CELEX: 52004PC0486
Language: en
Date: 2004-07-14
Title: Proposal for DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions.

|
			
		
		
		52004PC0486
		
			Proposal for DIRECTIVES OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL Re-casting Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit institutions. /* COM/2004/0486 final */
			
				
		
		
			
			   	EN
 || COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 14.7.2004
COM(2004) 486 final
2004/0155 (COD)
2004/0159 (COD)
Volume I
 
Proposal for
DIRECTIVES OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL
Re-casting Directive 2000/12/EC of the
European Parliament and of the Council of 20 March 2000 relating to the taking
up and pursuit of the business of credit institutions and Council Directive
93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and
credit institutions.
(presented by the Commission)
{SEC(2004) 921}
EXPLANATORY MEMORANDUM
1.           GENERAL COMMENTS
A single financial market in the EU will be
a key factor in promoting the competitiveness of the European economy and the
lowering the capital cost to companies. The Financial Services Action Plan
announces a directive on new capital adequacy rules for credit institutions and
investment firms in 2004, in step with progress at G-10 level in the Basel
Committee on Banking Supervision[1].
The agreement by the G-10 Basel Committee
on Banking Supervision of the so-called Basel Accord in 1988 (Basel I) led to
the adoption of minimum capital requirements across over 100 countries[2]. It was broadly
contemporaneous to the adoption of key EU directives (Directive 89/299/EEC
of 17.4.1989 on own funds, Directive 89/647/EEC of 18.12.1989 on a
solvency ratio, consolidated in Directive 2000/12/EC of the European
Parliament and of the Council of 20.3.2000 relating to the taking up and
pursuit of the business of credit institutions).
These directives addressed credit
institutions’ risks arising from credit-granting activities. Directive
93/6/EEC of 15.3.1993 on the capital adequacy of investment firms and credit
institutions extended both the credit risk and market risk rules to investment
firms. 
1) The need for improved European requirements.
The existing rules have made a significant
contribution to the single market and high prudential standards. However,
various important shortcomings have been identified.
1. Crude estimates of credit risks result in an extremely crude measure of risk and is in danger of
falling into disrepute.
2. Scope for capital arbitrage: innovations in markets have enabled financial institutions to
effectively arbitrage the mismatch between institutions’ own allocation of
capital to risks and minimum capital requirements. 
3. Lack of recognition of effective risk
mitigation: the present Directives do not
provide appropriate levels of recognition for risk mitigation techniques.
4. Incompleteness of the risks covered under the existing directives, including operational risk, which are
not subject to any capital charges.
5. Absence of requirement for supervisors to evaluate the actual risk profile of credit institutions
to satisfy themselves that adequate capital is held having regard to that risk
profile.
6. Absence of requirement for
supervisory cooperation: in an increasingly
cross-border market authorities must cooperate effectively with each other in
the supervision of cross-border groups to reduce regulatory burdens.
7. Absence of proper market disclosures:
the present Directives do not facilitate
effective market discipline for reliable information for market participants to
make well-founded assessments.
8. Lack of flexibility in the regulatory
framework: the current EU system the lacks the
flexibility to keep pace with rapid developments in financial markets and risk
management practices, and with improvements in regulatory and supervisory tools.
What would happen under a “no policy
change” scenario?
There is strong consensus that the present
situation is unsustainable. Capital requirements and risks would continue to be
misaligned resulting in limited effectiveness of the prudential rules and
increased risks to consumers and financial stability. The full extent of the
risks that some financial institutions are undertaking would still not be
captured. In addition, the newest and most effective risk management techniques
would not be actively encouraged or recognised and financial services groups
operating in more than one Member State would continue to be subject to
disproportionate burdens resulting from multiple layers of regulation and
supervision. Finally, the EU would be unable to benefit appropriately from
future developments, given the difficulty in speedily updating the current EU
regulatory framework. In view of the proposed global implementation of the new
Basel Accord the EU financial services sector would be significantly
disadvantaged compared with its overseas competitors.
2) The approach of the Directive
The
Commission’s 1998 Financial Services Action Plan stated that the EU needed accurate,
internationally consistent, up to date prudential standards. They should also
be proportionate recognising the reduction in risks arising from the context in
which exposures are incurred, and in particular lending to consumers and to
small- or medium-sized entities. Rules should apply to both credit institutions
and investment firms (level playing field) but also need to be proportionate
and take fully into account the ‘biodiversity’ of EU financial institutions. 
2.           Consultation and impact
assessment 
a) Consultation of stakeholders and
interested parties
The Commission has been engaged in
consultation with stakeholders and interested parties since November 1999.
Three full consultation papers have been issued on 22.11.1999, 5.2.2001 and 1.7.2003.
A full and structured dialogue with stakeholders was organised on 18.11.2002.
Consultation papers on specific technical issues have been published (real
estate and covered bonds on 7.4. 2003; ‘expected losses and unexpected losses´
on 26.11.2003; collective investment undertakings on 3.2.2004).
Commentators have generally been very
supportive of the major objectives of the project. Enhanced risk-sensitivity
leading to greater financial stability is supported and there is now a pressing
need for the rules to be updated, to respond to the significant advances in
techniques for risk measurement and management in financial services, and to
reflect increased regulatory and supervisory sophistication. There is strong
support for the Commission’s approach that the EU capital framework should be
revised consistent with the new international framework but differentiated
where necessary for EU specificities.
Less complex institutions
There is broad
and significant support for the application of the new rules in Europe – to all
credit institutions and investment services providers whatever the legal nature
and complexity of the institution, also to avoid ‘second class’ institutions
that would be likely to result if some were excluded. This reflects the
perception that the proposed new framework has been well designed for the
purposes of broad application. 
Flexibility of the new
directive
There is
continued wide and strong support for the approach proposed to ensure that the
new framework is responsive to market and supervisory innovation to maintain an
optimally efficient and competitive EU financial services sector. Stakeholders
support the approach where enduring principles and objectives are set out in
the articles and provide the mandate for the more detailed and technical
provisions contained in the annexes. The procedure for amending the annexes
must ensure full and effective consultation with interested parties.
Investment firms
Significant
modifications have been introduced to address concerns expressed by some from
the investment firm sector about being subject to capital requirements which
they perceive to be more appropriate for credit institutions.
Complexity
Some respondents
asked for simplification and less prescription. The Commission has increased
the clarity and user-friendliness of the text. The design will be attractive to
those institutions seeking simple rules to apply or wishing to progress
gradually to more complex capital rules. The proposed new framework contains a
range of options and approaches of different degrees of sophistication. 
Since 1999 there have also been several
consultations on detailed issues. The proposal has been taken account of very
detailed and useful comments from interested parties, in particular the banking
and investment firm industry. 
b) Impact assessment
An extended impact assessment has been
carried out to identify whether there is a need for action at EU level and, if
so, the action required.
The
Basel Committee published a quantitative impact study (QIS3) involving credit
institutions across 40 countries to assess the impact of the new Basel proposals on banks' minimum capital requirements. The Commission assisted in
extending this study to EU countries not represented in Basel. The key
conclusions were that the new rules will in general reduce capital requirements
for EU credit institutions by around 5% compared to present levels.
Furthermore, the outcomes for the different approaches are in line with
objectives – particularly combining capital neutrality with appropriate
incentives for institutions to move towards more sophisticated approaches. Finally,
smaller domestic credit institutions adopting the simple approach will face slightly
reduced capital charges; larger internationally active credit institutions
adopting the more advanced approach will face substantially unchanged capital
charges; smaller but specialised and sophisticated EU credit institutions
adopting the advanced approach might face substantially lower capital
requirements than at present. Importantly, the main source of reduction in
capital requirements is the ‘retail’ portfolio, which is mostly composed of
loans to Small and Medium Enterprises (SMEs) below EUR 1 million and
residential mortgage loans. The new operational risk capital charge is the main
source of offset of this decrease in capital requirements for credit
institutions.
In addition, at the request of the
Barcelona European Council the Commission commissioned a study on the
consequences of the draft proposed new capital requirements for credit
institutions and investment firms in the EU[3].
The final report, prepared by PricewaterhouseCoopers, is positive about the
impact (with only two areas of criticism – investment firms and venture capital
- both of which have been addressed in the Commission’s proposals).[4] The key conclusions are
that the new capital requirements framework should be positive for the EU, and
for prudential regulation in the EU. EU credit institutions’ capital
requirements should decrease by ± 5% (€ 90 billion) and translate into an
annual increase in profits of ± € 10-12 billion. There is no disadvantage for
smaller credit institutions and no indication that the new regime will force mergers
or consolidation. The decision to cover all credit institutions in the
directive will not put EU firms at a competitive disadvantage, nor is the US decision to apply only advanced approaches to some 20 big credit institutions a
significant competitive factor. Implementation costs for EU credit institutions
are not solely driven by Basel II and many of these investments (perhaps as
high as 80%) would have happened anyway, although over a longer period.
Importantly, there will be no negative impact on the availability and cost of
finance for SMEs in most EU Member States (‘procyclicality’ effects are less -
and less damaging - than the present rules). SME fears stem from insufficient
information understanding of Basel II. The macro-economic effects of Basel II
on the EU-economy are small - there could be a benign supply-side shock to the
economy reducing the cost of capital to firms and generating an increase of 0.07%
in EU GDP. In general the new capital framework will reduce the banking
system’s vulnerability through greater awareness of risk, improved risk
management, and a more efficient allocation of capital should have beneficial
long-run consequences for the EU economy. 
3.           legal basis 
The proposals are 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. The chosen instrument is a
Directive as the most appropriate to achieve the objectives and it amends
existing directives covering the same technical issues. Its provisions do not
go beyond what it is necessary to achieve the objectives pursued.
4.           Comments on the articles
The proposals apply the ‘re-casting
technique’ (Interinstitutional Agreement 2002/C 77/01) enabling substantive
amendments to existing legislation without a self-standing amending directive. This
reduces complexity and makes EU legislation more accessible and comprehensible.
Amendments of a non-substantive nature are
made to many provisions to improve the structure, drafting and readability of
the directives.
A.          Directive 2000/12/EC
Article 4: Definitions
Article 4 contains certain new definitions
concerning essential concepts to clarify their meaning and contribute to a
better understanding.
Article 22:
The existing wording has been amended to
clarify and develop the obligation for credit institutions to have in place
effective internal risk management systems. Given the diversity of credit
institutions covered, these requirements will have to be met on a proportionate
basis. Relevant technical provisions are in Annex V.
Articles 56-67:
A small number of amendments have been made.
Although it is not intended to review the definition of ‘own funds’, as a
consequence of the modified approach to expected loss in the Basel Committee (‘Madrid decision’), some limited amendments are necessary. 
Articles 68-75:
Credit institutions must hold adequate own
funds on an ongoing basis and state the minimum level of those own funds. The
provisions specify how the requirements should be met if the credit institution
is part of a group (the existing option for Member States’ authorities to waive
certain requirements has been retained but with more precision). The
calculation of the requirements has been clarified in the light of the
introduction of Regulation (EC) no.1606/2002 on international accounting
standards.
Articles 76-101:
These provisions replace the existing
solvency ratio requirements for credit risk and introduce two methods to
calculate risk weighted exposure amounts.
The Standardised Approach (Art. 78-83) is
based on the existing framework, with risk weights determined by the allocation
of assets and off-balance sheet items to a limited number of risk buckets. Risk
sensitivity has been increased by the number of exposure classes and risk
buckets (Art. 79). There are lower risk weights for non-mortgage retail items
(75%) and residential mortgages (35%). A 150% risk weight for assets which are
90 days past due (100% for residential mortgages) is introduced. The use of
credit rating agencies’ ratings to assign risk weights where these are available
(‘external ratings’) is permitted (Art 81-83). Relevant technical provisions
are in Annex VI.
The Internal Ratings Based (IRB) approach
(Art 84-89), permits credit institutions to use their own estimates of the risk
parameters inherent in their different credit risk exposures. These parameters
form the inputs into a prescribed calculation designed to provide soundness to
a 99.9% confidence level. The ‘Foundation’ Approach allows credit institutions
to use their own estimates of probability of default, while using regulatory
prescribed values for other risk components. Under the ‘Advanced’ Approach,
credit institutions may use their own estimates for losses given default and
their exposure at default. Credit institutions are allowed to use pooled data
in the estimation of risk parameter values. This allows smaller credit
institutions to apply a more risk sensitive approach to calculating capital
requirements.
The proposed ‘roll-out’ rules (Art. 85) for
the IRB approach provide flexibility for credit institutions to move different
business lines and exposure classes to the Foundation or the Advanced IRB
Approach during a reasonable timeframe. ‘Partial’ use is allowed for
non-material exposure classes and business lines (capital requirements can be
calculated under the Standardised Approach even if a credit institution uses
the IRB Approach for other exposure classes). The proposed EU framework
recognises that, for small credit institutions the requirement to develop a
rating system for certain counterparties is potentially very burdensome.
Permanent partial use for these exposure classes is proposed even in cases
where credit institutions’ exposures to such counterparts are material (Art. 89).
Relevant technical provisions for the IRB
approach are in Annex VI.
Articles 90-93:
The rules identify common issues for
mitigation techniques and treat common underlying risks or economic effects
consistently. These include the recognition of a wider range of collateral and
guarantee/credit derivative providers than at present. The IRB Foundation
Approach gives a prudentially appropriate level of recognition to financial
receivables and physical collateral. Alternative methodologies are available
for credit institutions to choose between methods of different levels of
complexity (a Simple Method – based on an easy-to-use ‘risk weight
substitution’ approach; or a Comprehensive Method – involving the application
of volatility adjustments to the value of the collateral received). To
calculate volatility adjustments more and less complex approaches are made
available (a simple ‘Supervisory’ approach where the amounts of the benchmark
volatility adjustments are set out in a table; or a more risk-sensitive ‘Own
Estimates’ approach). Relevant technical provisions are in Annex VIII.
Articles 94-101:
These articles introduce for the first time
a harmonised set of rules for capital requirements for securitisation
activities and investments. This provides a significantly improved capital
requirements framework – allowing credit institutions to take advantage of the
funding, balance-sheet management and other advantages that such transactions
can deliver. It will also reduce the extent to which securitisation has been
seen as an instrument of capital arbitrage. Relevant technical provisions are
in Annex IX.
Articles 102-105:
These
provisions introduce requirements to meet the operational risk faced by credit
institutions. Three different methodologies are available. A simple approach
(Art. 103) based on a single income indicator (Basic Indicator Approach - BIA).
This approach provides a capital buffer against operational risk, without
requiring credit institutions to develop sophisticated and costly information
systems about their risk exposure. A more precise approach based on business
lines (Standardised Approach - STA) (Art. 104) is more risk-sensitive as the
capital requirement for operational risk is differentiated to reflect the
relative risks of different business lines. This approach is likely to be
attractive to a large number of smaller / less complex credit institutions.
More sophisticated methodologies (Advanced Measurement Approaches - AMAs) (Art.
105) generate their own measures of operational risk, subject to more demanding
risk management standards. AMAs are expected to be gradually adopted mainly by
large internationally active credit institutions and smaller specialised credit
institutions which have developed advanced risk monitoring systems for their
main activities. Relevant technical provisions are in Annex X.
Articles 106-119:
A small number of amendments bring consistency
between capital requirements and the large exposures rules, in particular to
reflect the expanded recognition of credit risk mitigation techniques.
Article 123-124:
These Articles reflect the second ‘pillar’
of the Basel Committee’s capital accord. Art. 51A requires credit institutions
to have in place internal processes to measure and manage their risk and the
amount of ‘internal’ capital they themselves deem adequate to support those
risks. Competent authorities are required (Art. 124) to review compliance by
credit institutions with the various legal obligations for organisation and
risk control, and to evaluate the risks taken by credit institutions. This
assessment will be used by supervisors to determine whether weaknesses exist in
controls and capital held. Relevant technical provisions are in Annex XIII.
Articles 125-143:
There is an increasing degree of EU
cross-border business and a trend towards centralisation of risk management
within cross-border groups. This requires improved coordination and cooperation
amongst national supervisory authorities in the EU. The existing and well
established role of the consolidating supervisor has thus been developed
further. Under Art. 136 supervisors will be provided with a minimum harmonised
range of powers to require credit institutions to address any inadequacies in
the requirements of the Directive. 
Article 144:
A minimum set of disclosure requirements
exists for Member States’ authorities to enhance convergence of implementation
and introduce transparency.
Articles 145-149:
These provisions reflect the ‘third’ pillar
of the Basel Committee’s new capital accord. The disclosure of information by
credit institutions to market participants contributes to greater financial
soundness and stability, maintains a level playing field and respects the
sensitivity of certain information. Art. 147 requires disclosure on a minimum
annual basis for most credit institutions - more frequent disclosure may be
necessary in the light of specific criteria. Relevant technical provisions are
in Annex XII.
Article 150:
The Directive needs to keep pace with
market developments. The necessary degree of flexibility is provided by making
a distinction between core and technical rules (particularly in the annexes to
the directive) that may need adaptations in the short to medium term. Art. 150
adds new technical areas to those in Directive 2000/12/EC (introduced in 1989)
and proposes that the new technical Annexes should be able to be modified
following the same rapid procedure.
B.           Directive 93/6/EEC on
the Capital Adequacy of Investments Firms and Credit Institutions
Article 2: Scope
Article 2 specifies how the requirements
apply to individual investment firms, groups of investment firms, and mixed
groups.
Article 3: Definitions
There are certain new and amended
definitions on essential concepts to clarify their meaning and contribute to a
better understanding.
Article 11: Trading book capital
treatment
There is an enhanced definition of the
‘trading book’ to increase certainty as to the capital requirements that apply
and to restrict possible arbitrage between the ‘banking book’ / ‘trading book’
boundary. Relevant technical provisions are set out in Annex VII.
Articles 18 and 20:
Article 18 prescribes, for credit
institutions and investment firms, the minimum capital requirements for market
risk. The treatment of positions in collective investment undertakings and
credit derivatives and a number of other modifications for increased risk-sensitivity
are new. Relevant technical provisions are in Annexes I to VII. Article 20
extends the rules on capital requirements for credit risk and operational risk
in Directive 2000/12 to investment firms, as at present. New credit risk
elements include the provision of a treatment for credit derivatives and an
amended measure of exposure for repurchase transactions and
securities/commodities financing transactions. For operational risk there are
significant modifications to take account of the specific features of the
investment firm sector, with an option to continue the ‘Expenditure Based
Requirement’ for investment firms falling into the low-, medium- and
medium/high-risk categories.
Article 28: Large exposures
The current situation is continued where
credit institutions and investment firms are subject to the same rules, subject
to modifications to large exposures for trading book transactions. A new
element is an amended measure of exposure for repurchase transactions and
securities/commodities financing transactions. Relevant technical provisions
are in Annex VI.
Article 33: Valuation of positions for
reporting 
Enhanced requirements for the valuation of
trading book positions are prescribed for prudential soundness in the context
of rules designed for trading book positions to be priced on a daily basis. Relevant
technical provisions are in Annex VII.
Article 22: Consolidated requirements
The existing option for competent
authorities to waive the application of consolidated requirements for groups consisting
of investment firms is continued subject to more prudentially sound conditions.
Article 34: Risk management and capital
assessment
Article 34 incorporates the obligation for
credit institutions (Article 17 of Directive 2000/12), for investment firms to
have in place effective internal risk management systems. Given the diversity
of the institutions covered, these requirements will have to be met on a
proportionate basis. It also applies the requirement in Article 51A of
Directive 2000/12 to investment firms to have internal processes to measure and
manage the risk they are exposed to and the amount of capital (‘internal’
capital) they deem adequate to support those risks. It adds to the existing
risk management requirements for investment firms in Directive 2004/39/EC.
Article 37: Supervision
This Article applies the rules in Directive
2000/12 mutatis mutandis to investment firms. 
Article 42
As for Directive 2000/12, Directive 93/6
need to keep pace with market developments. The necessary flexibility is
brought by distinguishing between core and technical rules (particularly in the
annexes) that will need adaptations in the short to medium run. The technical
Annexes should be able to be modified following a rapid procedure. To reflect
expected further important developments in regulatory practice in the coming
years, a review clause is included for the treatment of counterparty risk.
