CELEX: 51988PC0194
Language: en
Date: 1988-04-20
Title: PROPOSAL FOR A COUNCIL DIRECTIVE ON A SOLVENCY RATIO FOR CREDIT INSTITUTIONS

No C 135/4                            Official Journal of the European Communities                               25. 5. 88
                                                              II
                                                      (Preparatory Acts)
                                                 COMMISSION
                        Proposal for a Council Directive on a solvency ratio for credit institutions
                                                     COM(88) 194 final
                              (Submitted by the Commission to the Council on 27 April 1988)
                                                       (88/C 135/04)
THE COUNCIL OF THE EUROPEAN COMMUNITIES,                          mental techniques of prudential supervision: Council
                                                                  Directive . . . / . . ./EEC on own funds, the Commission
Having regard to the Treaty establishing the European             recommendations 87/62/EEC (3) and 87/63/EEC (4) on
Economic Community, and in particular Article 57 (2),             large exposures and deposit protection schemes;
third sentence thereof,
                                                                  Whereas the Directive should also be seen as directly
Having regard to the proposal from the Commission,                complementary to the Second Coordination Directive
                                                                  which lays out the broader framework of which this
                                                                  Directive is an integral part;
In cooperation with the European Parliament,
Having regard to the opinion of the Economic and                  Whereas the minimum ratio contained in this Directive is
Social Committee,                                                 provisional in nature; whereas it will be reviewed
                                                                  following a statistical survey; whereas the Commission
                                                                  will, if necessary, duly propose an amendment to the
Whereas the Directive is a development from the work              figure before the final adoption of the Directive;
undertaken by the Banking Advisory Committee which
has, under Article 6 (4) of Council Directive
77/780/EEC of 12 December 1977 on the coordination                Whereas measurement of, and allowance for, interest
of laws, regulations and administrative provisions                and exchange rate risk, and other market risks, are also
relating to the taking up and pursuit of the business of          of great importance in prudential supervision; whereas,
credit institutions ('), as amended by Directive                  the Commission shall, accordingly, in cooperation with
86/524/EEC (2), responsibility for making 'suggestions            the competent authorities of Member States and others
to the Commission with a view to coordinating the coef-           working towards similar ends, further study the available
ficients applicable in the Member States';                        techniques; whereas it shall then make appropriate
                                                                  proposals for the further harmonization of prudential
                                                                  rules relating to these risks;
Whereas appropriate solvency ratios play a central role
in the prudential supervision of credit institutions;
                                                                  Whereas technical modification to the detailed rules
Whereas ratios which weight assets and off-balance sheet          contained in this Directive may from time to time be
transactions according to the degree of credit risk are           necessary to respond to new developments in the
particularly useful measures of solvency;                         banking sector; whereas the Commission              shall
                                                                  accordingly make such modifications as are necessary,
                                                                  after consulting the Banking Advisory Committee, within
Whereas the development of common standards of                    the limits of the implementing powers delegated to the
capital adequacy in relation to assets and off-balance            Commission by the provisions of the Treaty; whereas
sheet items at risk is accordingly, one of the essential          that Committee shall act as a 'Regulatory' Committee,
areas of harmonization necessary for the achievement of           according to the rules of procedure laid down in Article
mutual recognition and thus the completion of the                 2, procedure III, variant (a) of Council Decision
internal market in banking services;                              87/373/EEC of 13 July 1987 laying down procedures
                                                                  for the exercise of implementing powers conferred to the
Whereas in this respect the Directive is connected with           Commission (5),
other specific legislation also harmonizing the funda-
                                                                  O OJ No L 33, 4. 2. 1987, p. 10.
(') OJ No L 322, 17. 12. 1977, p. 30.                             (4) OJ No L 33, 4. 2. 1987, p. 16.
(2) OJ No L 309, 4. 11. 1986, p. 15.                              (») OJ No L 197, 18. 7. 1987. p. 33.
