 December 2012". 

In Article 48(1) the date "31 December 2010" is replaced by "31 December 2012". 

Article 3 

Transposition 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by 31 January 2010 at the latest. 
They  shall  forthwith  communicate  to  the  Commission  the  text  of  those  provisions 
and a correlation table between those provisions and this Directive. 

They shall apply those provisions from 31 March 2010. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

Article 4 

Entry into force 

This Directive shall enter into force on the twentieth day following that of its publication in 
the Official Journal of the European Union. 

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Article 5 

Addressees 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the European Parliament 
The President 

For the Council 
The President 

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