ê 2000/12/EC
2004/0155 (COD)
Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL 
relating to the taking up and pursuit of
the business of credit institutions (recast)
ò new
(Text with EEA relevance)
ê 2000/12/EC
(adapted)
THE EUROPEAN PARLIAMENT AND THE
COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing
the European Community, and in particular the first and third sentences of
Article 47(2) thereof,
Having regard to the proposal from the
Commission,
Having regard to the opinion of the
Economic and Social Committee[5],
Acting in accordance with the procedure
laid down in Article 251 of the Treaty[6],
Whereas:
ê 2000/12/EC
Recital 1 (adapted)
(1)              
Council Directive
73/183/EEC of 28 June 1973 on the abolition of restrictions on freedom of
establishment and freedom to provide services in respect of self-employed
activities of banks and other financial institutions[7], first Council Directive (77/780/EEC) of 12
December 1977 on the coordination of laws, regulations and administrative
provisions relating to the taking up and pursuit of the business of credit
institutions[8], Council Directive 89/299/EEC of 17 April
1989 on the own funds of credit institutions[9], second Council Directive 89/646/EEC of 15
December 1989 on the coordination of laws, regulations and administrative
provisions relating to the taking up and pursuit of the business of credit
institutions[10], Council Directive 89/647/EEC of 18 December
1989 on a solvency ratio for credit institutions[11], Council Directive 92/30/EEC of 6 April 1992
on the supervision of credit institutions on a consolidated basis[12], and Council Directive 92/121/EEC of 21
December 1992 on the monitoring and control of large exposures of credit
institutions[13] have been frequently and substantially
amended. For reasons of clarity and rationality, the said Directives therefore,
should be codified and combined in a single text. Ö Directive
2000/12/EC of the European Parliament and of the Council of 20 March 2000
relating to the taking up and pursuit of the business of credit institutions[14] has been substantially amended several times. Since further
amendments are to be made, it should be recast in the interest of clarity. Õ 
ê 2000/12/EC
Recital 2 (adapted)
Pursuant to the
Treaty, any discriminatory treatment with regard to establishment and to the
provision of services, based either on nationality or on the fact that an
undertaking is not established in the Member State where the services are
provided, is prohibited.
ê 2000/12/EC
Recital 3
(2)              
In order to make it easier to take up and pursue
the business of credit institutions, it is necessary to eliminate the most
obstructive differences between the laws of the Member States as regards the
rules to which these institutions are subject.
ê 2000/12/EC
Recital 4 (adapted)
(3)              
This Directive constitutes the essential
instrument for the achievement of the internal market, a
course determined by the Single European Act and set out in timetable form in
the Commission's White Paper, from the point of view of both the freedom
of establishment and the freedom to provide financial services, in the field of
credit institutions.
ê 2000/12/EC
Recital 5 (adapted)
(4)              
Measures to coordinate credit institutions must,
both in order to protect savings and to create equal conditions of competition
between these institutions, apply to all of them. Due regard must Ö should
however Õ be had, where applicable, to the objective differences in
their statutes and their proper aims as laid down by national laws.
ê 2000/12/EC
Recital 6 (adapted)
(5)              
The scope of those measures should therefore be
as broad as possible, covering all institutions whose business is to receive
repayable funds from the public, whether in the form of deposits or in other
forms such as the continuing issue of bonds and other comparable securities and
to grant credits for their own account. Exceptions must
Ö should Õ be provided
for in the case of certain credit institutions to which this Directive cannot
apply. The provisions of this Directive shall Ö should Õ not prejudice
the application of national laws which provide for special supplementary
authorisations permitting credit institutions to carry on specific activities
or undertake specific kinds of operations.
ê 2000/12/EC
Recital 7 (adapted)
(6)              
The approach which has
been adopted is Ö It is
appropriate Õ to achieve Ö effect Õ only the
essential harmonisation necessary and sufficient to secure the mutual
recognition of authorisation and of prudential supervision systems, making
possible the granting of a single licence recognised throughout the Community
and the application of the principle of home Member State prudential
supervision. Therefore, the requirement that a programme of operations must be
produced should be seen merely as a factor enabling the competent authorities
to decide on the basis of more precise information using objective criteria. A
measure of flexibility may Ö should Õ none-the-less
be possible as regards the requirements on the legal form of credit
institutions of Ö concerning Õ the protection
of banking names.
ò new
(7)              
Since the objective of
the proposed action cannot be sufficiently achieved by the Member States and
can therefore, by reason of the scale and the effects of the action, 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 confines itself to the minimum required in order to achieve
those objectives and does not go beyond what is necessary for that purpose. 
ê 2000/12/EC
Recital 8 (adapted)
(8)              
Equivalent financial requirements for credit institutions are necessary to
ensure similar safeguards for savers and fair conditions of competition between
comparable groups of credit institutions. Pending further coordination,
appropriate structural ratios should be formulated that
will make Ö making Õ it possible
within the framework of cooperation between national authorities to observe, in
accordance with standard methods, the position of comparable types of credit
institutions. This procedure should help to bring about the gradual
approximation of the systems of coefficients established and applied by the
Member States. It is necessary, however to make a distinction between
coefficients intended to ensure the sound management of credit institutions and
those established for the purposes of economic and monetary policy.
ê 2000/12/EC
Recital 9 (adapted)
ð new
(9)              
The principles of mutual recognition and home
Member State supervision require that Member States' competent authorities
should not grant or should withdraw Ö an Õ authorisation
where factors such as Ö the Õ content of the
activities programmes, the geographical distribution Ö of
activities Õ or the
activities actually carried on indicate clearly that a credit institution has
opted for the legal system of one Member State for the purpose of evading the
stricter standards in force in another Member State within whose territory it
carries on or intends to carry on the greater part of its activities. A credit
institution which is a legal person must Ö should Õ be authorised
in the Member State in which it has its registered office. A credit institution
which is not a legal person must Ö should Õ have its head
office in the Member State in which it has been authorised. In addition, Member
States must Ö should Õ require that a
credit institution's head office always be situated in its home Member State and that it actually operates there.
ê 2000/12/EC
Recital 10 (adapted)
(10)          
The competent authorities should not authorise
or continue the authorisation of a credit institution where they are liable to
be prevented from effectively exercising their supervisory functions by the
close links between that institution and other natural or legal persons. Credit
institutions already authorised must Ö should Õ also satisfy
the competent authorities in that respect. The definition
of «close links» in this Directive lays down minimum criteria. That does not
prevent Member States from applying it to situations other than those envisaged
by the definition. The sole fact of having acquired a significant proportion of
a company's capital does not constitute participation, within the meaning of
«close links», if that holding has been acquired solely as a temporary
investment which does not make it possible to exercise influence over the
structure or financial policy of the institution.
ê 2000/12/EC
Recital 11 (adapted)
(11)          
The reference to the supervisory authorities'
effective exercise of their supervisory functions covers supervision on a
consolidated basis which must be exercised over a credit institution where the
provisions of Community law so provide. In such cases, the authorities applied
to for authorisation must Ö should Õ be able to
identify the authorities competent to exercise supervision on a consolidated
basis over that credit institution.
ê 2000/12/EC
Recital 12 (adapted)
The home Member State may also establish rules stricter than those laid down in Article 5(1), first
subparagraph and (2), and Articles 7, 16, 30, 51 for institutions authorised by
its competent authorities.
ê 2000/12/EC
Recital 13 (adapted)
The abolition of the
authorisation requirement with respect to the branches of Community credit
institutions necessitates the abolition of endowment capital.
ê 2000/12/EC
Recital 14 (adapted)
(12)          
By virtue of mutual
recognition, the approach chosen permits cCredit
institutions authorised in their home Member States Ö should be
allowed Õ to carry on,
throughout the Community, any or all of the activities listed in Annex I by
establishing branches or by providing services. The
carrying-on of activities not listed in the said Annex enjoys the right of
establishment and the freedom to provide services under the general provisions
of the Treaty.
ê 2000/12/EC
Recital 15 (adapted)
(13)          
It is appropriate, however
to extend mutual recognition to the activities listed in Annex I when they are
carried on by financial institutions which are subsidiaries of credit
institutions, provided that such subsidiaries are covered by the consolidated
supervision of their parent undertakings and meet certain strict conditions.
ê 2000/12/EC
Recital 16 (adapted)
(14)          
The host Member State may
Ö should be
able Õ, in connection
with the exercise of the right of establishment and the freedom to provide
services, Ö to Õ require
compliance with specific provisions of its own national laws or regulations on
the part of institutions not authorised as credit institutions in their home
Member States and with regard to activities not listed in Annex I provided
that, on the one hand, such provisions are compatible with Community law and
are intended to protect the general good and that, on the other hand, such
institutions or such activities are not subject to equivalent rules under this
legislation or regulations of their home Member States.
ê 2000/12/EC
Recital 17 (adapted)
(15)          
The Member States must
Ö should Õ ensure that
there are no obstacles to carrying on activities receiving mutual recognition
in the same manner as in the home Member State, as long as the latter do not
conflict with legal provisions protecting the general good in the host Member State.
ê 2000/12/EC
Recital 18 (adapted)
There is a necessary
link between the objective of this Directive and the liberalisation of capital
movements being brought about by other Community legislation. In any case the
measures regarding the liberalisation of banking services must be in harmony
with the measures liberalising capital movements.
ê 2000/12/EC
Recital 19 (adapted)
(16)          
The rules governing branches of credit
institutions having their head office outside the Community should be analogous
in all Member States. It is important at the present time
to provide that such rules may not be more favourable than those for branches
of institutions from another Member State. It should be
specified that tThe Community may Ö should be
able to Õ conclude
agreements with third countries providing for the application of rules which accord
such branches the same treatment throughout its territory,
account being taken of the principle of reciprocity. The branches of
credit institutions authorised in third countries do
Ö should Õ not enjoy the
freedom to provide services under the second paragraph of Article 49 of the
Treaty or the freedom of establishment in Member States other than those in
which they are established. However, requests for the
authorisation of subsidiaries or of the acquisition of holdings made by
undertakings governed by the laws of third countries are should subject to
a procedure intended to ensure that Community credit institutions receive
reciprocal treatment in the third countries in question.
ê 2000/12/EC
Recital 20 (adapted)
The authorisations
granted to credit institutions by the competent national authorities pursuant
to this Directive have Community-wide, and no longer merely nationwide,
application. Existing reciprocity clauses have therefore no effect. A flexible
procedure is therefore needed to make it possible to assess reciprocity on a
Community basis. The aim of this procedure is not to close the Community's
financial markets but rather, as the Community intends to keep its financial
markets open to the rest of the world, to improve the liberalisation of the
global financial markets in other third countries. To that end, this Directive
provides for procedures for negotiating with third countries and, as a last
resort, for the possibility of taking measures involving the suspension of new
applications for authorisation or the restriction of new authorisations.
ê 2000/12/EC
Recital 21 (adapted)
(17)          
It is desirable that aAgreement should be reached, on the basis of
reciprocity, between the Community and third countries with a view to allowing
the practical exercise of consolidated supervision over the largest possible
geographical area.
ê 2000/12/EC
Recital 22 (adapted)
(18)          
Responsibility for supervising the financial
soundness of a credit institution, and in particular its solvency, rests Ö should
lay Õ with the competent authorities of its home Member State. The host Member State's competent authorities retain
Ö should be Õ responsibility Ö responsible Õ for the
supervision of Ö the Õ liquidity Ö of the
branches Õ and monetary policy Ö policies Õ. The
supervision of market risk must Ö should Õ be the subject
of close cooperation between the competent authorities of the home and host
Member States.
ê 2000/12/EC
Recital 23 and 24 (adapted)
ð new
(19)          
The smooth operation of the internal banking
market requires not only legal rules but also close and regular cooperation ð and significantly enhanced
convergence of regulatory and supervisory practices ï between the competent authorities of the Member States. For the Ö To this end, in particular, Õ consideration
of problems concerning individual credit institutions ð and the mutual exchange of
information should take place in ï the «groupe de contact» (contact
group) ð Committee of European Banking
Supervisors ï set up ð by Commission Decision
2004/5/EC [15] ï between the banking supervisory
authorities remains the most appropriate forum.
That group is a suitable body for the mutual exchange of information provided
for in Article 28. That mutual information procedure does Ö should Õ not in any
case replace the bilateral collaboration Ö co-operationÕ established by Article 28. The competent host Member State authorities can,. wWithout
prejudice to their powers of proper control, Ö the
competent authorities of the host Member States should be able Õ continue either, in an emergency, on their own
initiative or following the initiative of the competent Ö authorities
of Õ home Member
State authorities, to verify that the activities
of a credit institution established within their territories comply with the
relevant laws and with the principles of sound administrative and accounting
procedures and adequate internal control.
ê 2000/12/EC
Recital 25 (adapted)
(20)          
It is appropriate to allow the exchange of
information between the competent authorities and authorities or bodies which,
by virtue of their function, help to strengthen the stability of the financial
system. In order to preserve the confidential nature of the information
forwarded, the list of addressees must Ö should Õ remain within
strict limits.
ê 2000/12/EC
Recital 26 and 27 (adapted)
(21)          
Certain behaviour, such as fraud and insider
offences, is liable to affect the stability, including the integrity, of the
financial system, even when involving institutions other than credit
institutions. It is necessary to specify the conditions under which such exchanges of
information Ö in such
cases Õ are Ö is Õ authorised.
ê 2000/12/EC
Recital 28 (adapted)
(22)          
Where it is stipulated that information may be
disclosed only with the express agreement of the competent authorities, these may Ö should be
able Õ, where
appropriate, Ö to Õ make their
agreement subject to compliance with strict conditions.
ê 2000/12/EC
Recital 29
(23)          
Exchanges of information between, on the one
hand, the competent authorities and, on the other, central banks and other
bodies with a similar function in their capacity as monetary authorities and,
where appropriate, other public authorities responsible for supervising payment
systems should also be authorised.
ê 2000/12/EC
Recital 30 (adapted)
(24)          
For the purpose of strengthening the prudential
supervision of credit institutions and Ö the Õ protection of
clients of credit institutions, it should be stipulated
that an auditors must Ö should Õ have a duty to
report promptly to the competent authorities, wherever, as
provided for by this Directive, he Ö during
the performance of their tasks, Õ becomes aware, while carrying
out his tasks, of certain facts which are liable to have a serious
effect on the financial situation or the administrative and accounting
organisation of a credit institution. Having regard to
the aim in view, it is desirable for the Ö For the
same reason Õ Member States to Ö should
also Õ provide that
such a duty should apply
Ö applies Õ in all
circumstances where such facts are discovered by an auditor during the
performance of his tasks in an undertaking which has close links with a credit
institution. The duty of auditors to communicate, where appropriate, to the
competent authorities certain facts and decisions concerning a credit
institution which they discover during the performance of their tasks in a
non-financial undertaking does Ö should Õ not in itself
change the nature of their tasks in that undertaking nor the manner in which
they must perform those tasks in that undertaking.
ê 2000/12/EC
Recitals 31 to 35 (adapted)
Common basic
standards for the own funds of credit institutions are a key factor in the
creation of an internal banking market since own funds serve to ensure the
continuity of credit institutions and to protect savings. Such harmonisation
strengthens the supervision of credit institutions and contributes to further
coordination in the banking sector.
Such standards must
apply to all credit institutions authorised in the Community.
The own funds of a
credit institutions can serve to absorb losses which are not matched by a
sufficient volume of profits. The own funds also serve as an important
yardstick for the competent authorities, in particular for the assessment of
the solvency of credit institutions and for other prudential purposes.
Credit institutions,
in an internal banking market, engage in direct competition with each other,
and the definitions and standards pertaining to own funds must therefore be
equivalent. To that end, the criteria for determining the composition of own
funds must not be left solely to Member States. The adoption of common basic standards
will be in the best interests of the Community in that it will prevent
distortions of competition and will strengthen the Community banking system.
The definition of own
funds laid down in this Directive provides for a maximum of items and qualifying
amounts, leaving it to the discretion of each Member State to use all or some
of such items or to adopt lower ceilings for the qualifying amounts.
ê 2000/12/EC
Recital 36 (adapted)
(25)          
This Directive specifies the
Ö that for certain
own funds items Õ qualifying
criteria for certain own funds items Ö should be
specified, without prejudice to the possibility of Õ and the Member States remain free
to apply more stringent provisions.
ê 2000/12/EC
Recital 37 (adapted)
At the initial stage
common basic standards are defined in broad terms in order to encompass all the
items making up own funds in the different Member States.
ê 2000/12/EC
Recital 38
(26)          
According to the nature of the items making up
own funds, this Directive distinguishes between on the one hand, items
constituting original own funds and, on the other, those constituting
additional own funds.
ê 2000/12/EC
Recital 39 (adapted)
(27)          
To reflect the fact that items constituting
additional own funds are not of the same nature as those constituting original
own funds, the amount of the former included in own funds must Ö should Õ not exceed the
original own funds. Moreover, the amount of certain items of additional own
funds included must Ö should Õ not exceed one
half of the original own funds.
ê 2000/12/EC
Recital 39 (adapted)
(28)          
In order to avoid distortions of competition,
public credit institutions must Ö should Õ not include in
their own funds guarantees granted them by the Member States or local
authorities.
ê 2000/12/EC
Recital 40 (adapted)
(29)          
Whenever in the course of supervision it is necessary
to determine the amount of the consolidated own funds of a group of credit
institutions, the calculation shall Ö should Õ be effected in
accordance with this Directive.
ê 2000/12/EC
Recital 41 (adapted)
ð new
(30)          
The precise accounting technique to be used for
the calculation of own funds, the solvency ratio ð their adequacy for the risk to which
a credit institution is exposed ï, and for the assessment of the concentration of exposures must Ö should Õ take account
of the provisions of Council Directive 86/635/EEC of 8 December 1986 on the
annual accounts and consolidated accounts of banks and other financial
institutions[16],
which incorporates certain adaptations of the provisions of Council Directive
83/349/EEC of 13 June 1983 based on Article 44(2)(g) of the Treaty on
consolidated accounts Ö [17] Õ ð or of Regulation (EC) No 1606/2002
of the European Parliament and Council of 19 July 2002 on the application of
international accounting standards[18]
whichever governs the accounting of the credit institutions under national
law ï.
ê 2000/12/EC
Recital 42 to 47 (adapted)
The provisions on own
funds, form part of the wider international effort to bring about approximation
of the rules in force in major countries regarding the adequacy of own funds.
In
an internal banking market, institutions are required to enter into direct
competition with one another and the common solvency
ration in the form of a minimum ratio prevent
distortions of competition and strengthen the Community banking system.
The Commission
will draw up a report and periodically examine, with the aim of tightening them,
the provisions on own funds and thus achieving greater convergence on a common
definition of own funds. Such convergence will allow the alignment of Community
credit institutions' own funds.
The provisions
on solvency ratios are the outcome of work carried out by the Banking Advisory
Committee which is responsible for making suggestions to the Commission with a
view to coordinating the coefficients applicable in the Member States.
The
establishment of an appropriate solvency ratio plays a central role in the
supervision of credit institutions.
A ratio which
weights assets and off-balance-sheet items according to the degree of credit
risk is a particularly useful measure of solvency. 
ò new
(31)          
Minimum capital requirements
play a central role in the supervision of credit institutions and in the mutual
recognition of supervisory techniques. In that respect, the provisions on
minimum capital requirements should be considered in conjunction with other
specific instruments also harmonising the fundamental techniques for the
supervision of credit institutions.
(32)          
In order to prevent
distortions of competition and to strengthen the banking system in the internal
market, it is appropriate to lay down common minimum capital requirements.
(33)          
For the purposes of ensuring
adequate solvency it is important to lay down minimum capital requirements
which weight assets and off-balance-sheet items according to the degree of risk.
ê 2000/12/EC
Recitals 48 to 51 (adapted)
The development of
common standards for own funds in relation to assets and off-balance-sheet
items exposed to credit risk is, accordingly, an essential aspect of the
harmonisation necessary for the achievement of the mutual recognition of
supervision techniques and thus the completion of the internal banking market.
In that
respect, the provisions on a solvency ratio must be considered in conjunction
with other specific instruments also harmonising the fundamental techniques of
the supervision of credit institutions.
In an internal
banking market, institutions are required to enter into direct competition with
one another and the common solvency standards in the form of a minimum ratio
prevent distortions of competition and strengthen the Community banking system.
This Directive
provides for different weightings to be given to guarantees issued by different
financial institutions. The Commission accordingly undertakes to examine
whether this Directive taken as a whole significantly distorts competition
between credit institutions and insurance undertakings and, in the light of
that examination, to consider whether any remedial measures are justified.