 ---pagebreak---  25. 5. 88                               Official Journal of the European Communities                               No C 135/5
 HAS ADOPTED THIS DIRECTIVE:                                            Investment Bank (EIB), and the Bank for Inter-
                                                                        national Settlements (BIS), the International Bank for
                                                                        Reconstruction and Development (IBRD), and the
                      Scope and definitions                             International Monetary Fund (IMF),
                            Article 1                               — full risk', 'medium risk', 'medium/low risk' and 'low
 1.    This Directive shall apply to credit institutions                risk'off-balance sheet items are described in Annex 1
within the meaning of the first indent of Article 1 of                  and listed in Annex 2,
 Directive 77/780/EEC.
                                                                   — 'participation' shall be defined in accordance with the
2.     Notwithstanding indent 1 above, the Member                       third indent of Article 1 of Directive 83/350/EEC.
 States need not apply this Directive to credit institutions
listed in Article 2 (2) of Directive 77/780/EEC.
                                                                                              Article 3
3.     Credit institutions which, as defined in Article 2 (4)
 (a) of Directive 77/780/EEC are affiliated to a central                                 General principles
body in the same Member State, may be exempted from
the provisions of this Directive, provided that the totality        1.    For the purposes of measuring the solvency of
of those affiliated credit institutions and the central body        credit institutions as defined in Article 1, the competent
are included in consolidated solvency ratios in                     authorities of Member States shall ensure that ratios are
accordance with this Directive.                                     calculated for each credit institution which express its
                                                                    own funds, as defined in Article 4, as a proportion of its
                                                                   total risk-adjusted assets and off-balance sheet items, as
                                                                   defined in Article 5.
                            Article 2
For the purposes of this Directive:
                                                                    2.    Ratios shall be calculated on a consolidated basis in
— 'competent authorities' shall be defined in accordance            accordance with Directive 83/350/EEC and Council
     with the fifth indent of Article 1 of Council Directive        Directive 86/635/EEC of 8 December 1986 on the
     83/350/EEC of 13 June 1983 on the supervision of              annual accounts and consolidated accounts of banks and
     credit institutions on a consolidated basis ('),              other financial institutions (2). Notwithstanding the
                                                                   above requirement, unconsolidated ratios shall also be
                                                                   calculated for all credit institutions. However, the
— 'domestic credit institutions' shall comprise all credit         competent authorities shall have the discretion to require
     institutions authorized in the Member States, in              subconsolidated rather than unconsolidated ratios for
     accordance with Article 3 of Directive 77/780/EEC,            credit institution subsidiaries.
     and branches of those institutions established outside
     the European Communities,
                                                                   3.     Without prejudice to the compliance obligations of
— foreign credit institutions' in this Directive shall             credit institutions established in Article 9 (2), (3) and (4),
     comprise all private and public undertakings licensed         the competent authorities shall ensure that the ratios are
     outside the Member States which satisfy the defi-             controlled not less than twice each year.
     nition in the first indent of Article 1 of Directive
     77/780/EEC, and their branches,
                                                                   4.     Valuation of assets and off-balance sheet items
— in the case of central governments and central banks,            shall be undertaken in accordance with Directive
     regional governments and local authorities, and the           86/635/EEC.
     non-bank sector as defined below, 'domestic' shall
     mean of the Member States; 'foreign' shall mean of
     other countries,
                                                                                              Article 4
— 'non-bank sector' shall be defined as all borrowers                                Own funds: the numerator
     other than credit institutions as defined in the second
     and third indents above, central governments and              Own funds, as defined in Directive . . . / . . ./EEC of . . .
     central banks, regional governments and local auth-            1988 on the own funds of credit institutions, shall form
     orities, the European Communities and the European            the numerator of the solvency ratio.
(*) OJ No L 193, 18. 7. 1983, p. 18.                               O OJ No L 372, 31. 12. 1986, p. 1.
 ---pagebreak---  No C 135/6                            Official Journal of the European Communities                              25. 5. 88
                          Article 5                                  — asset items carrying the explicit guarantee of the
                                                                         BIS, IBRD and IMF,
 Risk-adjusted assets and off-balance sheet transactions:
                      the denominator
 1.   Degrees of credit risk, expressed as percentage                — all off-balance sheet items incurred on behalf of
weights, shall be assigned to the asset items in                         'domestic' central governments and central
accordance with the provisions of Article 6. The balance                banks,
sheet value of each asset shall then be multiplied by the
relevant weight to arrive at a risk-adjusted value.                  — all off-balance sheet items carrying the explicit
                                                                        guarantee of 'domestic' central governments and
2.    In the case of the off-balance sheet items included               central banks,
in categories (a) to (e) of Article 6, a two-stage calcu-
lation, in accordance with rules presented in Annex 1,
                                                                     — all off-balance sheet items incurred on behalf of
shall be used to arrive at risk weights. Risk-adjusted
                                                                        the European Communities and the EIB,
values shall be obtained by multiplying the value of each
off-balance sheet item by the relevant risk weight.
                                                                     — all off-balance sheet items carrying the explicit
3.    In the case of the interest rate and foreign                      guarantee of the European Communities and the
exchange rate related to off-balance sheet items in                     EIB,
Article 6 (2), the potential costs of replacing cash flows
in the event of counterparty default shall be assessed by            — all off-balance sheet items incurred on behalf of
the application of either of the two methods presented in               the BIS, IBRD and IMF,
Annex 3. These costs shall be multiplied by the relevant
counterparty weights in Article 6 (1) to give risk-
adjusted values.                                                     — all off-balance sheet items carrying the explicit
                                                                        guarantee of the BIS, IBRD and IMF,
4.    The total of the risk-adjusted values of assets and
off-balance sheet items described above shall be the                 — loans and off-balance sheet items, fully and
denominator of the solvency ratio.                                      completely secured to the satisfaction of the
                                                                        relevant competent authorities, by any of the
                                                                        asset items shown above and by deposits and
                          Article 6                                     certificates    of deposit with the        lending
                        Risk weights                                    institutions,
1.    The following weights shall be applied to the asset
and off-balance sheet items shown below, although the                — all off-balance sheet items having low risk,
competent authorities may establish higher weights as                   regardless of counterparty,
they see fit:
                                                                 (b) 10 % weight
(a) Nil weight
    — cash in hand and equivalent items,                             — off-balance sheet items, having medium risk,
                                                                        incurred on behalf         of 'domestic'     credit
                                                                        institutions,
    — asset items representing claims on 'domestic'
        central governments and central banks,
                                                                     — off-balance sheet items, having medium risk
    — asset items representing claims carrying the                      carrying the explicit guarantee of 'domestic'
        explicit   guarantee      of  'domestic'     central            credit institutions,
        governments and central banks,
                                                                     — off-balance sheet items, having medium risk and
    — asset items representing claims on the European                   an original maturity of up to and including one
        Communities and the EIB,                                        year, incurred on behalf of 'foreign' credit
                                                                        institutions,
    — asset items carrying the explicit guarantee of the
        European Communities and the EIB,                            — off-balance sheet items, having medium risk and
                                                                        an original maturity of up to and including one
    — asset items representing claims on the BIS, IBRD                  year, carrying the explicit guarantee of 'foreign'
        and IMF,                                                        credit institutions;
 ---pagebreak--- 25. 5. 88                               Official Journal of the European Communities                              No C 135/7
(c) 20 % weight                                                            central banks and the 'domestic' and 'foreign'
                                                                           non-bank sectors;
    — asset items representing claims on 'domestic'
        credit institutions,                                               off-balance sheet items, having medium risk and
                                                                          an original maturity of more than one year,
    — asset items representing claims, with an original                   incurred on behalf of 'foreign' credit institutions,
        maturity of up to and including one year, on
        'foreign' credit institutions,                                    off-balance sheet items, having medium risk and
                                                                          an original maturity of more than one year,
    — asset items carrying the explicit guarantee of                      carrying the explicit guarantee of 'foreign' credit
        'domestic' credit institutions,                                    institutions,
    — asset items representing claims, with an original                   loans to individuals for the purchase of
        maturity of up to and including one year,                         residential property in the Community for their
        carrying the explicit guarantee of 'foreign' credit               own occupation, fully and completely secured to
        institutions,                                                     the satisfaction of the relevant competent auth-