ò new
(34)          
It is essential to
take account of the diversity of credit institutions in the Community by
providing alternative approaches to the calculation of minimum capital
requirements for credit risk incorporating different levels of risk-sensitivity
and requiring different degrees of sophistication. Use of external ratings and
credit institutions’ own estimates of individual credit risk parameters
represents a significant enhancement in the risk-sensitivity and prudential
soundness of the credit risk rules. There should be appropriate incentives for
credit institutions to move towards the more risk-sensitive approaches.
(35)          
The minimum capital
requirements should be proportionate to the risks addressed. In particular the
reduction in risk levels deriving from having a large number of relatively
small exposures should be reflected in the requirements.
(36)          
Increased recognition
should be given to techniques of credit risk mitigation within a framework of
rules designed to ensure that solvency is not undermined by undue recognition.
(37)          
In order to ensure
that the risks and risk reductions arising from credit institutions’
securitisation activities and investments are appropriately reflected in the
minimum capital requirements of credit institutions it is necessary to include
rules providing for a risk-sensitive and prudentially sound treatment of such
activities and investments.
ê 2000/12/EC
Recital 52 (adapted)
Annex III lays down
the treatment of off-balance-sheet items in the context of the calculation of
credit institutions' capital requirements. With a view to the smooth
functioning of the internal market and in particular with a view to ensuring a
level playing field Member States are obliged to strive for uniform assessment
of contractual netting agreements by their competent authorities. Annex III
takes account of the work of an international forum of banking supervisors on
the supervisory recognition of bilateral netting, in particular the possibility
of calculating the own-funds requirements for certain transactions on the basis
of a net rather than a gross amount provided that there are legally binding
agreements which ensure that the credit risk is confined to the net amount. For
internationally active credit institutions and groups of credit institutions in
a wide range of third countries, which compete with Community credit
institutions, the rules adopted on the wider international level will result in
a refined supervisory treatment of over-the-counter (OTC) derivative
instruments. This refinement results in a more appropriate compulsory capital
cover taking into account the risk-reducing effects of supervisorily recognised
contractual netting agreements on potential future credit risks. The clearing
of OTC derivative instruments provided by clearing houses acting as a central
counterparty plays an important role in certain Member States. It is
appropriate to recognise the benefits from such a clearing in terms of a
reduction of credit risk and related systemic risk in the prudential treatment
of credit risk. It is necessary for the current and potential future exposures
arising from cleared OTC derivatives contracts to be fully collateralised and
for the risk of a build-up of the clearing house's exposures beyond the market
value of posted collateral to be eliminated in order for cleared OTC
derivatives to be granted for a transitional period the same prudential
treatment as exchange-traded derivatives. The competent authorities must be
satisfied as to the level of the initial margins and variation margins required
and the quality of and the level of protection provided by the posted
collateral. For credit institutions incorporated in the Member States, Annex
III creates a similar possibility for the recognition of bilateral netting by
the competent authorities and thereby offers them equal conditions of
competition. The rules are both well balanced and appropriate for the further reinforcement
of the application of prudential supervisory measures to credit institutions.
The competent authorities in the Member States should ensure that the
calculation of add-ons is based on effective rather than apparent national
amounts.
ò new
(38)          
Operational risk is a
significant risk faced by credit institutions requiring coverage by own funds. It
is essential to take account of the diversity of credit institutions in the
Community by providing alternative approaches to the calculation of operational
risk requirements incorporating different levels of risk-sensitivity and
requiring different degrees of sophistication. There should be appropriate
incentives for credit institutions to move towards the more risk-sensitive
approaches. In view of the emerging state of the art for the measurement and
management of operational risk the rules should be kept under review and
updated as appropriate including in relation to the charges for different
business lines and the recognition of risk mitigation techniques.
(39)          
In order to ensure
adequate solvency of credit institutions within a group it is essential that
the minimum capital requirements apply on the basis of the consolidated
financial situation of the group. In order to ensure that own funds are appropriately
distributed within the group and available to protect savings where needed, the
minimum capital requirements should apply to individual credit institutions
within a group, unless this objective can be effectively otherwise achieved.
ê 2000/12/EC
Recital 53 (adapted)
The
minimum ratio provided for in this Directive reinforces the capital
of credit institutions in the Community. A level of 8% has been adopted
following a statistical survey of capital requirements in force at the beginning
of 1988.
ê 2000/12/EC
Recital 54
(40)          
The essential rules for monitoring large
exposures of credit institutions should be harmonised. Member States should
still be able to adopt provisions more stringent than those provided for by
this Directive.
ê 2000/12/EC
Recital 55 (adapted)
(41)          
The monitoring and control of a credit
institution's exposures is Ö should be Õ an integral
part of its supervision. Ö Therefore Õ Eexcessive
concentration of exposures to a single client or group of connected clients may
result in an unacceptable risk of loss. Such a situation may
Ö can Õ be considered
prejudicial to the solvency of a credit institution.
ê 2000/12/EC
Recital 56 (adapted)
(42)          
In an internal banking
market, Ö Since Õ credit
institutions Ö in the
internal market Õ are engaged in
direct competition, with one another and monitoring requirements throughout the Community should therefore
be equivalent Ö throughout
the Community Õ. To that end, the criteria applied to determining the
concentration of exposures must be the subject of legally binding rules at
Community level and cannot be left entirely to the discretion of the Member
States. The adoption of common rules will therefore best serve the Community's
interests, since it will prevent differences in the conditions of competition,
while strengthening the Community's banking system.
ê 2000/12/EC
Recital 57 (adapted)
ð new
(43)          
The provisions on a
solvency ratio for credit institutions include a list of credit risks which may
be incurred by credit institutions. That list should therefore be used also for
the definition of exposures for the purposes of limits to large exposures. It
is not, however, ð While it
is appropriate to base the definition of exposures for the purposes of limits
to large exposures on that provided for the purposes of minimum own funds
requirements for credit risk, it is not ï appropriate to refer on
principle to the weightings or degrees of risk laid down in the said
provisions. Those weightings and degrees of risk were devised for the purpose
of establishing a general solvency requirement to cover the credit risk of
credit institutions. In the context of the regulation of
large exposures, the aim is. Ö In order Õ to limit the
maximum loss that a credit institution may incur through any single client or
group of connected clients. It
Ö it Õ is therefore appropriate to adopt a
prudent approach in which, as a general rule, account is taken of the nominal
value of exposures, but no Ö rules for
the determination of large exposures which take account of the nominal value of
the exposure without applying Õ weightings or
degrees of risk are applied.
ò new
(44)          
While it
is desirable, pending further review of the large exposures provisions, to
permit the recognition of the effects of credit risk mitigation in a manner
similar to that permitted for minimum capital requirement purposes in order to
limit the calculation requirements, the rules on credit risk mitigation were
designed in the context of the general diversified credit risk arising from
exposures to a large number of counterparties. Accordingly, recognition of the
effects of such techniques for the purposes of limits to large exposures
designed to limit the maximum loss that may be incurred through any single
client or group of connected clients should be subject to prudential
safeguards.
ê 2000/12/EC
Recital 58 (adapted)
(45)          
When a credit institution incurs an exposure to
its own parent undertaking or to other subsidiaries of its parent undertaking,
particular prudence is necessary. The management of exposures incurred by
credit institutions must Ö should Õ be carried out
in a fully autonomous manner, in accordance with the principles of sound
banking management, without regard to any Ö other Õ considerations
other than those principles. The provision of this Directive require that wWhere
the influence exercised by persons directly or indirectly holding a qualifying
participation in a credit institution is likely to operate to the detriment of
the sound and prudent management of that institution, the competent authorities
shall Ö should Õ take
appropriate measures to put an end to that situation. In the field of large
exposures, specific standards Ö ,
including more stringent restrictions, Õ should also be laid down for exposures incurred by a credit
institution to its own group, and in such cases more
stringent restrictions are justified than for other exposures. More stringent
restrictions Ö. Such
standards Õ need not,
however be applied where the parent undertaking is a financial holding company
or a credit institution or where the other subsidiaries are either credit or
financial institutions or undertakings offering ancillary banking services, provided that all such undertakings
are covered by the supervision of the credit institution on a consolidated
basis. In such cases the consolidated monitoring of the
group of undertakings allows for an adequate level of supervision, and does not
require the imposition of more stringent limits on exposure. Under this
approach banking groups will also be encouraged to organise their structures in
such a way as to allow consolidated monitoring, which is desirable because a
more comprehensive level of monitoring is possible. 
ò new
(46)          
Credit institutions
should ensure that they have internal capital which, having regard to the risks
to which they are or might be exposed, is adequate in quantity, quality and
distribution. Accordingly, credit institutions should have strategies and
processes in place for assessing and maintaining the adequacy of their internal
capital.
(47)          
Competent authorities
have responsibility to be satisfied that credit institutions have good
organisation and adequate own funds, having regard to the risks to which the credit
institutions are or might be exposed to.
(48)          
In order for the
internal market in banking to operate effectively the Committee of European
Banking Supervisors should contribute to the consistent application of this
directive and to the convergence of supervisory practices throughout the
Community.
(49)          
For the same reason
and to ensure that Community credit institutions which are active in several
Member States are not disproportionately burdened as a result of the continued
responsibilities of individual Member State competent authorities for
authorisation and supervision, it is essential to significantly enhance the
co-operation between competent authorities. In this context the role of the
consolidated supervisor should be strengthened. The Committee of European
Banking Supervisors should support and enhance such co-operation.
ê 2000/12/EC
Recital 65 (adapted)
(50)          
Supervision of credit institutions on a
consolidated basis must be aimed Ö aims Õ at, in
particular, protecting the interests of the depositors of the said Ö credit Õ institutions
and Ö at Õ ensuring the
stability of the financial system.
ê 2000/12/EC
Recital 59 (adapted)
(51)          
In order to be effective, supervision on a
consolidated basis must Ö should
therefore Õ be applied to
all banking groups, including those the parent undertakings of which are not
credit institutions. The competent authorities must
Ö should Õ hold the
necessary legal instruments to be able to exercise such supervision.
ê 2000/12/EC
Recital 60 (adapted)
(52)          
In the case of groups with diversified
activities Ö where Õ the parent undertakings of which control at least one
credit institution subsidiary, the competent authorities must
Ö should Õ be able to
assess the financial situation of a credit institution in such a group. Pending subsequent coordination, the Member States may lay down
appropriate methods of consolidation for the achievement of the objective of
this Directive. The competent authorities must
Ö should Õ at least have
the means of obtaining from all undertakings within a group the information
necessary for the performance of their function. Cooperation between the
authorities responsible for the supervision of different financial sectors must Ö should Õ be established
in the case of groups of undertakings carrying on a range of financial
activities Ö . Pending
subsequent coordination, the Member States should be able to lay down
appropriate methods of consolidation for the achievement of the objective of
this Directive. Õ
ê 2000/12/EC
Recital 61 (adapted)
(53)          
The Member States can, furthermore,
Ö should be
able to Õ refuse or
withdraw banking authorisation in the case of certain group structures
considered inappropriate for carrying on banking activities, in particular
because such structures could not be supervised effectively. In this respect
the competent authorities Ö should Õ have the Ö necessary Õ powers mentioned in the first subparagraph of Article 7(1), Article
7(2), point (c) of Article 14(l), and Article 16 of this Directive, in order
to ensure the sound and prudent management of credit institutions.
ê 2000/12/EC
Recitals 62 to 64 (adapted)
The Member States can
equally apply appropriate supervision techniques to groups with structures not
covered by this Directive. If such structures become common, this Directive
should be extended to cover them.
Supervision on a
consolidated basis must take in all activities defined in Annex I. All
undertakings principally engaged in such activities must therefore be included
in supervision on a consolidated basis. As a result, the definition of
financial institutions must be widened in order to cover such activities.
Directive 86/635/EEC,
together with Directive 83/349/EEC, established the rules of consolidation
applicable to consolidated accounts published by credit institutions. It is
therefore possible to define more precisely the methods to be used in
prudential supervision exercised on a consolidated basis.
ò new
(54)          
In order for the
internal market in banking to operate with increasing effectiveness and for
citizens of the Community to be afforded adequate levels of transparency, it is
necessary that competent authorities disclose publicly and in a way which
allows for meaningful comparison the manner in which this Directive is
implemented.
(55)          
In
order to strengthen market discipline and stimulate credit institutions to
improve their market strategy, risk control and internal management
organization, appropriate public disclosure by credit institutions should be
provided for.
ê 2000/12/EC
Recital 66 (adapted)
(56)          
The examination of problems connected with
matters covered by this Directive as well as by other Directive on the business
of credit institutions requires cooperation between the competent authorities
and the Commission within a banking advisory committee,
particularly when conducted with a view to closer coordination. The Banking Advisory Committee of the competent authorities of
the Member States does not rule out other forms of cooperation between
authorities which supervise the taking up and pursuit of the business of credit
institutions and, in particular, cooperation within the «groupe de contact»
(contact group) set up between the banking supervisory authorities.
ê 2000/12/EC
Recital 67 (adapted)
(57)          
Technical modifications to
the detailed rules laid down in this Directive may from time to time be
necessary to take account of new developments in the banking sector. The
Commission shall accordingly make such modifications as are necessary, after
consulting the Banking Advisory Committee, within the limits of the
implementing powers conferred on the Commission by the Treaty. The measures necessary for the implementation of this Directive
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 Commission Ö [19] Õ .
ò new
(58)          
In order to avoid
disruption to markets and to ensure continuity in overall levels of own funds it
is appropriate to provide for specific transitional arrangements.
(59)          
In view of the
risk-sensitivity of the rules relating to minimum capital requirements, it is
desirable to keep under review whether these have significant effects on the
economic cycle. The Commission, taking into account the contribution of the
European Central Bank should report on these aspects to the European Parliament
and to the Council.
ê 2000/12/EC
Recital 68 (adapted)
Article 36 (1) of
this Directive permits joint and several commitments of borrowers in the case
of credit institutions organised as cooperative societies or funds to be
treated as own funds items under Article 34 (2)(7). The Danish Government has expressed
a strong interest in having its few mortgage credit institutions organised as
cooperative societies or funds converted into public limited liability
companies. In order to facilitate the conversion or to make it possible, a
temporary derogation allowing them to include part of their joint and several
commitments as own funds is required. This temporary derogation should not
adversely affect competition between credit institutions.
ê 2000/12/EC
Recitals 69 to 71
(69) The application of a 20% weighting to credit
institutions' holdings of mortgage bonds may unsettle a national financial
market on which such instruments play a preponderant role. In this case,
provisional measures are taken to apply a 10% risk weighting. The market for securitisation
is undergoing rapid development. It is therefore desirable that the Commission
should examine with the Member States the prudential treatment of asset-backed
securities and put forward, before 22 June 1999, proposals aimed at adapting existing legislation in order to define an appropriate prudential treatment for
asset-backed securities. The competent authorities may authorise a 50%
weighting to assets secured by mortgages on offices or on multipurpose
commercial premises until 31 December 2006. The property to which the mortgage
relates must be subject to rigorous assessment criteria and regular revaluation
to take account of the developments in the commercial property market. The
property must be either occupied or let by the owner. Loans for property
development are excluded from this 50% weighting.
(70) In order to ensure harmonious application of the
provisions on large exposures, Member States should be allowed to provide for
the two-stage application of the new limits. For smaller credit institutions, a
longer transitional period may be warranted inasmuch as too rapid an
application of the 25% rule could reduce their lending activity too abruptly.
(71) Moreover, the harmonisation of the conditions
relating to the reorganisation and winding-up of credit institutions is also
proceeding.
ê 2000/12/EC
Recital 72 (adapted)
(60)          
The arrangements necessary for the supervision
of liquidity risks will also have to be
harmonised.
ê 2000/12/EC
Recital 73 (adapted)
This Directive must
not affect to obligations of the Member States concerning the deadlines for
transposition set out in Annex V, Part B
ò new
(61)          
This Directive
respects the fundamental rights and observes the principles recognised in
particular by the Charter of Fundamental Rights of the European Union as
general principles of Community law.
(62)          
The
obligation to transpose this Directive into national law should be confined to
those provisions which represent a substantive change as compared with the
earlier Directives. The obligation to transpose the provisions which are
unchanged arises under the earlier Directives.
(63)          
This
Directive should be without prejudice to the obligations of the Member States
relating to the time-limits for transposition into national law of the
Directives set out in Annex XIII, Part B.
ê 2000/12/EC
HAVE ADOPTED THIS DIRECTIVE:
ò new
 CONTENTS 
 TITLE I || SUBJECT MATTER, SCOPE AND DEFINITIONS 
 TITLE II || REQUIREMENTS FOR ACCESS TO THE TAKING UP AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS 
 TITLE III || PROVISIONS CONCERNING THE FREEDOM OF ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES 
 Section 1 || Credit institutions 
 Section 2 || Financial institutions 
 Section 3 || Exercise of the right of establishment 
 Section 4 || Exercise of the freedom to provide services 
 Section 5 || Powers of the competent authorities of the host Member State 
 TITLE IV || RELATIONS WITH THIRD COUNTRIES 
 Section 1 || Notification in relation to third countries' undertakings and conditions of access to the markets of these countries 
 Section 2 || Cooperation with third countries' competent authorities regarding supervision on a consolidated basis 
 TITLE V || PRINCIPLES AND TECHNICAL INSTRUMENTS FOR PRUDENTIAL SUPERVISION AND DISCLOSURE 
 Chapter 1 || Principles of prudential supervision 
 Section 1 || Competence of home and host Member State 
 Section 2 || Exchange of information and professional secrecy 
 Section 3 || Duty of persons responsible for the legal control of annual and consolidated accounts 
 Section 4 || Power of sanction and right to apply to the courts 
 Chapter 2 || Technical instruments of prudential supervision 
 Section 1 || Own funds 
 Section 2 || Provision against risks 
 Subsection 1 || Level of application 
 Subsection 2 || Calculation of requirements 
 Subsection 3 || Minimum Level of Own Funds 
 Section 3 || Minimum own funds requirements for credit risk 
 Subsection 1 || Standardised Approach 
 Subsection 2 || Internal Ratings based Approach 
 Subsection 3 || Credit risk mitigation 
 Subsection 4 || Securitisation 
 Section 4 || Minimum own funds requirements for operational risk 
 Section 5 || Large exposures 
 Section 6 || Qualifying holdings outside the financial sector 
 Chapter 3 || Credit institutions' assessment process 
 Chapter 4 || Supervision and disclosure by competent authorities  
 Section 1 || Supervision 
 Section 2 || Disclosure by competent authorities 
 Chapter 5 || Disclosure by credit institutions 
 TITLE VI || POWERS OF EXECUTION 
 TITLE VII || TRANSITIONAL AND FINAL PROVISIONS 
 Chapter 1 || Transitional provisions 
 Chapter 2 || Final provisions 
 ANNEX I || List of activities subject to mutual recognition 
 ANNEX II || Classification of off-balance-sheet items 
 ANNEX III || The treatment of derivative instruments 
 ANNEX IV || Types of derivatives 
 ANNEX V || Technical criteria on organisation and treatment of risks 
 ANNEX VI || Standardised Approach 
 ANNEX VI Part 1 || Risk weights 
 ANNEX VI Part 2 || Recognition of ECAIs and mapping of their credit assessments 
 ANNEX VI Part 3 || Use of ECAIs’ credit assessments for the determination of risk weights 
 ANNEX VII || Internal Ratings based Approach 
 ANNEX VII Part 1 || Risk weighted exposure amounts and expected loss amounts 
 ANNEX VII Part 2 || PD, LGD, and Maturity 
 ANNEX VII Part 3 || Exposure value 
 ANNEX VII Part 4 || Minimum Requirements for IRB Approach 
 ANNEX VIII || Credit risk mitigation 
 ANNEX VIII Part 1 || Eligibility 
 ANNEX VIII Part 2 || Minimum Requirements 
 ANNEX VIII Part 3 || Calculating the effects of credit risk mitigation 
 ANNEX VIII Part 4 || Maturity mismatches 
 ANNEX VIII Part 5 || Combinations of credit risk mitigation in the Standardised Approach 
 ANNEX VIII Part 6 || Basket CRM techniques 
 ANNEX IX || Securitisation 
 ANNEX IX Part 1 || Definitions for purposes of Annex X 
 ANNEX IX Part 2 || Minimum requirements for recognition of significant credit risk transfer and calculation of risk-weighted exposure amounts and expected loss amounts for securitised exposures 
 ANNEX IX Part 3 || External credit assessments 
 ANNEX IX Part 4 || Calculation 
 ANNEX X || Operational Risk 
 ANNEX X Part 1 || Basic Indicator Approach 
 ANNEX X Part 2 || Standardised Approach 
 ANNEX X Part 3 || Advanced Measurement Approaches 
 ANNEX X Part 4 || Combined use of different methodologies 
 ANNEX X Part 5 || Loss event type classification 
 ANNEX XI || Technical criteria on the review and evaluation by the competent authorities 
 ANNEX XII || Technical criteria on disclosure 
 ANNEX XII Part 1 || General criteria 
 ANNEX XII Part 2 || General requirements 
 ANNEX XII Part 3 || Qualifying requirements for the use of particular instruments or methodologies 
 ANNEX XIII Part A || Repealed Directives, together with their successive amendments (referred to in Article 158) 
 ANNEX XIII Part B || Deadlines for implementation (referred to in Article 159) 
 ANNEX XIV || Correlation table 
ê 2000/12/EC
(adapted)
TITLE I
Ö SUBJECT MATTER,
SCOPE AND Õ DEFINITIONS AND SCOPE
ê 2000/12/EC
Article 2(1) and (2) (adapted)
Article 1
1.           This Directive concerns Ö lays down
rules concerning Õ the taking up
and pursuit of the business of credit institutions Ö , and
their prudential supervision Õ. This Directive shall apply to all credit institutions.
2.           Article Ö39Õ and 52 to 56 Ö Title V,
Chapter 4, Section 1 Õ shall also apply to financial holding companies and mixed-activity
holding companies which have their head offices in the Community.
3.           The institutions permanently excluded by
paragraph 3 Ö pursuant
to Article 5 Õ, with the
exception, however, of the Member States’ central
banks Ö of the
Member States Õ, shall be
treated as financial institutions for the purposes of Articles 25 and 52 to 56 Ö 39 and
Title V, Chapter 4, Section 1Õ.
ê 2000/12/EC
Article 2(3) (adapted)
Article 2
This Directive shall not apply to Ö the
following Õ :
–                        
the central banks of Member States,
–                        
post office giro institutions,
–                        
in Belgium, the «Institut de Réescompte et de
Garantie/Herdiscontering- en Waarborginstituut»,
–                        
in Denmark, the «Dansk
Eksportfinansieringsfond», the «Danmarks Skibskreditfond», and «Dansk Landbrugs
Realkreditfond»,
–                        
in Germany, the «Kreditanstalt für
Wiederaufbau», undertakings which are recognised under the
«Wohnungsgemeinnützigkeitsgesetz» as bodies of State housing policy and are not
mainly engaged in banking transactions, and undertakings recognised under that
law as non-profit housing undertakings,
–                        
in Greece, the
«Ελληνική
Τράπεζα
Βιομηχανικής
Αναπτύξεως,», (Elliniki
Trapeza Viomichanikis Anaptyxeos), the «Ταμείο
Παρακαταθηκών
και Δανείων» (Tamio
Parakatathikon kai Danion), and the «Ταχυδρομικό
Ταμιευτήριο»
(Tachidromiko Tamieftirio),
–                        
in Spain, the «Instituto de Crédito Oficial»,
–                        
in France, the «Caisse des dépôts et
consignations»,
–                        
in Ireland, credit unions and the friendly
societies,
–                        
in Italy, the «Cassa depositi e prestiti»,
–                        
in the Netherlands, the «Netherlandse
Investeringsbank voor Ontwikkelingslanden NV», the «NV Noordelijke
Ontwikkelingsmaatschappij», the «NV Industriebank Limburgs Instituut voor
Ontwikkeling en Financiering» and the «Overijsselse Ontwikkelingsmaatschappij
NV»,
–                        
in Austria, undertakings recognised as housing
associations in the public interest and the «Österreichische Kontrollbank AG»,
–                        
in Portugal, «Caixas Económicas» existing on 1 January 1986 with the exception of those incorporated as limited companies and of the
«Caixa Económica Montepio Geral»,
–                        
in Finland, the «Teollisen yhteistyön rahasto
Oy/Fonden för industriellt samarbete AB», and the «Kera Oy/Kera Ab»,
–                        
in Sweden, the «Svenska Skeppshypotekskassan»,
–                        
in the United Kingdom, the National Savings
Bank, the Commonwealth Development Finance Company Ltd, the Agricultural
Mortgage Corporation Ltd, the Scottish Agricultural Securities Corporation Ltd,
the Crown Agents for overseas governments and administrations, credit unions
and municipal banks.
ê Act of
accession 2003
–                        
in Latvia, the “kra¯jaizdevu sabiedrı¯bas”,
undertakings that are recognised under the “kra¯jaizdevu sabiedrı¯bu
likums” as cooperative undertakings rendering financial services solely to
their members,
–                        
in Lithuania, the “kredito unijos” other than
the “Centrine˙ kredito unija”,
–                        
in Hungary, the “Magyar Fejlesztési Bank Rt.”
and the “Magyar Export-Import Bank Rt.”,
–                        
in Poland, the “Spółdzielcze Kasy Oszcze˛dnos´ciowo
- Kreditowe” and the “Bank Gospodarstwa Krajowego”.’
ê Directive
2004/xx/EC Art. 3.1 (adapted)
4.         The
Commission, pursuant to the procedure set out in Article 60(2) shall decide on
any amendments to the list in paragraph 3.
ê 2000/12/EC
Article 2(5) and (6) (adapted)
Article 3
1.         Ö One or
more Õ cCredit
institutions situated in the same Member State and Ö which
are Õ permanently affiliated,
on 15 December 1977, to a central body which supervises them and which is
established in that Ö the Õ same Member
State, may be exempted from the requirements of Articles Ö 7 and 11(1)Õ 6(1), 8 and 59 if, no later than 15 December 1979,
national law provides that:
(a)          the commitments of the central body and affiliated
institutions are joint and several liabilities or the commitments of its
affiliated institutions are entirely guaranteed by the central body,
(b)          the solvency and liquidity of the central body and of all
the affiliated institutions are monitored as a whole on the basis of
consolidated accounts,
(c)          the management of the central body is empowered to issue
instructions to the management of the affiliated institutions.
Credit institutions operating locally which
are Ö permanently Õ affiliated,
subsequent to 15 December 1977, to a central body within the meaning of the
first subparagraph, may benefit from the conditions laid down therein if they
constitute normal additions to the network belonging to that central body.
ê Directive
2004/xx/EC Art. 3.2 (adapted)
In the case of credit institutions other
than those which are set up in areas newly reclaimed from the sea or have
resulted from scission or mergers of existing institutions dependent or
answerable to the central body, the Commission, pursuant to the procedure set
out in Article 60(2) Ö 150 Õ may lay down
additional rules for the application of the second subparagraph including the
repeal of exemptions provided for in the first subparagraph, where it is of the
opinion that the affiliation of new institutions benefiting from the
arrangements laid down in the second subparagraph might have an adverse effect
on competition.
ê 2000/12/EC
Article 2(5) and (6) (adapted)
2.         A credit institution which, as defined Ö referred
to Õ in the first
subparagraph of paragraph 5 Ö 1 Õ, may also be
exempted from the provisions of ArticlesÖ 9 and 10 Õ 5, and also Articles 40 to 51, and
65 Ö Title V,
Chapter 2, Sections 2, 3, 4, 5 and 6 and Chapter 3 Õ provided that,
without prejudice to the application of those provisions to the central body,
the whole as constituted by the central body together with its affiliated
institutions is subject to the abovementioned Ö those Õ provisions on a consolidated basis.
In case of exemption, Articles Ö 16, 23,
24, 25, 26(1) to (3), 28 and 29 to 37 Õ 13, 18, 19, 20(1) to (6), 21 and 22 shall apply to the
whole as constituted by the central body together with its affiliated
institutions.
ê 2000/12/EC
Art. 1 (adapted)
Article 4
Definitions
For the purposes of this Directive, Ö the
following definitions shall apply: Õ
ê 2000/28/EC
Art. 1(1) to (5) (adapted)
(1)              
«credit institution» shall
mean Ö means Õ :
(a)     an undertaking whose business is to
receive deposits or other repayable funds from the public and to grant credits
for its own account;or
(b)     an electronic money institution within
the meaning of Directive 2000/46/EC of the European Parliament and of the
Council of 18 September 2000 on the taking up, pursuit
and prudential supervision of the business of electronic money institutions[20].
            For the purposes of applying the supervision on a
consolidated basis, shall be considered as a credit institution, a credit
institution according to the first paragraph and any private or public
undertaking which corresponds to the definition in the first paragraph and
which has been authorised in a third country.
            For the purposes of applying the supervision and
control of large exposures, shall be considered as a credit institution, a
credit institution according to the first paragraph, including branches of a
credit institution in third countries and any private or public undertaking, including
its branches, which corresponds to the definition in the first paragraph and
which has been authorised in a third country;
(2)              
«authorisation» shall mean
Ö means Õ an instrument
issued in any form by the authorities by which the right to carry on the
business of a credit institution is granted;
(3)              
«branch» shall mean
Ö means Õa place of
business which forms a legally dependent part of a credit institution and which
carries out directly all or some of the transactions inherent in the business
of credit institutions; any number of places of business
set up in the same Member State by a credit institution with headquarters in
another Member State shall be regarded as a single branch;
(4)              
«competent authorities» shall
mean Ö means Õ the national
authorities which are empowered by law or regulation to supervise credit
institutions;
(5)              
«financial institution» shall
mean Ö means Õ an undertaking
other than a credit institution, the principal activity of which is to acquire
holdings or to carry on one or more of the activities listed in points 2 to 12
of Annex I;
ò new
(6)              
«institutions», for
the purposes of Sections 2 and 3 of Title V, Chapter 2, means institutions as
defined in [Article 2(3) of Council Directive 96/3/EEC[21]];
ê 2000/12/EC
Art. 1 (6) to (8) adapted (adapted)
(7)              
«home Member State» shall
mean Ö means Õ the Member State in which a credit institution has been authorised in accordance with Articles 4 to 11 Ö 6 to 9
and 11 to 14 Õ ;
(8)              
«host Member State» shall
mean Ö means Õ the Member State in which a credit institution has a branch or in which it provides services;
(9)              
«control» shall mean
Ö means Õ the
relationship between a parent undertaking and a subsidiary, as defined in
Article 1 of Directive 83/349/EEC, or a similar relationship between any
natural or legal person and an undertaking;
ê 2002/87/EC
Art. 29(1)(a) (adapted)
ð new
(10)          
«participation» for the purposes of supervision on a consolidated basis and for the purposes of
points Ö (o) and
(p) Õ 15 and 16 of Articles
34 Ö 57 Õ (2), Ö 71 to 73 Õ Article 42 and Title V, Chapter 4 shall
mean Ö means Õ participation
within the meaning of the first sentence of Article 17 of Ö Council Õ Directive
78/660/EEC Ö [22] Õ, or the
ownership, direct or indirect, of 20 % or more of the voting rights or
capital of an undertaking;
ê 2000/12/EC
Art. 1 (10) to (13) (adapted)
(11)          
«qualifying holding» shall
mean Ö means Õ a direct or
indirect holding in an undertaking which represents 10 % or more of the capital
or of the voting rights or which makes it possible to exercise a significant
influence over the management of the Ö that Õ undertaking in which a holding subsists. Ö ; Õ
(12) «initial
capital» shall mean capital as defined in Article 34 (2)(1) and (2);
(12)          
«parent undertaking» shall
mean Ö means Õ
(a)     a parent undertaking as defined in Articles 1 and 2 of
Directive 83/349/EEC.
(b)     It shall, for the
purposes of supervision on a consolidated basis and
control of large exposures, mean Ö Articles 71
to 73, Title V, Chapter 2, Section 5 and Chapter 4 Õ, a parent
undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any
undertaking which, in the opinion of the competent authorities, effectively
exercises a dominant influence over another undertaking;
(13)          
«subsidiary» shall
mean Ö means Õ
(a)     a subsidiary undertaking as defined in Articles 1 and 2 of
Directive 83/349/EEC;
(b)     It shall, for the purposes of supervision on a
consolidated basis and control of large exposures, mean Ö Articles 71
to 73, Title V, Chapter 2, Section 5, and Chapter 4 Õ a subsidiary
undertaking within the meaning of Article 1(1) of Directive 83/349/EEC and any
undertaking over which, in the opinion of the competent authorities, a parent
undertaking effectively exercises a dominant influence.
All subsidiaries of subsidiary undertakings
shall also be considered subsidiaries of the undertaking that is their original
parent;
ò new
(14)          
“parent
credit institution in a Member State” means a credit institution which has a
credit institution or a financial institution as a subsidiary or which holds a
participation in such an institution, and which is not itself a subsidiary of
another credit institution authorised in the same Member State, or of a
financial holding company set up in the same Member State, and in which no
other credit institution authorised in the same Member State holds a
participation;
(15)          
“parent
financial holding company in a Member State” means a financial holding company
which is not itself a subsidiary of a credit institution authorised in the same
  Member State, or of a financial holding company set up in the same Member State;
(16)          
“EU
parent credit institution” means a parent credit institution in a Member State
which is not a subsidiary of another credit institution authorised in any
Member State, or of a financial holding company set up in any Member State, and
in which no other credit institution authorised in any Member State holds a
participation;
(17)          
“EU
parent financial holding company” mean a parent financial holding company in a Member State which is not a subsidiary of a credit institution authorised in any Member State;
ê 2000/12/EC
Art. 1 (14) to (18) (adapted)
(14) “Zone A» shall
comprise all the Member States and all other countries which are full members
of the Organisation for Economic Cooperation and Development (OECD) and those
countries which have concluded special lending arrangements with the
International Monetary Fund (IMF) associated with the Fund's general
arrangements to borrow (GAB). Any country which reschedules its external
sovereign debt is, however, precluded from Zone A for a period of five years;
(15) «Zone B» shall
comprise all countries not in Zone A;
(16) «Zone A
credit institutions»       shall mean all credit institutions authorised in the
Member States, in accordance with Article 4, including their branches in third
countries, and all private and public undertakings covered by the definitions
in point 1, first subparagraph and authorised in other Zone A countries,
including their branches;
(17) Zone B
credit institutions»          shall mean all private and public undertakings
authorised outside Zone A covered by the definition in point 1, first
subparagraph, including their branches within the Community;
(18) «non-bank
sector» shall mean all borrowers other than credit institutions as defined in points 16 and 17, central governments and
central banks, regional governments and local authorities, the European
Communities, the European Investment Bank (EIB) and multilateral development
banks as defined in point 19;
ê 2004/69/EC
Art. 1 (adapted)
«multilateral
development banks» shall mean the International Bank for Reconstruction and
Development, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development Bank, the
Council of Europe Resettlement Fund, the Nordic Investment Bank, the Caribbean
Development Bank, the European Bank for Reconstruction and Development, the
European Investment Fund, the Inter-American Investment Corporation and the
Multilateral Investment Guarantee Agency;
ê 2000/12/EC
Art. 1 (20)
(20)
«full-risk», «medium-risk», «medium/low-risk» and «low-risk» off-balance-sheet
items» shall mean the items described in Article 43(2) and listed in Annex II;
ò new
(18)          
“public sector
entities” means non-commercial administrative bodies responsible to central
governments, regional governments or local authorities, or authorities that in
the view of the competent authorities exercise the same responsibilities as
regional and local authorities;
ê 2002/87/EC
Art. 29.1(b) adapted (adapted)
(19)          
«financial holding company» shall mean Ö means Õ a financial
institution, the subsidiary undertakings of which are either exclusively or
mainly credit institutions or financial institutions, at least one of such
subsidiaries being a credit institution, and which is not a mixed financial
holding company within the meaning of Directive 2002/87/EC of the European
Parliament and of the Council of 16 December 2002 on the
supplementary supervision of credit institutions, insurance undertakings and
investment firms in a financial conglomerate[23];
(20)          
«mixed-activity holding company» shall mean Ö means Õ a parent
undertaking, other than a financial holding company or a credit institution or
a mixed financial holding company within the meaning of Directive 2002/87/EC,
the subsidiaries of which include at least one credit institution;
ê 2000/12/EC
Art. 1 (23) (adapted)
(21)          
«ancillary banking
services undertaking» shall mean Ö means Õ an undertaking
the principal activity of which consists in owning or managing property,
managing data-processing services, or any other similar activity which is
ancillary to the principal activity of one or more credit institutions; 
ò new
(22)          
“operational risk”
means the risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events, and includes legal risk; 
ê 2000/12/EC
Art. 1 (24) (adapted)
«exposures» for the
purpose of applying Articles 47, 48 and 49 shall mean the assets and
off-balance-sheet items referred to in Article 43 and in Annexes II and IV
thereto Title V, Chapter 2, Section 2, and 3, without application of the risk weightings
or degrees of risk there provided for; the risks referred to in Annex IV must
be calculated in accordance with one of the methods set out in Annex III,
without application of the weightings for counterparty risk; all elements
entirely covered by own funds may, with the agreement of the competent
authorities, be excluded from the definition of exposures provided that such
own funds are not included in the credit institution’s own funds calculation of
the solvency ratio for the purposes of Article 44 or in the
calculation of other monitoring ratios provided for in this Directive and
in other Community acts; exposures shall not include:
–              
in the case of foreign
exchange transactions, exposures incurred in the ordinary course of settlement
during the 48 hours following payment, or
–              
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;
ò new
(23)          
“central banks”
include the European Central Bank unless otherwise indicated; 
(24)          
“dilution risk” means
the risk that an amount receivable is reduced through cash or non-cash credits
to the obligor; 
(25)          
“probability of
default” means the probability of default of a counterparty over a one year
period; 
(26)          
“loss” means economic
loss, including material discount effects, and material direct and indirect
costs associated with collecting on the instrument; 
(27)          
“loss given default”
means the ratio of the loss on an exposure due to the default of a counterparty
to the amount outstanding at default; 
(28)          
“conversion factor”
means the ratio, to the currently undrawn amount of the commitment, of the
currently undrawn amount of a commitment subject to an advised limit that will
be drawn and outstanding at default; 
(29)          
“expected loss (EL)”
shall mean the ratio of the amount expected to be lost on an exposure from a
potential default of a counterparty or dilution over a one year period to the
amount outstanding at default; 
(30)          
“credit risk
mitigation” means a technique used by a credit institution to reduce the credit
risk associated with an exposure or exposures which the credit institution
continues to hold; 
(31)          
“funded credit
protection” means a technique of credit risk mitigation where the reduction of
the credit risk on the exposure of a credit institution derives from the right
of the credit institution - in the event of the default of the counterparty or
on the occurrence of other specified credit events relating to the counterparty
- to liquidate, or to obtain transfer or appropriation of, or to retain certain
assets or amounts, or to reduce the amount of the exposure to, or to replace it
with, the amount of the difference between the amount of the exposure and the
amount of a claim on the credit institution; 
(32)          
“unfunded credit
protection” means a technique of credit risk mitigation where the reduction of
the credit risk on the exposure of a credit institution derives from the
undertaking of a third party to pay an amount in the event of the default of
the borrower or on the occurrence of other specified events; 
(33)          
“repurchase
transaction” means any transaction governed by an agreement falling within the
definition of ‘repurchase agreement’ or ‘reverse repurchase agreement’ as defined
in [Article 3 point (m) of Directive 93/6/EEC]; 
(34)          
“securities or
commodities lending or borrowing transaction” means any transaction falling
within the definition of ‘securities or commodities lending’ or ‘securities or commodities
borrowing’ as defined in [Article 3 point (n) of Directive 93/6/EEC];
(35)          
“cash assimilated
instrument” means a certificate of deposit or other similar instrument issued
by the lending credit institution;
(36)          
“securitisation” means
a transaction or scheme, whereby the credit risk associated with an exposure or
pool of exposures is tranched, having the following characteristics:
(a)     payments in
the transaction or scheme are dependent upon the performance of the exposure or
pool of exposures;
(b)     the
subordination of tranches determines the distribution of losses during the
ongoing life of the transaction or scheme;
(37)          
“traditional securitisation”
means a securitisation involving the economic transfer of the exposures being
securitised to a securitisation special purpose entity which issues securities.