                                                                          orities, by mortgages on the property in question;
    — off-balance sheet items, having full risk, incurred
        on behalf of 'domestic' credit institutions,               (e) 100 % weight
        off-balance sheet items, having full risk, carrying            — asset items representing claims on 'foreign'
        the explicit guarantee of 'domestic' credit                       central and regional governments, local auth-
        institutions,                                                     orities and central banks,
        off-balance sheet items, having full risk and an                  asset items representing claims, with an original
        original maturity of up to and including one                      maturity of more than one year, on 'foreign'
        year, incurred on behalf of 'foreign' credit                      credit institutions,
        institutions,
                                                                          asset items representing claims on the 'domestic'
        off-balance sheet items, having full risk and an                  and 'foreign' non-bank sectors,
        original maturity of up to and including one
        year, carrying the explicit guarantee of 'foreign'                off-balance sheet items, having full risk, incurred
        credit institutions,                                              on behalf of 'foreign' central and regional
                                                                          governments, local authorities and central banks
        loans and full and medium risk off-balance sheet                  and the 'domestic' and 'foreign' non-bank
        items, fully and completely secured to the satis-                 sectors,
        faction of the relevant competent authorities, by
        any of the asset items shown above in the 20 %                    off-balance sheet items, having full risk and an
        weight category,                                                  original maturity of more than one year, incurred
                                                                          on behalf of 'foreign' credit institutions,
        off-balance sheet items having medium/low risk
        incurred on behalf of the 'domestic' and 'foreign'                tangible assets in accordance with assets heading
        non-bank sectors,                                                 C.II of Article 9 of Council Directive
                                                                          78/660/EEC of 25 July 1978 on the annual
        asset items representing local currency claims of                 accounts of certain types of companies ('),
        'foreign' branches of domestic credit institutions
        on 'foreign' central governments, funded by local                 participations where not deducted from          own
        currency deposits,                                                funds,
        cash items in process of collection, where the                    all other assets except where deducted from own
        corresponding prior payments have already been                    funds.
        made;
                                                                  2.    The methods laid out in Annex 3 shall be applied to
(d) 50 °/o weight                                                 interest rate and foreign exchange rate related to off-
                                                                  balance sheet instruments.
    — off-balance sheet items, having medium risk,
        incurred on behalf of 'foreign' central and
        regional governments, local authorities and               (') OJ No L 222, 14. 8. 1978, p. 11.
 ---pagebreak---  No C 135/8                            Official Journal of the European Communities                                         25. 5. 88
                          Article 7                               The representative of the Commission shall submit to the
                                                                  Committee a plan of measures to take. The Committee
 1.   Member States shall fix weights of either 0 %,              shall give its opinion on the plan within a time limit to be
20 % or 50 % in the case of asset items representing              fixed by the Chairman in accordance with the urgency of
claims on their own regional governments and local                the matter. The opinion shall be given on a qualified
authorities, and full risk off-balance sheet items incurred       majority basis according to Article 148 (2) of the Treaty
on behalf of their own regional governments and local             in the case of decisions which the Council is called Upon
authorities. Medium risk off-balance sheet items incurred         to take following a proposal of the Commission. In the
on behalf of their own regional governments and local             Committee the votes of the representatives shall be
authorities shall correspondingly be weighted at 0 %,             weighted according to the abovementioned article. The
10 % or 20 %. Loans and off-balance sheet items                   Chairman shall not vote.
carrying the explicit guarantee of a regional or local
authority shall have the same weight as loans to, or off-
balance sheet items incurred on behalf of, the same               The Commission shall implement the envisaged measures
regional government or local authority.                           when they are in conformity with the opinion of the
                                                                  Committee.
                                                                 When the envisaged measures do not conform with the
2.    Member States shall notify the Commission of their          opinion of the Committee, or in the absence of an
weights, the Commission shall disseminate that infor-             opinion, the Commission shall without delay submit to
mation and Member States shall mutually respect the               the Council a proposal relating to the measures to take.
weights chosen by each other. They shall have the                The Council shall act according to qualified majority
discretion to apply weights of either 0 %, 20 % or 50 %          voting.
in the case of those foreign countries determined in
accordance with Article 8 (2), with medium risk off-
balance sheet items weighted correspondingly at 0 %,              If at the end of the period which will be set in the case
10 % or 20 %.                                                     of each decision to be taken by the Council as a result of
                                                                  this paragraph, a period which must not exceed three
                                                                  months from the day on which the Council was
                                                                  informed, the Council has not acted, the Commission
                          Article 8                               shall implement the proposed measures.