This shall be accomplished by the transfer of ownership of the securitised
exposures from the originator credit institution or through sub-participation.
The securities issued do not represent payment obligations of the originator
credit institution;
(38)          
“synthetic
securitisation” means a securitisation where the tranching is achieved by the
use of credit derivatives or guarantees, and the pool of exposures is not
removed from the balance sheet of the originator credit institution;
(39)          
“tranche” means a
contractually established segment of the credit risk associated with an
exposure or number of exposures, where a position in the segment entails a risk
of credit loss greater than or less than a position of the same amount in each
other such segment, without taking account of credit protection provided by
third parties directly to the holders of positions in the segment or in other
segments;
(40)          
“securitisation
position” shall mean an exposure to a securitisation;
(41)          
“originator” means either
of the following:
(a)     an entity
which, either itself or through related entities, directly or indirectly, was
involved in the original agreement which created the obligations or potential
obligations of the debtor or potential debtor giving rise to exposure being
securitised;
(b)     an entity which
purchases a third party’s exposures onto its balance sheet and then securitises
them;
(42)          
“sponsor” means a
credit institution other than an originator credit institution that establishes
and manages an asset-backed commercial paper programme or other securitisation
scheme that purchases exposures from third party entities;
(43)          
“credit enhancement”
means a contractual arrangement whereby the credit quality of a position in a
securitisation is improved in relation to what it would have been if the
enhancement had not been provided, including the enhancement provided by more
junior tranches in the securitisation and other types of credit protection;
(44)          
“securitisation
special purpose entity (SSPE)” means a corporation trust or other entity, other
than a credit institution, organised for carrying on a securitisation or
securitisations, the activities of which are limited to those appropriate to
accomplishing that objective, the structure of which is intended to isolate the
obligations of the SSPE from those of the originator credit institution, and the
holders of the beneficial interests in which have the right to pledge or
exchange those interests without restriction;
ê 2000/12/EC
Article 1(25) to (27) (adapted)
(45)          
«group of connected clients» shall mean Ö means Õ : 
(a)     two or more natural or legal persons who, unless it is shown
otherwise, constitute a single risk because one of them, directly or
indirectly, has control over the other or others;
or
(b)     two or more natural or legal persons between whom there is no
relationship of control as defined Ö set
out Õ in the first
indent 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, the other or all of the others would be likely to encounter repayment
difficulties;
(46)          
«close links» shall mean
Ö means Õ a situation in
which two or more natural or legal persons are linked by
Ö in any of
the following ways Õ : 
(a)     participation ,
which shall mean the Ö in the
form of Õ ownership,
direct or by way of control, of 20% or more of the voting rights or capital of
an undertaking, or;
(b)     control, which
shall mean the relationship between a parent undertaking and a subsidiary, in
all the cases referred to in Article 1(1) and (2) of Directive 83/349/EEC, or a
similar relationship between any natural or legal person and an undertaking;
any subsidiary undertaking of a subsidiary undertaking shall also be considered
a subsidiary of the parent undertaking which is at the head of those
undertakings.;
(c)     A situation in
which two or more natural or legal persons are permanently linked Ö the fact
that both or all are permanently linked Õ to one and the
same Ö third Õ person by a
control relationship shall also be regarded as
constituting a close link between such persons;
(47)          
«recognised exchanges» shall
mean Ö means Õ exchanges Ö which
are Õ recognised Ö as
such Õ by the
competent authorities Ö and Õ which Ö meet the
following conditions:Õ
(a)     Öthey Õ function
regularly;
(b)     Öthey Õhave rules,
issued or approved by the appropriate authorities of the home country of the
exchange, which define Ö defining Õthe conditions
for the operation of the exchange, the conditions of access to the exchange as
well as the conditions that must be satisfied by a contract before it can
effectively be dealt on the exchange;
(c)     Öthey Õhave a clearing
mechanism that provides for Ö whereby Õ contracts
listed in Annex IV to be Ö are Õ subject to
daily margin requirements providing an appropriate
protection Ö which, Õ in the opinion
of the competent authorities Ö, provide
appropriate protection Õ in the opinion of the competent authorities. 
ê 2000/12/EC
Art. 3 (adapted)
Article 5
Prohibition
for undertakings other than credit institutions from carrying on the business
of taking deposits or other repayable funds from the public
The Member States shall prohibit persons or
undertakings that are not credit institutions from carrying on the business of
taking deposits or other repayable funds from the public. 
Ö The first
paragraph Õ This prohibition shall not apply to the taking of
deposits or other funds repayable by a Member State or by a Member State's
regional or local authorities or by public international bodies of which one or
more Member States are members or to cases expressly covered by national or
Community legislation, provided that those activities are subject to
regulations and controls intended to protect depositors and investors and
applicable to those cases.
ê 2000/12/EC

TITLE II
REQUIREMENTS FOR ACCESS TO THE TAKING UP
AND PURSUIT OF THE BUSINESS OF CREDIT INSTITUTIONS
ê 2000/12/EC
Art. 4 (adapted)
è1 Directive 2004/xx/EC Art. 3
Article 6
Authorisation
Member States shall require credit
institutions to obtain authorisation before commencing their activities. Ö Without
prejudice to Articles 7 to 9, 11 and 12Õ Tthey
shall lay down the requirements for such authorisation subject
to Articles 5 to 9, and notify them to è1 the Commission ç .
ê 2000/12/EC
Art. 8 (adapted)
Article 7
Programme of
operations and structural organisation
Member States shall require applications
for authorisation to be accompanied by a programme of operations setting out, inter
alia, the types of business envisaged and the structural organisation of
the institution.
ê 2000/12/EC Article
9 (adapted)
Article 8
Economic
needs
Member States may not require the
application for authorisation to be examined in terms of the economic needs of
the market.
ê 2000/12/EC
Art. 5(1) (adapted)
Article 9
Initial
capital
1.           Without prejudice to other
general conditions laid down by national law, the competent authorities shall
not grant authorisation when the credit institution does not possess separate
own funds or in cases where initial capital is less than EUR 5 million.
ê 2000/12/EC
Art. 1 (11) (adapted)
«Initial capital» shall mean
Ö comprise Õ capital Ö and reserves
as referred to Õ as defined in Article 34 Ö 57(a) and
(b) Õ (2)(1) and (2).
ê 2000/12/EC
Article 5(1) and (2) (adapted)
Member States may decide that credit
institutions which do not fulfil the requirement of separate own funds and
which were in existence on 15 December 1979 may continue to carry on their
business. They may exempt such credit institutions from complying with the
requirement contained in the first subparagraph of Article Ö 11 Õ 6(1).
2.           The Member States Ö may,
subject to the following conditions, grant Õ shall, however, have the option of grantingauthorisation
to particular categories of credit institutions the initial capital of which is
less than that Ö specified Õ prescribed in paragraph 1. In such
cases:
(a)     the initial capital Ö must Õ shall not be less than EUR 1 million;
(b)     the Member States concerned must
notify the Commission of their reasons for Ö exercising Õ using Ö this
option Õmaking use of the option provided for in this paragraph,
(c)     when the list
referred to in Article 11 is published, the name of each credit
institution that does not have the minimum capital Ö specified Õ prescribed in paragraph 1 Ö must Õ shall be annotated to that effect Ö in the
list referred to in Article 14. Õ
ê 2000/12/EC
Art. 5(3) to (7) (adapted)
Article 10
1.         A credit institution's own funds
may not fall below the amount of initial capital required by Ö under Article
9 Õ paragraphs 1 and 2 at the time of its authorisation.
2.         The Member States may decide
that credit institutions already in existence on 1 January 1993, the own funds
of which do not attain the levels specified for initial capital in Ö Article 9 Õ paragraphs 1 and 2, may continue to carry on their
activities. In that event, their own funds may not fall below the highest level
reached with effect from 22 December 1989.
3.         If control of a credit
institution falling within the category referred to in paragraph Ö 2 Õ 4 is taken by a natural or legal person other than the
person who controlled the institution previously, the own funds of that Ö credit Õ institution
must attain at least the level Ö specified Õ prescribed for initial capital in Ö Article 9 Õ paragraphs 1 and 2.
4.         In certain specific
circumstances and with the consent of the competent authorities, where there is
a merger of two or more credit institutions falling within the category referred
to in paragraph 4 Ö 2 Õ , the own
funds of the Ö credit Õ institution
resulting from the merger may not fall below the total own funds of the merged Ö credit Õ institutions
at the time of the merger, as long as the appropriate levels Ö specified
in Õ pursuant to Ö Article
9 Õ paragraphs 1 and 2 have not been attained.
5.         If, in the cases referred to in
paragraphs Ö 1, 2 and
4 Õ 3, 4 and 6, the own funds should be reduced, the
competent authorities may, where the circumstances justify it, allow an Ö credit Õ institution a
limited period in which to rectify its situation or cease its activities.
ê 2000/12/EC Article
6 (adapted)
Article 11
Management
body and place of the head office of credit institutions
1.           The competent authorities
shall grant an authorisation to the credit institution only when there are at
least two persons who effectively direct the business of the credit
institution.
Ö They Õ Moreover, the authorities concerned shall not grant
authorisation if these persons are not of sufficiently good repute or lack
sufficient experience to perform such duties.
2.           Each Member State shall
require that:
(a)     any credit institution which is a legal person and which, under
its national law, has a registered office Ö shall Õ have its head
office in the same Member State as its registered office;
(b)     any other credit institution Ö shall Õ have its head
office in the Member State which issued its authorisation and in which it actually
carries on its business.
ê 2000/12/EC
Art. 7 (adapted)
Article 12
Shareholders
and members
1.           The competent authorities
shall not grant authorisation for the taking-up of the business of credit
institutions Ö unless Õ before they have been informed of the identities of the
shareholders or members, whether direct or indirect, natural or legal persons,
that have qualifying holdings, and of the amounts of those holdings.
Ö In
determining a Õ For the purpose of the definition of qualifying holding
in the context of this Article, the voting rights referred to in Article 7 Ö 92 Õ of CouncilDirective 88/627/EEC[24]
Ö 2001/34/EC of
the European Parliament and of the Council[25] Õ shall be taken
into consideration.
2.           The competent authorities
shall refuse authorisation if, taking into account the need to ensure the sound
and prudent management of a credit institution, they are not satisfied as to
the suitability of the abovementioned shareholders
or members.
3.           Where close links exist
between the credit institution and other natural or legal persons, the
competent authorities shall grant authorisation only if those links do not
prevent the effective exercise of their supervisory functions.
The competent authorities shall also refuse
authorisation if the laws, regulations or administrative provisions of a Ö third Õ non-member country governing one or more natural or
legal persons with which the credit institution has close links, or
difficulties involved in their enforcement Ö of those
laws, regulations or administrative provisions Õ , prevent the
effective exercise of their supervisory functions.
The competent authorities shall require credit
institutions to provide them with the information they require to monitor
compliance with the conditions referred to in this paragraph on a continuous
basis.
ê 2000/12/EC
Articles 8 & 9 (adapted)
Article 8
Programme of
operations and structural organisation
Member States shall
require applications for authorisation to be accompanied by a programme of
operations setting out, inter alia, the types of business envisaged and
the structural organisation of the institution.
Article 9
Economic
needs
Member States may not
require the application for authorisation to be examined in terms of the
economic needs of the market.
ê 2000/12/EC
Article 10 (adapted)
Article 13
Authorisation
refusal
Reasons shall be given whenever an
authorisation is refused and the applicant shall be notified thereof within six
months of receipt of the application or, should the latter be incomplete,
within six months of the applicant's sending the information required for the
decision. A decision shall, in any case, be taken within 12 months of the
receipt of the application.
ê 2000/12/EC
Article 11 (adapted)
Article 14
Notification
of the authorisation to the Commission
Every authorisation shall be notified to
the Commission. 
Ö The name
of e Õ Each credit institution Ö to Õ shall be entered in a list Ö which
authorisation has been granted shall be entered in a list Õ. which t Ö The Õ the Commission shall publish Ö that
list Õ in the Official
Journal of the European Ö Union Õ Communities and shall keep Ö it Õ up to date.
ê 2000/12/EC
Art. 12 (adapted)
Article 15
Prior
consultation with the competent authorities of other Member States
1.         Ö The
competent authority shall, before granting authorisation to a credit
institution, Õ There must be prior consultation with Ö consult Õ the competent
authorities of the other Member State involved on the
authorisation of a credit institution Ö in the
following cases Õ which is:
Ö (a)  the
credit institution concerned is Õ a subsidiary
of a credit institution authorised in another Member State, or
Ö (b) the
credit institution concerned is Õ a subsidiary
of the parent undertaking of a credit institution authorised in another Member State, or;
Ö (c)  the
credit institution concerned is Õ controlled by
the same persons, whether natural or legal, as control a credit institution
authorised in another Member State.
ê 2002/87/EC
Art. 29.2 (adapted)
2.         The competent authority Ö shall,
before granting authorisation to a credit institution, consult the competent
authority Õ of a Member
State involved, responsible for the supervision of insurance undertakings or
investment firms, shall be consulted prior to the
granting of an authorisation to a credit institution which is: Ö in the
following cases: Õ
(a)     Ö the
credit institution concerned is Õ a subsidiary
of an insurance undertaking or investment firm authorised in the Community, or;
(b)     Ö the
credit institution concerned is Õ a subsidiary
of the parent undertaking of an insurance undertaking or investment firm
authorised in the Community;or
(c)     Ö the
credit institution concerned is Õ controlled by
the same person, whether natural or legal, Ö as Õ who controls an insurance undertaking or investment firm
authorised in the Community.
3.         The relevant competent
authorities referred to in the first and second
paragraphs Ö 1 and
2 Õ shall in
particular consult each other when assessing the suitability of the
shareholders and the reputation and experience of directors involved in the
management of another entity of the same group. They shall Ö exchange Õ inform each other of any information regarding the
suitability of shareholders and the reputation and experience of directors
which is of relevance to the other competent authorities
involved for the granting of an authorisation as well as for the ongoing
assessment of compliance with operating conditions.
ê 2000/12/EC Article
13 (adapted)
Article 16
Branches of
credit institutions authorised in another Member State
Host Member States may not require
authorisation or endowment capital for branches of credit institutions
authorised in other Member States. The establishment and supervision of such
branches shall be effected Ö in
accordance with Articles 22, 25, 26(1) to (3), 29 to 37 and 40Õ as prescribed in Articles 17, 20(l) to (6) and Articles 22
and 26.
ê 2000/12/EC
Art. 14 (adapted)
Article 17
Withdrawal of
authorisation
1.           The competent authorities
may withdraw the authorisation issued to a credit institution only where such
an institution:
(a)     does not make use of the authorisation
within 12 months, expressly renounces the authorisation or has ceased to engage
in business for more than six months, if the Member State concerned has made no
provision for the authorisation to lapse in such cases;
(b)     has obtained the authorisation through
false statements or any other irregular means;
(c)     no longer fulfils the conditions under
which authorisation was granted;
(d)     no longer possesses sufficient own
funds or can no longer be relied on to fulfil its obligations towards its
creditors, and in particular no longer provides security for the assets
entrusted to it;
(e)     falls within one of the other cases
where national law provides for withdrawal of authorisation.
2.           Reasons Ö shall Õ must be given for any withdrawal of authorisation and
those concerned informed thereof;. Ssuch withdrawal shall be notified to the
Commission.
ê 2000/12/EC
Article 15 (adapted)
Article 18
Name
For the purposes of exercising their activities, credit
institutions may, notwithstanding any provisions Ö in the
host Member State Õ concerning the
use of the words «bank», «savings bank» or other banking names which may exist in the host Member State, use throughout
the territory of the Community the same name as they use in the Member State in
which their head office is situated. In the event of there being any danger of
confusion, the host Member State may, for the purposes of clarification,
require that the name be accompanied by certain explanatory particulars.
ê 2000/12/EC
Art. 16 (1) (adapted)
Article 19
Qualifiying
holding in a credit institution
1.           The Member States shall require any natural or
legal person who proposes to hold, directly or indirectly, a qualifying holding in a credit institution
first to inform the competent authorities, telling them of the size of the
intended holding. 
Such a person must likewise inform the
competent authorities if he proposes to increase his qualifying holding so that
the proportion of the voting rights or of the capital held by him would reach
or exceed 20%, 33% or 50% or so that the credit institution would become his
subsidiary.
Without prejudice to the provisions of paragraph 2, the competent
authorities shall have a maximum of three months from the date of the
notification provided for in the first Ö and
second subparagraphs Õ subparagraph to oppose such a plan if, in view of the
need to ensure sound and prudent management of the credit institution, they are
not satisfied as to the suitability of the person Ö concerned Õ referred to in the first subparagraph. If they do not
oppose the plan referred to in the first subparagraph,
they may fix a maximum period for its implementation.
ê 2002/87/EC
Art. 29.3 (adapted)
2.           If the Ö person
proposing to acquire Õ acquirer of the holdings referred to in paragraph 1 is a
credit institution, insurance undertaking or investment firm authorised in
another Member State or the parent undertaking of a credit institution,
insurance undertaking or investment firm authorised in another Member State or
a natural or legal person controlling a credit institution, insurance
undertaking or investment firm authorised in another Member State, and if, as a
result of that acquisition, the Ö credit Õ institution in
which the acquirer proposes to hold a holding would become a subsidiary or
subject to the control of the acquirer, the assessment of the acquisition Ö shall Õ must be subject to the prior consultation Ö provided
for Õ referred to in Article Ö 15 Õ 12.
ê 2000/12/EC
Article 16(3) 
Article 20
3. The Member States shall require any natural or legal person who
proposes to dispose, directly or indirectly, of a qualifying holding in a
credit institution first to inform the competent authorities, telling them of
the size of his intended holding. Such a person must likewise inform the
competent authorities if he proposes to reduce his qualifying holding so that
the proportion of the voting rights or of the capital held by him would fall
below 20%, 33% or 50% or so that the credit institution would cease to be his
subsidiary.
ê 2000/12/EC
Art. 16 (4) to (6) (adapted)
Article 21
14.         On becoming aware of them, c Ö Credit Õ credit institutions shall Ö , on
becoming aware Õ inform the competent authorities of any acquisitions or
disposals of holdings in their capital that cause holdings to exceed or fall
below one of the thresholds referred to in Ö Article 19(1)
and Article 20 Õ paragraphs 1 and 3 Ö , inform
the competent authorities of those acquisitions or disposals. Õ
They shall also, at least once a year, inform Ö the
competent authorities Õ them of the names of shareholders and members possessing
qualifying holdings and the sizes of such holdings as shown, for example, by
the information received at the annual general meetings of shareholders and
members or as a result of compliance with the regulations relating to companies
listed on stock exchanges.
25.         The
Member States shall require that, where the influence exercised by the persons referred
to in Ö Article
19(1) Õ paragraph 1 is likely to operate to the
detriment of the prudent and sound management of the institution, the competent
authorities shall take appropriate measures to put an end to that situation.
Such measures may consist for example in
injunctions, sanctions against directors and managers, or the suspension of the
exercise of the voting rights attaching to the shares held by the shareholders
or members in question.
Similar measures shall apply to natural or
legal persons Ö who
fail Õ failing to comply with the obligation to provide prior
information, as laid down in Ö Article 19 (1). Õ paragraph 1. If a holding is acquired despite the
opposition of the competent authorities, the Member States shall, regardless of
any other sanctions to be adopted, provide either for exercise of the
corresponding voting rights to be suspended, or for the nullity of votes cast or
for the possibility of their annulment.
36.         Ö In
determining a Õ For the purposes of the definition of qualifying holding
and other levels of holding Ö referred
to Õ set out in this Article, the voting rights referred to
in Article 7 Ö 92 Õ of Council Directive 88/627/EEC Ö Directive
2001/34/EC Õ shall be taken
into consideration.
ê 2000/12/EC
Article 17 (adapted)
ð new
Article 22
Procedures
and internal control mechanisms
1.           Home Member State competent authorities shall require that every credit institution have sound
administrative and accounting procedures and adequate internal control
mechanisms. ð have robust governance arrangements,
which include a clear organisational structure with well defined, transparent
and consistent lines of responsibility, effective processes to identify,
manage, monitor and report the risks it is or might be exposed to, and adequate
internal control mechanisms, including sound administrative and accounting
procedures. ï
2.           The
arrangements, processes and mechanisms referred to in paragraph 1 shall be
comprehensive and proportionate to the nature, scale and complexity of the
credit institution’s activities. The technical criteria laid down in Annex V
shall be taken into account.
ê 2000/12/EC
TITLE III
PROVISIONS CONCERNING THE FREEDOM OF
ESTABLISHMENT AND THE FREEDOM TO PROVIDE SERVICES
ê 2000/12/EC
(adapted)
Ö Section 1
Credit institutions Õ
ê 2000/12/EC
Art. 18 (adapted)
Article 23
Credit
institutions
The Member States shall provide that the
activities listed in Annex I may be carried on within their territories, in
accordance with Articles Ö 25, 26(1)
to (3), 28(1) and (2) and 29 to 37 Õ 20(1) to (6), 21(1) and (2), and 22, either by the
establishment of a branch or by way of the provision of services, by any credit
institution authorised and supervised by the competent authorities of another
Member State, provided that such activities are covered by the authorisation.
ê 2000/12/EC
(adapted)
Ö Section 2 Financial institutions Õ
ê 2000/12/EC
Article 19 1st & 3rd paragraphs (adapted)
Article 24
Financial
institutions
1.           The Member States shall also
provide that the activities listed in Annex I may be carried on within their
territories, in accordance with Articles Ö 25, 26(1)
to (3), 28(1) and (2) and 29 to 37 Õ 20(1) to (6), 21(1) and (2), and 22, either by the
establishment of a branch or by way of the provision of services, by any
financial institution from another Member State, whether a subsidiary of a
credit institution or the jointly-owned subsidiary of two or more credit
institutions, the memorandum and aArticles of association of which permit the
carrying on of those activities and which fulfils each of the following conditions:
(a)     the parent undertaking or undertakings must be authorised as
credit institutions in the Member State by the law of which the Ö financial
institution Õ subsidiary is governed.;
(b)     the activities in question must actually be carried on within
the territory of the same Member State.;
(c)     the parent undertaking or undertakings must hold 90% or more of
the voting rights attaching to shares in the capital of the Ö financial
institution; Õ subsidiary.
(d)     the parent undertaking or undertakings must satisfy the
competent authorities regarding the prudent management of the Ö financial
institution Õ subsidiary and must have declared, with the consent of
the relevant home Member State competent authorities, that they jointly and
severally guarantee the commitments entered into by the Ö financial
institution; Õ subsidiary,
(e)     the Ö financial
institution Õ subsidiary must be effectively included, for the
activities in question in particular, in the consolidated supervision of the
parent undertaking, or of each of the parent undertakings, in accordance with Articles 52 to 56 Ö Title V,
Chapter 4, Section 1 Õ , in
particular for the calculation of the solvency ratio, for the control of large
exposures and for purposes of the limitation of holdings provided for in
Article Ö 120 Õ 50.
Compliance with these conditions Ö shall Õ must be verified by the competent authorities of the
home Member State and the latter Ö shall Õ must supply the Ö financial
institution Õ subsidiary with a certificate of compliance which must
form part of the notification referred to in Articles Ö 25 and 28 Õ 20(1) to (6), and 21(1) and (2).
The competent authorities of the home Member
State shall ensure the supervision of the Ö financial
institution Õ subsidiary in accordance with Articles Ö10 (1), 19
to 22, 40, 42 to 52 and 54 Õ 5(3), 16, 17, 26, 28, 29, 30, and 32.
ê 2000/12/EC
Art. 19
(sixth paragraph) (adapted)
2.           If a financial institution Ö as
referred to in the first subparagraph of paragraph 1 Õ eligible under this Article should ceases to fulfil any of the conditions imposed, the
home Member State shall notify the competent authorities of the host Member
State and the activities carried on by that Ö financial Õ institution in
the host Member State shall become subject to the legislation of the host
Member State.
ê 2000/12/EC
Art. 19
fourth paragraph (adapted)
3.           The provisions mentioned in Ö paragraphs
1 and 2 Õ this Article shall apply mutatis mutandis
to subsidiaries Öof a financial
institution as referred to in the first subparagraph of paragraph 1 Õsubject to the necessary modifications. In particular, the
words «credit institution» should be read as «financial institution fulfilling
the conditions laid down in Article 19» and the word «authorisation» as
«memorandum and Articles of association».
ê 2000/12/EC
Art. (19) 5th & 6th paragraphs (adapted)
The second
subparagraph of Article 20(3) shall read: 
«The home Member State competent authorities shall also communicate the amount of own funds of the
subsidiary financial institution and the consolidated solvency ratio of the
credit institution which is its parent undertaking».
If a financial
institution eligible under this Article should cease to fulfil any of the
conditions imposed, the home Member State shall notify the competent
authorities of the host Member State and the activities carried on by that
institution in the host Member State become subject to the legislation of the
host Member State.
ê 2000/12/EC
(adapted)
Ö Section
3 Exercise of the right of establishmentÕ
ê 2000/12/EC
Art. 20 (1) (2) & (3) 1st & 2nd subparagraphs
(adapted)
Article 25
Exercise of
the right of establishment
1.           A credit institution
wishing to establish a branch within the territory of another Member State shall notify the competent authorities of its Ö home Õ Member State.
2.           TheMember States State shall require every credit institution
wishing to establish a branch in another Member State to provide the following information
when effecting the notification referred to in paragraph 1:
(a)     the Member State within the territory
of which it plans to establish a branch;
(b)     a programme of operations setting out,
inter alia, the types of business envisaged and the structural
organisation of the branch;
(c)     the address in the host Member State from which documents may be obtained;
(d)     the names of those Ö to
be Õ responsible
for the management of the branch.
3.           Unless the competent
authorities of the home Member State have reason to doubt the adequacy of the
administrative structure or the financial situation of the credit institution,
taking into account the activities envisaged, they shall within three months of
receipt of the information referred to in paragraph 2 communicate that
information to the competent authorities of the host Member State and shall
inform the Ö credit Õ institution
accordingly.
The home Member State competent authorities
shall also communicate the amount of own funds and the solvency ratio of the
credit institution.
ê 2000/12/EC
Art. 19 5th subparagraph (adapted)
Ö By way of
derogation from the second subparagraph, in the case referred to in Article 24,Õ “The the home Member State competent authorities shall also communicate the amount of own funds of the subsidiary the financial institution and the
consolidated solvency ratio of the credit institution which is its parent
undertaking.”
ê 2000/12/EC
Art. 20 (3) 3rd subparagraph (adapted)
4.           Where the competent authorities of the home Member State
refuse to communicate the information referred to in paragraph 2 to the
competent authorities of the host Member State, they shall give reasons for
their refusal to the Ö credit Õ institution
concerned within three months of receipt of all the information.
That refusal,
or a failure to reply, shall be subject to a right to apply to the
courts in the home Member State.
ê 2000/12/EC
Art. 20(4) to (7) (adapted)
Article 26
14.         Before
the branch of a credit institution commences its activities the competent
authorities of the host Member State shall, within two months of receiving the
information Ö referred
to Õ mentioned in Ö Article
25 Õ (paragraph3), prepare for
the supervision of the credit institution in accordance with Ö Section 5 Õ Article 22 and if necessary indicate the conditions
under which, in the interest of the general good, those activities must be
carried on in the host Member State.
25.         On
receipt of a communication from the competent authorities of the host Member
State, or in the event of the expiry of the period provided for in paragraph 14
without receipt of any communication from the latter, the branch may be
established and Ö may Õ commence its
activities.
36.         In
the event of a change in any of the particulars communicated pursuant to Ö points
(b), (c) or (d) of Article 25 Õ (paragraph2)
(b), (c) or (d), a credit institution
shall give written notice of the change in question to the competent
authorities of the home and host Member States at least one month before making
the change so as to enable the competent authorities of the home Member State
to take a decision pursuant to Ö Article 25 Õ(paragraph3) and the
competent authorities of the host Member State to take a decision on the change
pursuant to paragraph 14 Ö of this
Article. Õ 4.
47.         Branches
which have commenced their activities, in accordance with the provisions in
force in their host Member States, before 1 January 1993, shall be presumed to have been subject to the procedure laid down in Ö Article
25 and in Õ paragraphs 1 Ö and
2 Õ to 5 Ö of this
Article. Õ They shall be
governed, from Ö that Õ the abovementioned date, by paragraph 6 Ö 3 of this
Article Õ , and by Ö Article
23, Sections 2 and 5 and Article 43 Õ Articles 18, 19, 22 and 29.
ê 2000/12/EC
Art. 1 (3) final clause
Article 27
Any any
number of places of business set up in the same Member State by a credit
institution with headquarters in another Member State shall be regarded as a
single branch;.
ê 2000/12/EC
(adapted)
Ö Section 4 Exercise
of the freedom to provide services Õ
ê 2000/12/EC
Art. 21 (adapted)
Article 28
Exercise of
the freedom to provide services
1.           Any credit institution
wishing to exercise the freedom to provide services by carrying on its
activities within the territory of another Member State for the first time
shall notify the competent authorities of the home Member State, of the
activities on the list in Annex I which it intends to carry on.
2.           The competent authorities
of the home Member State shall, within one month of receipt of the notification
Ö provided
for Õ mentioned in paragraph 1, send that
notification to the competent authorities of the host Member State.
3.           This Article shall not
affect rights acquired by credit institutions providing services before 1 January 1993.
ê 2000/12/EC
(adapted)
Ö Section
5 Powers of the competent authorities of the host Member State Õ
ê 2000/12/EC
Art. 22(1) (adapted)
Article 29
Power of the
competent authorities of the host Member State
1.Host
Member States may, for statistical purposes, require that all credit
institutions having branches within their territories shall report periodically
on their activities in those host Member States to the competent authorities of
those host Member States.
In discharging the responsibilities imposed
on them in Article Ö 41 Õ 27, host Member States may require that branches of
credit institutions from other Member States provide the same information as
they require from national credit institutions for that purpose.
ê 2000/12/EC
Art. 22(2) to (4) (adapted)
Article 30
12.         Where
the competent authorities of a host Member State ascertain Ö that Õ than an Ö credit Õ institution
having a branch or providing services within its territory is not complying
with the legal provisions adopted in that State pursuant to the provisions of this
Directive involving powers of the host Member State's competent authorities,
those authorities shall require the Ö credit Õ institution
concerned to put an end to that irregular situation.
23.         If
the Ö credit Õ institution
concerned fails to take the necessary steps, the competent authorities of the
host Member State shall inform the competent authorities of the home Member State accordingly. 
The competent authorities of the home Member State shall, at the earliest opportunity, take all appropriate measures to ensure
that the Ö credit Õ institution
concerned puts an end to that irregular situation. The nature of those measures
shall be communicated to the competent authorities of the host Member State.
34.         If,
despite the measures taken by the home Member State or because such measures
prove inadequate or are not available in the Member State in question, the Ö credit Õ institution
persists in violating the legal rules referred to in paragraph 2 Ö 1 Õ in force in
the host Member State, the latter State may, after informing the competent
authorities of the home Member State, take appropriate measures to prevent or
to punish further irregularities and, in so far as is necessary, to prevent
that Ö credit Õ institution
from initiating further transactions within its territory. The Member States
shall ensure that within their territories it is possible to serve the legal
documents necessary for these measures on credit institutions.
ê 2000/12/EC
Art. 22(5) (adapted)
Article 31
5.The provisions of Ö Articles
29 and 30 Õ paragraph 1 to 4 shall not affect the power of host
Member States to take appropriate measures to prevent or to punish
irregularities committed within their territories which are contrary to the
legal rules they have adopted in the interests
of the general good. This shall include the possibility of preventing offending
Ö credit Õ institutions
from initiating any further transactions within their territories.
ê 2000/12/EC
Art. 22(6) (adapted)
Article 32
6. Any measure adopted pursuant to paragraph
(2) Ö Article
30(2) and (3), or Article 31 Õ paragraph 3, 4 and 5 involving penalties or restrictions
on the exercise of the freedom to provide services must be properly justified
and communicated to the Ö credit Õ institution
concerned. Every such measure shall be subject to a right of appeal to the
courts in the Member State the authorities of which adopted it.
ê 2000/12/EC
Art. 22(7) (adapted)
Article 33
7. Before following the procedure provided for in Ö Article
30 Õ paragraph 2, 3 and 4, the competent authorities
of the host Member State may, in emergencies, take any precautionary measures
necessary to protect the interests of depositors, investors and others to whom
services are provided. The Commission and the competent authorities of the
other Member States concerned must be informed of such measures at the earliest
opportunity.
The Commission may, after consulting the
competent authorities of the Member States concerned, decide that the Member State in question must amend or abolish those measures.
ê 2000/12/EC
Art. 22 (8) (adapted)
Article 34
8.Host Member States may exercise the powers conferred on them under
this Directive by taking appropriate measures to prevent or to punish
irregularities committed within their territories. This shall include the
possibility of preventing Ö credit Õ institutions
from initiating further transactions within their territories.
ê 2000/12/EC
Art. 22(9) (adapted)
Article 35
9.In the event of the withdrawal of authorisation, the competent
authorities of the host Member State shall be informed and shall take
appropriate measures to prevent the Ö credit Õ institution
concerned from initiating further transactions within its territory and to
safeguard the interests of depositors.
ê 2000/12/EC
Art. 22 (10) (adapted)
Article 36
10.The Member States shall inform the Commission of the number and type
of cases in which there has been a refusal pursuant to Article Ö 25 and 26 Õ 20(1) to (6) or in which measures have been taken in
accordance with paragraph 4 of this Article Ö Article 30(3) Õ paragraph 4 of this Article.
ê 2000/12/EC
Art. 22(11) (adapted)
Article 37
11.Ö This
Section shall not Õ Nothing in this Article shall prevent credit
institutions with head offices in other Member States from advertising their
services through all available means of communication in the host Member State,
subject to any rules governing the form and the content of such advertising
adopted in the interests of the general good.
ê 2000/12/EC
TITLE IV
RELATIONS WITH THIRD COUNTRIES
ê 2000/12/EC
(adapted)
Ö Section
1 Notification in relation to third countries' undertakings and conditions
of access to the markets of these countries Õ
ê 2000/12/EC
Art. 23 (adapted)
Notification of
the subsidiaries of third countries' undertakings and conditions of access to
the markets of these countries
1.           The
competent authorities of the Member States shall inform the Commission
1 and the competent authorities of the other Member States :
(a) of any authorisation
of a direct or indirect subsidiary one or more parent undertakings of which are
governed by the laws of a third country;
(b) whenever such a
parent undertaking acquires a holding in a Community credit institution such
that the latter would become its subsidiary.
When authorisation is
granted to the direct or indirect subsidiary of one or more parent undertakings
governed by the law of third countries, the structure of the group shall be
specified in the notification which the competent authorities shall address to
the Commission in accordance with Article 11.
2.           The
Member States shall inform the Commission of any general difficulties
encountered by their credit institutions in establishing themselves or carrying
on banking activities in a third country.
3.           The
Commission shall periodically draw up a report examining the treatment accorded
to Community credit institutions in third countries, in the terms referred to
in paragraphs 4 and 5, as regards establishment and the carrying-on of banking
activities, and the acquisition of holdings in third-country credit
institutions. The Commission shall submit those reports to the Council,
together with any appropriate proposals.
4.           Whenever
it appears to the Commission, either on the basis of the reports referred to in
paragraph 3 or on the basis of other information, that a third country is not
granting Community credit institutions effective market access comparable to
that granted by the Community to credit institutions from that third country,
the Commission may submit proposals to the Council for the appropriate mandate
for negotiation with a view to obtaining comparable competitive opportunities
for Community credit institutions. The Council shall decide by a qualified
majority.
5.           Whenever
it appears to the Commission, either on the basis of the reports referred to in
paragraph 1 or on the basis of other information that Community credit
institutions in a third country do not receive national treatment offering the
same competitive opportunities as are available to domestic credit institutions
and the conditions of effective market access are not fulfilled, the Commission
may initiate negotiations in order to remedy the situation.
6.           In
the circumstances described in the first subparagraph, it may also be decided
at any time, and in addition to initiating negotiations, in accordance with the
procedure laid down in Article 60 (2), that the competent authorities of the
Member States must limit or suspend their decisions regarding requests pending
at the moment of the decision or future requests for authorisations and the
acquisition of holdings by direct or indirect parent undertakings governed by
the laws of the third country in question. The duration of the measures
referred to may not exceed three months.
Before the end of that
three-month period, and in the light of the results of the negotiations, the
Council may, acting on a proposal from the Commission, decide by a qualified
majority whether the measures shall be continued.
6.           Whenever
it appears to the Commission that one of the situations described in paragraphs
4 and 5 of Article 39 obtains, the Member States shall inform it at its
request:
(a)      of any request
for the authorisation of a direct or indirect subsidiary one or more parent
undertakings of which are governed by the laws of the third country in
question;
(b)     whenever they are
informed in accordance with Article 16 that such an undertaking proposes to
acquire a holding in a Community credit institution such that the latter would
become its subsidiary.
This obligation to
provide information shall lapse whenever an agreement is reached with the third
country referred to in paragraph 4 or 5or when the measures referred to in the
second and third subparagraphs of paragraph 5 cease to apply.
7.           Measures
taken pursuant to this Article comply with the Community's obligations under
any international agreements, bilateral or multilateral, governing the
taking-up and pursuit of the business of credit institutions.
ê 2000/12/EC Art. 24 (adapted)
è1 Directive 2004/xx/EC Art. 3.7
Article 38
Branches of
credit institutions having their head offices outside the Community
1.         Member States shall not apply to
branches of credit institutions having their head office outside the Community,
when commencing or carrying on their business, provisions which result in more
favourable treatment than that accorded to branches of credit institutions
having their head office in the Community.
2.         The competent authorities shall
notify the Commission and the è1 European Banking Committee ç of all
authorisations for branches granted to credit institutions having their head
office outside the Community.
3.         Without prejudice to paragraph 1, the Community may, through
agreements concluded in accordance with the Treaty
with one or more third countries, agree to apply provisions which, on the basis of the principle of reciprocity, accord
to branches of a credit institution having its head office outside the
Community identical treatment throughout the territory of the Community.
ò new
Section 2 
Cooperation with third countries'
competent authorities regarding supervision on a consolidated basis 
ê 2000/12/EC
Art. 25 (adapted)
Article 39
1.           The Commission may submit
proposals to the Council, either at the request of a Member State or on its own initiative, for the negotiation of agreements with one or more third
countries regarding the means of exercising supervision on a consolidated basis
over Ö the
following Õ:
(a)     credit institutions the parent undertakings of which have their
head offices situated in a third country; and
(b)     credit institutions situated in third countries the parent
undertakings of which, whether credit institutions or financial holding
companies, have their head offices in the Community.
2.           The agreements referred to
in paragraph 1 shall, in particular, seek to ensure Ö the
following Õ both:
(a)     that the competent authorities of the Member States are able to
obtain the information necessary for the supervision, on the basis of their
consolidated financial situations, of credit institutions or financial holding
companies situated in the Community and which have as subsidiaries credit
institutions or financial institutions situated outside the Community, or
holding participation in such institutions;
(b)     that the competent authorities of third countries are able to
obtain the information necessary for the supervision of parent undertakings the
head offices of which are situated within their territories and which have as
subsidiaries credit institutions or financial institutions situated in one or
more Member States or holding participation in such institutions.
ê Directive
2004/xx/EC Art. 3.8
3.           Without prejudice to
Article 300(1) and (2) of the Treaty establishing the European Community, the
Commission shall, with the assistance of the European Banking Committee,
examine the outcome of the negotiations referred to in paragraph 1 and the
resulting situation.
ê 2000/12/EC

TITLE V
ê 2000/12/EC
ð new
PRINCIPLES AND TECHNICAL INSTRUMENTS FOR
PRUDENTIAL SUPERVISION ð AND DISCLOSURE ï
ê 2000/12/EC
CHAPTER 1
PRINCIPLES OF PRUDENTIAL SUPERVISION
ò new
Section 1 
Competence of home and host Member   State
ê 2000/12/EC
Art. 26 (adapted)
Article 40
Competence of
control of the home Member State
1.           The prudential supervision
of a credit institution, including that of the activities it carries on
accordance with Articles 18 and 19 Ö 23 and
24 Õ , shall be the
responsibility of the competent authorities of the home Member State, without prejudice to those provisions of this Directive which give responsibility to the
authorities of the host Member State.