1.    Technical modifications in the areas of this
Directive shown below may be made in accordance with                                          Article 9
the procedure set out in paragraph 3:
                                                                  1.    Member States shall adopt the measures necessary
                                                                 to comply with the provisions of this Directive by
                                                                  1 January 1990.
— the minimum ratio established in Article 9,
                                                                  2.    Until 31 December 1992, credit institutions whose
— the weights and asset items in Article 6,                      ratios are below 8 °/o (') shall not allow their ratios to fall
                                                                  unless such falls are associated with the issue of new
                                                                  capital and occur in the period immediately following
                                                                  such issuance. The competent authorities shall ensure
— the list and classification of off-balance sheet items in
                                                                 that corrective measures are taken if falls occur for any
    Annexes 2 and 4 and their treatment in the calcu-
                                                                 reason other than that referred to above.
    lation of the ratio as described in Article 5 and
    Annexes 1 and 3.
                                                                  3.    With effect from 1 January 1993, credit institutions
                                                                 shall not allow their ratios, as defined in Articles 3 (1)
                                                                  and (2), to fall below 8 % ('). In the event of such an
2.    The Commission may also, according to the
                                                                 occurrence, the competent authorities shall ensure that
procedure set out in paragraph 3, extend to foreign
                                                                  appropriate measures to restore the ratio to the agreed
countries the same weights applied to domestic central
                                                                  minimum are taken as quickly as possible by the credit
governments, central banks and credit institutions, where
                                                                  institution in question.
the risks are considered equivalent, notably in the case of
credit institutions, because of arrangements made in an
international context and similarly to extend the 50 %            4.    Notwithstanding paragraph 3, the competent auth-
weight for mortgage-backed loans for the purchase of             orities may establish ratios above 8 % (*) as they
property in foreign countries.                                   consider appropriate.
3.    The Commission shall be assisted by a Committee             (') This figure is provisional. A definitive figure will be
composed of representatives from the Member States                    proposed after study of the results of a statistical exercise to
and chaired by a representative of the Commission.                    be undertaken in the first half of 1988.
 ---pagebreak--- 25. 5. 88                                 Official Journal of the European Communities                                      No C 135/9
5.   Member States shall communicate to the                                                        Article 10
Commission the texts of the main laws, regulations and
administrative provisions which they adopt in the field                 This Directive is addressed to the Member States.
covered by this Directive.
                                                               ANNEX 1
                    THE TREATMENT OF OFF-BALANCE SHEET ITEMS IN THE SOLVENCY RATIO
             The items shall first be grouped according to the perceived credit risk attaching to the instrument in
             question (see Annex 2). 'Full risk' off-balance sheet items shall be deemed to carry a credit risk equal to
             balance sheet items, and thus their full value taken into account; 'medium risk' items shall be considered to
             carry less risk and only one-half of their value taken into account; medium/low risk items shall be deemed
             to carry lower risk than the medium category and one-fifth of their value taken into account; 'low risk'
             items shall be considered to carry negligible risk and their value accordingly set at zero. The second stage
             shall be to multiply the off-balance sheet values, adjusted as described above, by the weights attributable to
             the relevant counterparties, in accordance with the treatment afforded to asset items. In the case of asset
             sale and repurchase agreements and outright forward purchases, the weights shall be those attaching to the
             assets in question and not to the counterparties to the transactions. Article 6 combines the two-stage
             process used for off-balance sheet items into a single percentage weight.
             Where off-balance sheet items carry explicit guarantees, they shall be weighted as if they were incurred on
             behalf of the guarantor rather than the counterparty. Where potential exposure arising from off-balance
             sheet business is fully and completely secured, to the satisfaction of the relevant competent authorities, by
             any assets having a 0 % or 20 % weight, the weight applicable to the collateral and not to the counterparty
             shall be used.