2.           Paragraph 1 shall not
prevent supervision on a consolidated basis pursuant to this Directive.
ê 2000/12/EC
Art 27 (adapted)
Article 41
Competence of
the host Member State
Host Member States shall Ö , pending
further coordination, Õ retain
responsibility in cooperation with the competent authorities of the home Member State for the supervision of the liquidity of the branches of credit institutions pending further coordination. 
Without prejudice to the measures necessary
for the reinforcement of the European Monetary System, host Member States shall
retain complete responsibility for the measures resulting from the
implementation of their monetary policies. 
Such measures may not provide for
discriminatory or restrictive treatment based on the fact that a credit
institution is authorised in another Member State.
ê 2000/12/EC
Art 28 (adapted)
Article 42
Collaboration
concerning supervision
The competent authorities of the Member
States concerned shall collaborate closely in order to supervise the activities
of credit institutions operating, in particular by having established branches
there, in one or more Member States other than that in which their head offices
are situated. They shall supply one another with all information concerning the
management and ownership of such credit institutions that is likely to
facilitate their supervision and the examination of the conditions for their
authorisation, and all information likely to facilitate the monitoring of such
institutions, in particular with regard to liquidity, solvency, deposit
guarantees, the limiting of large exposures, administrative and accounting
procedures and internal control mechanisms.
ê 2000/12/EC
Art. 29 (adapted)
Article 43
On-the-spot
verification of branches established in another Member State
1.           Host Member States shall
provide that, where a credit institution authorised in another Member State
carries on its activities through a branch, the competent authorities of the
home Member State may, after having first informed the competent authorities of
the host Member State, carry out themselves or through the intermediary of
persons they appoint for that purpose on-the-spot verification of the
information referred to in Article Ö 42 Õ 28.
2.           The competent authorities
of the home Member State may also, for purposes of the verification of
branches, have recourse to one of the other procedures laid down in Article Ö 141 Õ 55(7).
3.           This
Article Ö Paragraphs
1 and 2 Õ shall not
affect the right of the competent authorities of the host Member State to carry out, in the discharge of their responsibilities under this Directive,
on-the-spot verifications of branches established within their territory.
ê 2000/12/EC
(adapted)
Ö Section
2 Exchange of information and professional secrecy Õ
ê 2000/12/EC
Art. 30 (1) to (3) (adapted)
Article 44
Exchange of
information and professional secrecy
1.           TheMember States shall provide that all
persons working Ö for Õ or who have worked
for the competent authorities, as well as auditors or experts acting on behalf
of the competent authorities, shall be bound by the obligation of professional
secrecy. 
Ö No Õ This means that no confidential information which they
may receive in the course of their duties may be divulged to any person or
authority whatsoever, except in summary or collective form, such that
individual Ö credit Õ institutions
cannot be identified, without prejudice to cases covered by criminal law.
Nevertheless, where a credit institution has
been declared bankrupt or is being compulsorily wound up, confidential
information which does not concern third parties involved in attempts to rescue
that credit institution may be divulged in civil or commercial proceedings.
2.           Paragraph 1 shall not
prevent the competent authorities of the various Member States from exchanging
information in accordance with this Directive and with other Directives
applicable to credit institutions. That information shall be subject to the
conditions of professional secrecy indicated in paragraph 1.
ê 2000/12/EC
Art. 30 (4) (adapted)
Article 45
4.Competent authorities receiving confidential information under Ö Article 44 Õ paragraphs 1 or 2 may use it only in the course of their
duties Ö and only
for the following purposes Õ:
(a)        to check that the conditions governing the taking-up of the
business of credit institutions are met and to facilitate monitoring, on a
non-consolidated or consolidated basis, of the conduct of such business,
especially with regard to the monitoring of liquidity, solvency, large
exposures, and administrative and accounting procedures and internal control
mechanisms;, or
(b)        to impose sanctions;, or
(c)        in an administrative appeal against a decision of the
competent authority;, or
(d)       in court proceedings initiated pursuant to Article 33 Ö 55 Õ or to special
provisions provided for in this in other Directives adopted in the field of
credit institutions.
ê 2000/12/EC
Art. 30 (3) (adapted)
Article 46
3.         Member States may conclude cooperation agreements,
providing for exchanges of information, with the competent authorities of third
countries or with authorities or bodies of third countries as defined in paragraphs 5 and 6 Ö Articles 47
and 48(1) Õ only if the
information disclosed is subject to guarantees of professional secrecy at least
equivalent to those referred to in this Article. Such exchange of information
must be for the purpose of performing the supervisory task of the authorities
or bodies mentioned.
Where the information originates in another
  Member State, it may not be disclosed without the express agreement of the
competent authorities which have disclosed it and, where appropriate, solely
for the purposes for which those authorities gave their agreement.
ê 2000/12/EC
Art 30 (5) (adapted)
Article 47
5. Paragraphs 1 and 4
Ö Articles
44(1) and 45 Õ shall not
preclude the exchange of information within a Member State, where there are two
or more competent authorities in the same Member State, or between Member
States, between competent authorities and Ö the
followingÕ: 
(a)        authorities entrusted with the public duty of supervising
other financial organisations and insurance companies and the authorities
responsible for the supervision of financial markets.;
(b)        bodies involved in the liquidation and bankruptcy of credit
institutions and in other similar procedures.;
(c)        persons responsible for carrying out statutory audits of the
accounts of credit institutions and other financial institutions.,
in the discharge of their supervisory
functions., and
Ö Nor shall
they preclude Õ the disclosure
to bodies which administer deposit-guarantee schemes of information necessary
to the exercise of their functions. 
Ö In both
cases, the Õ The information received shall be subject to the
conditions of professional secrecy Ö specified Õ indicated in paragraph 1Ö Article 44(1) Õ.
ê 2000/12/EC
Art. 30 (6) & (7) (adapted)
Article 48
16.         Notwithstanding
Ö Articles
44 to 46 Õ paragraphs 1 to 4, Member States may authorise the exchanges of
information between the competent authorities and Ö the
followingÕ: 
(a)     the authorities responsible for overseeing the bodies, involved
in the liquidation and bankruptcy of credit institutions and other similar
procedures; , or
(b)     the authorities responsible for overseeing persons charged with
carrying out statutory audits of the accounts of insurance undertakings, credit
institutions, investment firms and other financial institutions.
Ö In such
cases, Õ Member States which have recourse to the provisions of the first subparagraph
shall require Ö fulfilment
of Õ at least that the following conditions are
met:
(a)      the information Ö must Õ shall be for the purpose of performing the supervisory
task referred to in the first subparagraph.;
(b)     information received in this context Ö must Õ shall be subject to the conditions of professional
secrecy imposed in Ö Article 44(1) Õ paragraph1).;
(c)     where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which
have disclosed it and, where appropriate, solely for the purposes for which
those authorities gave their agreement.
Member States shall communicate to the
Commission and to the other Member States the names of the authorities which may receive
information pursuant to this paragraph.
27.         Notwithstanding
Ö Articles
44 to 46 Õ paragraphs 1 to 4, Member States may, with the aim of
strengthening the stability, including integrity, of the financial system,
authorise the exchange of information between the competent authorities and the
authorities or bodies responsible under law for the detection and investigation
of breaches of company law.
Ö In such
cases Õ Member States which have recourse to the provision in the first subparagraph
shall require Ö fulfilment
of Õ at least that
the following conditions are met:
(a)     the information is for the purpose of performing the task
referred to in the first subparagraph.;
(b)     information received in this context Ö is Õ shall be subject to the conditions of professional
secrecy imposed in Ö Article
44(1) Õ (paragraph1).;
(c)     where the information originates in another Member State, it may not be disclosed without the express agreement of the competent authorities which
have disclosed it and, where appropriate, solely for the purposes for which
those authorities gave their agreement.
Where, in a Member State, the authorities or
bodies referred to in the first subparagraph perform their task of detection or
investigation with the aid, in view of their specific competence, of persons appointed
for that purpose and not employed in the public sector, the possibility of
exchanging information provided for in the first subparagraph may be extended
to such persons under the conditions Ö specified Õ stipulated in the second subparagraph.
In order to implement the third indent of the second subparagraph, the authorities or
bodies referred to in the first subparagraph shall communicate to the competent
authorities which have disclosed the information, the names and precise
responsibilities of the persons to whom it is to be sent.
Member States shall communicate to the
Commission and to the other Member States the names of the authorities or
bodies which may receive information pursuant to this Ö Article Õ paragraph.
Before 31 December 2000, t The Commission shall draw up a report on the application of the
provisions of this Ö Article Õ paragraph.
ê 2000/12/EC
Art 30 (8) (adapted)
Article 49
8.This Ö Section Õ Article shall not prevent a competent authority from
transmitting Ö information to
the following for the purposes of their tasks Õ:
(a)        central banks and other bodies with a similar function in
their capacity as monetary authorities.;
(b)        where appropriate, to other public authorities responsible
for overseeing payment systems.
information intended
for the performance of their task, nor Ö Nor Õ shall it
prevent such authorities or bodies from communicating to the competent
authorities such information as they may need for the purposes of Ö Article 45Õ paragraph 4. 
Information received in this context shall
be subject to the conditions of professional secrecy Ö set
out Õ imposed in this Article
Ö 44(1) Õ.
ê 2000/12/EC
Art. 30 (9) 1st and 2nd paragraphs (adapted)
Article 50
9. In addition, nNotwithstanding
the provisions referred to in Ö Articles 44(1)
and 45Õ paragraph 1 and 4, the
Member States may, by virtue of provisions laid down by law, authorise the
disclosure of certain information to other departments of their central
government administrations responsible for legislation on the supervision of
credit institutions, financial
institutions, investment services and insurance companies and to inspectors
acting on behalf of those departments.
However, such disclosures may be made only
where necessary for reasons of prudential control.
ê 2000/12/EC
Art 30 (9) 3rd paragraph (adapted)
Article 51
However, tThe
Member States shall provide that information received under Ö Articles
44(2) and 47 Õ paragraph 2 and 5 and Ö information Õ that obtained by means of the on-the-spot verification
referred to in Article Ö 43 Õ 29(1) and (2) may never be disclosed in the cases
referred to in this Ö Article Õ paragraph except with the express consent of the
competent authorities which disclosed the information or of the competent
authorities of the Member State in which on-the-spot verification was carried
out.
ê 2000/12/EC
Art. 30 (10) (adapted)
Article 52
10.Ö This
Section Õ Article shall not prevent the competent
authorities Ö of a
Member State Õ from
communicating the information referred to in Ö Articles 44
to 46Õ paragraph 1 to 4 to a
clearing house or other similar body recognised under national law for the
provision of clearing or settlement services for one of their Member States'
markets if they consider that it is necessary to communicate the information in
order to ensure the proper functioning of those bodies in relation to defaults
or potential defaults by market participants. The information received in this
context shall be subject to the conditions of professional secrecy Ö laid
down Õ imposed in Ö Article
44(1) Õ paragraph 1. 
The Member States shall, however, ensure
that information received under paragraph 2
Ö Article
44(2) Õ may not be
disclosed in the circumstances referred to in this Ö Article Õ paragraph without the express consent of the competent
authorities which disclosed it.
ò new
Section 3 
Duty of persons responsible for the
legal control of annual and consolidated accounts
ê 2000/12/EC
Art. 31 (adapted)
Article 53
Duty of
persons responsible for the legal control of annual and consolidated accounts
1.           Member States shall
provide at least that: (a) any person
authorised within the meaning of Ö eight Õ Council
Directive 84/253/EEC[26],
performing in a credit institution the task described in Article 51 of Ö fourth Õ Council
Directive 78/660/EEC[27],
or Article 37 of Council Directive 83/349/EEC, or Article 31 of Ö Council Õ Directive
85/611/EEC[28],
or any other statutory task, shall have a duty to report promptly to the
competent authorities any fact or decision concerning that Ö credit Õ institution of
which he has become aware while carrying out that task which is liable to:
(a)     constitute a material breach of the laws, regulations or
administrative provisions which lay down the conditions governing authorisation
or which specifically govern pursuit of the activities of credit institutions, or;
(b)     affect the continuous functioning of the credit institution, or;
(c)     lead to refusal to certify the accounts or to the expression of
reservations.
Ö Member
States shall provide at least that Õ (b) that person shall likewise have a duty to
report any fact Ö or Õ and decision of which he becomes aware in the course of
carrying out a task as described in Ö the first
sub-paragraph Õ (a) in an undertaking having close links resulting from
a control relationship with the credit institution within which he is carrying
out Ö that Õ the abovementioned task.
2.           The disclosure in good
faith to the competent authorities, by persons authorised within the meaning of
Directive 84/253/EEC, of any fact or decision referred to in paragraph 1 shall
not constitute a breach of any restriction on disclosure of information imposed
by contract or by any legislative, regulatory or administrative provision and
shall not involve such persons in liability of any kind.
ê 2000/12/EC
(adapted)
ÖSection 4 Power
of sanction and right to apply to the courts Õ
ê 2000/12/EC
Art. 32 (adapted)
Article 54
Power of
sanction of the competent authorities
Without prejudice to the procedures for the
withdrawal of authorisations and the provisions of criminal law, the Member States
shall provide that their respective competent authorities may, as against
credit institutions, or those who
effectively control the business of credit institutions, which breach laws, regulations or
administrative provisions concerning the supervision or pursuit of their
activities, adopt or impose in respect of them
penalties or measures aimed specifically at ending Ö the Õ observed
breaches or the causes of such breaches.
ê 2000/12/EC
Art. 33 (adapted)
Article 55
Right to
apply to the courts
Member States shall ensure that decisions
taken in respect of a credit institution in pursuance of laws, regulations and
administrative provisions adopted in accordance with this Directive may be
subject to the right to apply to the courts. The same shall apply where no
decision is taken, within six months of
its submission, in respect of an application for authorisation which contains
all the information required under the provisions in force.
ê 2000/28/EC
1.2 (adapted)
Article 33a
Article 3 of
Directive 2000/46/EC shall apply to credit institutions
ê 2000/12/EC
CHAPTER 2
TECHNICAL INSTRUMENTS OF PRUDENTIAL
SUPERVISION
Section 1
Own funds
ê 2000/12/EC
Art. 34 (1) (adapted)
Article 56
General
principles
1.Wherever a Member State lays down by law, regulation or
administrative action a provision in implementation of Community legislation
concerning the prudential supervision of an operative credit institution which
uses the term or refers to the concept of own funds, it shall bring this term
or concept into line with the definition given in Ö Articles
57 to 61 and Articles 63 to 66Õparagraph 2, 3 and 4 and Articles 35 to 38.
ê 2000/12/EC
Art. 34 (2) 1st paragraph (adapted)
ð new
Article 57
Subject to the limits imposed in Article 38 Ö 66 Õ , the
unconsolidated own funds of credit institutions shall consist of the following
items:
(1a)   capital within the meaning of Article 22
of Directive 86/635/EEC, in so far as it has been paid up, plus share premium
accounts but excluding cumulative preferential shares;
(2b)   reserves within the meaning of Article 23
of Directive 86/635/EEC and profits and losses brought forward as a result of
the application of the final profit or loss;.. The Member
States may permit inclusion of interim profits before a formal decision has
been taken only if these profits have been verified by persons responsible for
the auditing of the accounts and if it is proved to the satisfaction of the
competent authorities that the amount thereof has been evaluated in accordance
with the principles set out in Directive 86/635/EEC and is net of any
foreseeable charge or dividend; 
(3c)   funds for general banking risks within the
meaning of Article 38 of Directive 86/635/EEC;
(4d)   revaluation reserves within the meaning of
Article 33 of Directive 78/660/EEC;
(5e)   value adjustments within the meaning of
Article 37(2) of Directive 86/635/EEC;
(6f)   other items within the meaning of Article 35 Ö 63 Õ ;
(7g)   the commitments of the members of credit
institutions set up as cooperative societies and the joint and several
commitments of the borrowers of certain institutions organised as funds, as
referred to in Article 36 Ö 64 Õ (1);
(8h)   fixed-term cumulative preferential shares
and subordinated loan capital as referred to in Article 36
Ö 64 Õ (3).
The following items shall be deducted in
accordance with Article 38 Ö 66 Õ :
(9i)    own shares at book value held by a credit
institution;
(10j)  intangible assets within the meaning of
Article 4(9) («Assets») of Directive 86/635/EEC;
(k11) material losses of the current financial
year;
ê 2002/87/EC
Art. 29.4(a) (adapted)
(l12)  holdings in other credit and financial
institutions amounting to more than 10 % of their capital;
(m13)            subordinated claims and
instruments referred to in Article 35 Ö 63 Õ and Article 36 Ö 64 Õ (3) which a
credit institution holds in respect of credit and financial institutions in
which it has holdings exceeding 10 % of the capital in each case;
(n14) holdings in other credit and financial
institutions of up to 10 % of their capital, the subordinated claims and
the instruments referred to in Article 35 Ö 63 Õ and Article 36 Ö 64 Õ (3) which a
credit institution holds in respect of credit and financial institutions other
than those referred to in points 12 and 13 of this
subparagraph in respect of the amount of the total of such holdings,
subordinated claims and instruments which exceed 10 % of that credit
institution's own funds calculated before the deduction of items in points Ö (l) to (p) Õ 12 to 16 of this subparagraph;
(o15) participations within the meaning of Article
Ö 4(10) Õ 1(9) which a credit institution holds in:
(i)      insurance undertakings within the meaning of Article 6 of Ö First
Council Õ Directive
73/239/EEC Ö [29] Õ , Article 6 of
Ö First
Council Õ Directive
79/267/EEC Ö [30] Õ or Article
1(b) of Directive 98/78/EC of the European Parliament and of the Council[31];
(ii)     reinsurance undertakings within the meaning of Article 1(c) of
Directive 98/78/EC;
(iii)    insurance holding companies within the meaning of Article 1(i)
of Directive 98/78/EC;
(p16) each of the following items which the
credit institution holds in respect of the entities defined in point (15o) in which it holds a participation:
(i)      instruments referred to in Article 16(3) of Directive
73/239/EEC,
(ii)     instruments referred to in Article 18(3) of Directive
79/267/EEC.
ò new
(q)     For credit institutions calculating risk-weighted exposure amounts
under Section 3, Subsection 2, negative amounts resulting from the calculation
in Annex VII, Part 1, paragraph 34 and expected loss amounts calculated in
accordance with Annex VII, Part 1 paragraphs 30 and 31; 
(r)      The
exposure amount of securitisation positions which receive a risk weight of
1250% under Annex IX, Part 4, calculated in the manner there specified.
ê 2000/12/EC
Art. 34 (2) point 2, final sentence (adapted)
ð new
Ö For the
purposes of point (b), the Õ The Member States may permit inclusion of interim
profits before a formal decision has been taken only if these profits have been
verified by persons responsible for the auditing of the accounts and if it is
proved to the satisfaction of the competent authorities that the amount thereof
has been evaluated in accordance with the principles set out in Directive
86/635/EEC and is net of any foreseeable charge or dividend;.
ð In the case of a credit institution
which is the originator of a securitisation, net gains arising from the
capitalisation of future income from the securitised assets and providing
credit enhancement to positions in the securitisation shall be excluded from the
item specified in point (b).ï
ê 2002/87/EC
Art. 29.4(b) (adapted)
Article 58
Where shares in another credit institution,
financial institution, insurance or reinsurance undertaking or insurance
holding company are held temporarily for the purposes of a financial assistance
operation designed to reorganise and save that entity, the competent authority
may waive the provisions on deduction referred to in points Ö (l) to
(p) Õ12 to 16.
Article 59
As an alternative to the deduction of the
items referred to in points Ö (o) to
(p) Õ 15 and 16, Member States may allow their credit
institutions to apply mutatis mutandis methods 1, 2, or 3 of Annex I to Directive
2002/87/EC. Method 1 (Accounting consolidation) Ö may Õ shall only be applied Ö only Õ if the
competent authority is confident about the level of integrated management and
internal control regarding the entities which would be included in the scope of
consolidation. The method chosen shall be applied in a consistent manner over
time.
Article 60
Member States may provide that for the
calculation of own funds on a stand-alone basis, credit institutions subject to
supervision on a consolidated basis in accordance with Chapter Ö 4,
Section 1 Õ 3, or to
supplementary supervision in accordance with Directive 2002/87/EC, need not
deduct the items referred to in points Ö (l) to
(p) Õ12 to 16 which are held in credit institutions,
financial institutions, insurance or reinsurance undertakings or insurance
holding companies, which are included in the scope of consolidated or
supplementary supervision.