                                                               ANNEX 2
                                      CLASSIFICATION OF OFF-BALANCE SHEET ITEMS
             Full risk
             — Guarantees having the character of credit substitutes,
             — Acceptances,
             — Endorsements on bills not carrying the name of other credit institutions,
             — Transactions with recourse,
             — Irrevocable standby letters of credit having the character of credit substitutes,
             — Asset sale and repurchase agreements as defined in Article 12 (1) and (2) of Directive 86/635/EEC, if
                 these agreements are treated as off-balance sheet items pending full compliance with Directive
                 86/635/EEC,
             — Assets purchased under outright forward purchase agreements,
             — The unpaid portion of partly-paid shares and securities,
             — Other items also carrying full risk.
 ---pagebreak--- N o C 135/10                                Official J o u r n a l of the E u r o p e a n C o m m u n i t i e s                         2 5 . 5. 88
           Medium risk
           — Documentary credits issued and confirmed (see also medium/low risk),
           — Warranties and indemnities (including tender, performance, customs and tax bonds) and guarantees not
                having the character of credit substitutes,
           — Asset sale and repurchase agreements as defined in Article 12 (3) and (5) of Directive 86/635/EEC,
           — Irrevocable standby letters of credit not having the character of credit substitutes,
           — Undrawn credit facilities (agreements to lend purchase securities, provide guarantees, acceptance
                facilities) with an original maturity of more than one year;
           — Other items also carrying medium risk.
           Medium/low risk
           — Documentary credits in which underlying shipment acts as collateral and other self-liquidating
               transactions,
           — Other items also carrying medium/low risk.
           Low risk
           — Undrawn credit facilities (agreements to lend, purchase securities, provide guarantees, acceptance
               facilities) with an original maturity of up to and including one year,
           — Other items also carrying low risk.
                                                                     ANNEX      3
           T H E T R E A T M E N T O F INTEREST RATE AND FOREIGN EXCHANGE RATE RELATED OFF-
                                                         BALANCE SHEET ITEMS
           Subject to the consent of their supervisory authorities, credit institutions shall choose one of the methods
           presented below to measure the risks associated with the transactions listed in Annex 4. Interest and
           exchange rate contracts traded on recognized exchanges, and exchange rate contracts with an original
           maturity of seven days or less shall be excluded.
           Method 1: the 'marking to market' approach
           Step (a):         on the basis of attaching current market values to contracts (marking to market) the current
                             replacement cost of all contracts with a positive value shall be obtained.
           Step (b):         to obtain a figure for potential future credit exposure the notional principal amounts or
                             values underlying the institutions' aggregate books shall be multiplied by the following
                             percentages ('):
                                        residual maturity                                                       exchange rate contracts
                             less than one year                                                                          1%
                             one year and over                                                                           5%
           Step (c):         the sum of current replacement cost and potential future credit exposure shall be multiplied
                             by the risk weight attached to the relevant counterparties in Article 6.
           (') These percentages are provisional and subject to revision.
 ---pagebreak--- 25. 5. 88                               Official J o u r n a l of the E u r o p e a n C o m m u n i t i e s                         NoC 135/11
          Method 2: the 'original exposure' approach
          Step (a):       the notional principal amounts of each instrument shall be multiplied by the percentages
                          given below (*):
                                     original maturity                   interest rate contracts            exchange rate contracts
                          less than one year                                      0,5 %                              2%
                          one year and less than two years                         1%                               6%
                          additional allowance for
                          each subsequent year                                     1 %                              4%
          Step (b):       the original exposures thus obtained shall be multiplied by the counterparty weights given in
                          Article 6.
          (') These percentages are provisional and subject to revision.
                                                                 ANNEX       4
          TYPES O F INTEREST A N D FOREIGN EXCHANGE RATE RELATED OFF-BALANCE SHEET
                                                                   ITEMS
          Interest rate contracts
          —   Single-currency interest rate swaps
          —   Basis swaps
          —   Forward rate agreements
          —   Interest rate futures
          —   Interest rate options purchased
          —   Other contracts of similar nature
          Exchange rate contracts
          —   Cross-currency interest rate swaps
          —   Forward foreign exchange contracts
          —   Currency futures
          —   Currency options purchased
          —   Other contracts of similar nature.