This provision shall apply to all the
prudential rules harmonised by Community acts.
ê 2000/12/EC
Art 34 (3) (adapted)
Article 61
3.The concept of own funds as defined in points Ö (a) to
(h) Õ (1) to (8) of paragraph 2 Ö Article
57 Õ embodies a
maximum number of items and amounts. The use of those items and the fixing of
lower ceilings, and the deduction of items other than those listed in points (9) to (13) Ö (i) to
(r) Õ of Ö Article
57 Õ paragraph 2 shall be left to the discretion of the
Member States. Member
States shall nevertheless be obliged to consider increased convergence with a
view to a common definition of own funds.
To that end, the Commission shall, by 1 January 1996 at the latest, submit a report to the European Parliament and to the
Council on the application of this Article and Articles 35 to 39, accompanied,
where appropriate, by such proposals for amendment as it shall deem necessary.
Not later than 1 January 1998, the European Parliament and the Council shall,
acting in accordance with the procedure laid down in Article 251 of the Treaty
and after consultation of the Economic and Social Committee, examine the
definition of own funds with a view to the uniform application of the common
definition.
ê 2000/12/EC
Art 34 (4) (adapted)
4The items listed in points Ö (a) to
(e) Õ (1) to (5) of Ö Article
57 Õ paragraph 2 must be available to a credit institution
for unrestricted and immediate use to cover risks or losses as soon as these
occur. The amount must be net of any foreseeable tax charge at the moment of
its calculation or be suitably adjusted in so far as such tax charges reduce
the amount up to which these items may be applied to cover risks or losses.
ò new
Article 62
Member States
will report to the Commission on the progress achieved in convergence with a
view to a common definition of own funds. On the basis of these reports the
Commission shall, if appropriate, by 1 January 2009 at the latest, submit a proposal to the European Parliament and to the Council for amendment of this
Article and Articles 35 to 39. 
ê 2000/12/EC
Art 35 (adapted)
Article 63
Other items
1.           The concept of own funds used by a Member State may
include other items provided that, whatever their legal or accounting
designations might be, they have the following characteristics:
(a)     they are freely available to the
credit institution to cover normal banking risks where revenue or capital
losses have not yet been identified;
(b)     their existence is disclosed in
internal accounting records;
(c)     their amount is determined by the
management of the credit institution, verified by independent auditors, made
known to the competent authorities and placed under the supervision of the
latter.
2.           Securities of indeterminate duration and other
instruments that fulfil the following conditions may also be accepted as other
items:
(a)     they may not be reimbursed on the
bearer's initiative or without the prior agreement of the competent authority;
(b)     the debt agreement must provide for
the credit institution to have the option of deferring the payment of interest
on the debt;
(c)     the lender's claims on the credit
institution must be wholly subordinated to those of all non-subordinated
creditors;
(d)     the documents governing the issue of
the securities must provide for debt and unpaid interest to be such as to
absorb losses, whilst leaving the credit institution in a position to continue
trading;
(e)     only fully paid-up amounts shall be
taken into account.
To these may be added cumulative preferential
shares other than those referred to in point Ö (h) Õ 8 of Article 34 Ö 57 Õ (2).
ò new
3.           For credit institutions calculating
risk-weighted exposure amounts under Section 3, Subsection 2, positive amounts
resulting from the calculation in Annex VII, Part 1, paragraph 34, may, up to
0.6% of risk weighted exposure amounts calculated under Subsection 2, be
accepted as other items. For these credit institutions value adjustments and
provisions included in the calculation referred to in Annex VII, Section 3, Part 1, paragraph 34 and value
adjustments and provisions for exposures referred to in point (e) of Article 57
shall not be included in own funds other than in accordance with this provision. For these purposes,
risk-weighted exposure amounts shall not include those calculated in respect of
securitisation positions which have a risk weight of 1250%.
ê2000/12/EC Art
36 (adapted)
Article 64
Other
provisions concerning own funds
1.           The commitments of the
members of credit institutions set up as cooperative societies referred to in
point Ö (g) Õ 7 of Article 34(2)Ö57Õ, shall
comprise those societies' uncalled capital; together with the legal commitments
of the members of those cooperative societies to make additional non-refundable
payments should the credit institution incur a loss, in which case it must be
possible to demand those payments without delay.
The joint and several commitments of borrowers
in the case of credit institutions organised as funds shall be treated in the
same way as the preceding items.
All such items may be included in own funds in
so far as they are counted as the own funds of institutions of this category
under national law.
2.           Member States shall not
include in the own funds of public credit institutions guarantees which they or
their local authorities extend to such entities.
3.           Member States or the
competent authorities may include fixed-term cumulative preferential shares
referred to in point Ö (h) Õ (8) of Article 34(2)Ö57Õ and
subordinated loan capital referred to in that provision in own funds, if
binding agreements exist under which, in the event of the bankruptcy or
liquidation of the credit institution, they rank after the claims of all other
creditors and are not to be repaid until all other debts outstanding at the
time have been settled.
Subordinated loan capital must also fulfil the following additional criteria:
(a)     only fully paid-up funds may be taken
into account;
(b)     the loans involved must have an
original maturity of at least five years, after which they may be repaid; if the maturity of the debt is not fixed, they shall be
repayable only subject to five years' notice unless the loans are no longer
considered as own funds or unless the prior consent of the competent
authorities is specifically required for early repayment. The competent
authorities may grant permission for the early repayment of such loans provided
the request is made at the initiative of the issuer and the solvency of the
credit institution in question is not affected;
(c)     the extent to which they may rank as
own funds must be gradually reduced during at least the last five years before
the repayment date;
(d)     the loan agreement must not include
any clause providing that in specified circumstances, other than the winding-up
of the credit institution, the debt will become repayable before the agreed
repayment date.
ê 2000/12/EC
Art. 36(3)(b), excluding first 19 words 
ð new
ð For the purposes of point (b) of the
second subparagraph, ï if the maturity of the debt is not fixed, they shall be repayable
only subject to five years' notice unless the loans are no longer considered as
own funds or unless the prior consent of the competent authorities is
specifically required for early repayment. The competent authorities may grant
permission for the early repayment of such loans provided the request is made
at the initiative of the issuer and the solvency of the credit institution in
question is not affected;
ò new
4.           Credit
institutions shall not include in own funds either the fair value reserves
related to gains or losses on cash flow hedges of financial instruments
measured at amortised cost, or any gains or losses on their liabilities valued
at fair value that are due to changes in the credit institutions’ own credit standing.
ê2000/12/EC Art
37 (adapted)
Article 65
Calculation
of own funds on a consolidated basis
1.           Where the calculation is
to be made on a consolidated basis, the consolidated amounts relating to the
items listed under Article 34 Ö57Õ(2) shall be
used in accordance with the rules laid down in Articles
52 to 56ÖChapter 4,
Section 1Õ. Moreover, the
following may, when they are credit («negative») items, be regarded as
consolidated reserves for the calculation of own funds:
(a)     any minority interests within the meaning of Article 21 of
Directive 83/349/EEC, where the global integration method is used;
(b)     the first consolidation difference within the meaning of
Articles 19, 30 and 31 of Directive 83/349/EEC;
(c)     the translation differences included in consolidated reserves
in accordance with Article 39(6) of Directive 86/635/EEC;
(d)     any difference resulting from the inclusion of certain
participating interests in accordance with the method prescribed in Article 33
of Directive 83/349/EEC.
2.           Where the above debit (“positive”)
items, they must be deducted in the calculation of consolidated own funds
Ö Where the
items referred to in points (a) to (d) of paragraph 1 are debit («positive»)
items, they shall be deducted in the calculation of consolidated own
funds. Õ
ê 2000/12/EC
Art 38 (1) (adapted)
ð new
Article 66
Deductions
and limits
1. The items referred to in points Ö (d) to
(h) Õ (4) to (8) of Article 34(2)Ö57Õ, shall be
subject to the following limits:
(a)     the total of the items in points Ö (d) to
(h) Õ (4) to (8) may not exceed a maximum of 100% of the items
in points Ö (a) plus
(b) and (c) Õ (1) plus (2) and (3) minus Ö (i) to
(k) Õ (9), (10) (11) ð and 50% of the amounts in item (q) ï;
(b)     the total of the items in points Ö (g) to
(h) Õ (7) and (8) may not exceed a maximum of 50% of the items
in points Ö (a) plus
(b) and (c) Õ (1) plus (2) and (3) minus (i) to (k) (9), (10) and (11) ð and 50% of the amounts in item (q) ï ;
(c)     the total of the items in points (l) (12) and (13) ð to (q)ï shall be
deducted from the total of the items.
ò new
2.           The
items referred to in point (r) of Article 57 shall be deducted from the total
of the items specified in points (a) to (h) of that Article, unless the credit
institution includes the former items in its calculation of risk-weighted
exposure amounts for the purposes of Article 75 as specified in Annex IX, Part
4.
ê 2000/12/EC
Art 38 (2)
23.         The
competent authorities may authorise credit institutions to exceed the limit
laid down in paragraph 1 in temporary and exceptional circumstances.
ê 2000/12/EC
Art 39 (adapted)
Article 67
Provision of
proof to the competent authorities
Compliance with the conditions laid down in
Ö this
Section Õ Article 34 (2), (3) and (4) and Articles 35 to 38 must
be proved to the satisfaction of the competent authorities.
ò new
Section 2
Provision
against risks
Subsection 1 -
Level of application
Article 68
1.           Credit institutions shall comply with the obligations laid
down in Articles 22 and 75 and Section 5 on an individual basis.
2.           Every credit institution which is neither a subsidiary in
the Member State where it is authorised and supervised, nor a parent
undertaking, and every credit institution not included in the consolidation
pursuant to Article 73, shall comply with the obligations laid down in Articles
120 and 123 on an individual basis.
3.           Every credit institution which is neither a parent
undertaking, nor a subsidiary, and every the credit institution not included in
the consolidation pursuant to Article73, shall comply with the obligations laid
down in Chapter 5 on an individual basis.
Article 69
1.           The Member States may choose not to apply Article 68(1) to
any subsidiary of a credit institution, where both the subsidiary and the
credit institution are subject to authorisation and supervision by the Member
State concerned, and the subsidiary is included in the supervision on a
consolidated basis of the credit institution which is the parent undertaking,
and all of the following conditions are satisfied, in order to ensure that own
funds are distributed adequately among the parent undertaking and the
subsidiaries:
(a)     there is no current or foreseen material or legal impediment to
the prompt transfer of own funds or repayment of liabilities by its parent
undertaking;
(b)     its parent undertaking is committed to an unconditional, explicit
and irrevocable obligation to transfer own funds to the subsidiary and meet its
liabilities, or the risks in the subsidiaries are of negligible interest;
(c)     the risk evaluation, measurement and control procedures of the parent
undertaking cover the subsidiary;
(d)     the parent undertaking has the right to appoint or remove a
majority the members of the management body of the subsidiary.
2.           The Member States may exercise the option provided for in
paragraph 1 where the parent undertaking is a financial holding company set up
in the same Member State as the credit institution, provided that it is subject
to the same supervision as that exercised over credit institutions, and in
particular to the standards laid down in Article 71(1).
Article 70
The competent authorities may allow on a case by case basis parent credit
institutions in a Member State to incorporate in the calculation of their
requirement under Article 68(1)
subsidiaries in the Community which meet
the conditions laid down in the points (a), (c) and (d) of Article 69(1), and
whose material exposures or material liabilities are to that parent credit
institution in a Member State.
Article 71
1.           Without
prejudice to Articles 68 to 70, parent credit institutions in a Member State shall comply, to the extent and
in the manner prescribed in Article 133, with the obligations laid down in
Articles 75, 120, 123 and Section 5 on the basis of their consolidated
financial situation.
2.           Without
prejudice to Articles 68 to 70, credit institutions controlled by a parent financial
holding company in a Member State shall comply, to the extent and in the manner prescribed in Article 133,
with the obligations laid down in Articles 75, 120, 123 and Section 5 on the
basis of the consolidated financial situation of that financial holding
company. 
Where more than one
credit institution is controlled by a parent financial holding company in a Member State, the first subparagraph shall apply only to the credit institution to which
supervision on a consolidated basis applies in accordance with Articles 125 and
126.
Article 72
1.           EU parent credit
institutions shall comply
with the obligations laid down in Chapter 5 on the basis of their consolidated
financial situation.
However, in respect
of their significant subsidiaries, they shall disclose the information
specified in Annex XII, Part 1, paragraph 5, on an individual or
sub-consolidated basis.
2.           Credit
institutions controlled by an EU parent financial holding company shall comply with the obligations laid
down in Chapter 5 on the basis of the consolidated financial situation of that
financial holding company.
However, in respect
of their significant subsidiaries, they shall disclose the information
specified in Annex XII, Part 1, paragraph 5, on an individual or
sub-consolidated basis.
3.           The competent
authorities responsible for
exercising supervision on a consolidated basis pursuant to Articles 125 to 131 may decide not to
apply in full or in part paragraphs 1 and 2 to the credit institutions which
are included within comparable disclosures provided on a consolidated basis by
a parent undertaking established in a third country.
ê 2000/12/EC
Art. 52 (3) (adapted)
Article 73
61.         The Member States or the competent authorities responsible
for exercising supervision on a consolidated basis pursuant to Article 53 Ö 125 to
131 Õ may decide in
the Ö following Õ cases listed below that a credit institution,
financial institution or ancillary banking services
undertaking which is a subsidiary or in which a participation is held need not
be included in the consolidation:
(a)     where if the undertaking Ö concerned Õ that should be included is situated in a
third country where there are legal impediments to the transfer of the
necessary information.;
(b)     where if, in the opinion of the
competent authorities, the undertaking Ö concerned Õ that should be included is of negligible
interest only with respect to the objectives of monitoring credit institutions
and in Ö any
event whereÕ all cases the balance-sheet total of the
undertaking Ö concerned Õ that should be included is less than the
smaller of the following two amounts:
(i)      EUR 10 million;
(ii)     or1% of the
balance-sheet total of the parent undertaking or the undertaking that holds the
participation.
If several undertakings
meet the above criteria, they must nevertheless be included in the
consolidation where collectively they are of non-negligible interest with
respect to the aforementioned objectives, or
(c)     where if, in the opinion of the
competent authorities responsible for exercising supervision on a consolidated
basis, the consolidation of the financial situation of the undertaking Ö concerned Õ that should be included would be
inappropriate or misleading as far as the objectives of the supervision of
credit institutions are concerned.
ê 2000/12/EC
Art. 52 (3) 2nd indent, final sentence (adapted)
If Ö , in the
cases referred to in point (b) of the first subparagraph Õ , several
undertakings meet the above criteria Ö set out
therein Õ , they must
nevertheless be included in the consolidation where collectively they are of
non-negligible interest with respect to the specified aforementioned
objectives, or.
ò new
2.           Competent authorities shall require subsidiary credit institutions
to apply the requirements laid down in Articles 75, 120, 123 and Section 5 on a
sub-consolidated basis if those credit institutions, or the parent undertaking
where it is a financial holding company, have a credit
institution or a financial institution or an asset management company as
defined in Article 2(5) of Directive 2002/87/EC as a subsidiary in a third
country, or hold a participation in such an undertaking.
3.           The
competent authorities shall require the parent undertakings and subsidiaries
subject to this Directive to meet the obligations laid down in Article 22 on a
consolidated or sub-consolidated basis, to ensure that their arrangements, processes and mechanisms are
consistent and well-integrated and that any data and information relevant to
the purpose of supervision can be produced.
Subsection 2 - Calculation of requirements
Article 74
1.           Save where otherwise provided, the valuation of assets and
off-balance-sheet items shall be effected in accordance with the accounting
framework to which the credit institution is subject under Regulation (EC) No
1606/2002 and Directive 86/635/EEC.
2.           Notwithstanding the requirements laid down in Articles 68 to
72, the competent authorities shall ensure that the calculations to verify the
compliance of credit institutions with the obligations laid down in Article 75
are carried out not less than twice each year.
The
calculations shall be carried out either by the credit institutions themselves,
in which case they shall communicate the results and any component data
required to the competent authorities, or by the competent authorities, using
data supplied by the credit institutions.
Subsection 3 -
Minimum Level of Own Funds
Article 75
Without prejudice
to Article 136, Member States shall require credit institutions to provide own
funds which are at all times more than or equal to the sum of the following
capital requirements:
(a)        for
credit risk and dilution risk in respect of all of their business activities
with the exception of their trading book business and illiquid assets if
deducted from own funds under [Directive 93/6/EEC, Article 13(2)(d) ], 8 per
cent of the total of their risk-weighted exposure amounts calculated in
accordance with Section 3; 
(b)        in
respect of their trading-book business, for position risk, settlement and
counter-party risk and, in so far as the limits laid down in Articles 111 to
117 are authorised to be exceeded, for large exposures exceeding such limits,
the capital requirements determined in accordance with [Directive 93/6/EEC,
Chapter V, Section 4];
(c)        in
respect of all of their business activities, for foreign-exchange risk and for
commodities risk, the capital requirements determined according to [Article 18
of Directive 93/6/EEC];
(d)       in
respect of all of their business activities, for operational risk, the capital
requirements determined in accordance with Section 4.
ê 2000/12/EC
Section 2
Solvency ratio
Article 40
General principles
1. The solvency ratio expresses own funds, as defined
in Article 41, as a proportion of total assets and off-balance-sheet items,
risk-adjusted in accordance with Article 42.
2. The solvency ratios of credit institutions which
are neither parent undertakings as defined in Article 1 of Directive
83/349/EEC, nor subsidiaries of such undertakings shall be calculated on an
individual basis.
3. The solvency ratios of credit institutions which
are parent undertakings shall be calculated on a consolidated basis in
accordance with the methods laid down in this Directive and in Directive
86/635/EEC.
4. The competent authorities responsible for
authorising and supervising a parent undertaking which is a credit institution
may also require the calculation of a subconsolidated or unconsolidated ratio
in respect of that parent undertaking and of any of its subsidiaries which are
subject to authorisation and supervision by them. Where such monitoring of the
satisfactory allocation of capital within a banking group is not carried out,
other measures must be taken to attain that end.
5. Without prejudice to credit institutions'
compliance with the requirements of paragraphs 2, 3 and 4, and of Article 52(8)
and (9), the competent authorities shall ensure that ratios are calculated not
less than twice each year, either by credit institutions themselves, which
shall communicate the results and any component data required to the competent
authorities, or by the competent authorities, using data supplied by the credit
institutions.
6. The valuation of assets and off-balance-sheet
items shall be effected in accordance with Directive 86/635/EEC.
Article 41
The numerator: own funds
Own funds as defined in this Directive shall form the
numerator of the solvency ratio.
Article 42
The denominator: risk-adjusted assets and
off-balance-sheet items
1. Degrees of credit risk, expressed as percentage
weightings, shall be assigned to asset items in accordance with Articles 43 and
44, and exceptionally Articles 45, 62 and 63. The balance-sheet value of each
asset shall then be multiplied by the relevant weighting to produce a
risk-adjusted value.
2. In the case of the off-balance-sheet items listed
in Annex II, a two-stage calculation as prescribed in Article 43(2) shall be
used.
3. In the case of the off-balance-sheet items
referred to in Article 43(3), the potential costs of replacing contracts in the
event of counterparty default shall be calculated by means of one of the two
methods set out in Annex III. Those costs shall be multiplied by the relevant
counterparty weightings in Article 43(1), except the 100% weightings as
provided for there shall be replaced by 50% weightings to produce risk-adjusted
values.
4. The total of the risk-adjusted values of the
assets and off-balance-sheet items mentioned in paragraphs 2 and 3 shall be the
denominator of the solvency ratio.
Article 43
Risk weightings
1. The following weightings shall be applied to the
various categories of asset items, although the competent authorities may fix
higher weightings as they see fit:
(a)        Zero weighting
(1)     cash in hand and equivalent items;
(2)     asset items constituting claims on Zone A central governments
and central banks;
(3)     asset items constituting claims on the European Communities;
(4)     asset items constituting claims carrying the explicit
guarantees of Zone A central governments and central banks or of the European
Communities;
(5)     asset items constituting claims on Zone B central governments
and central banks denominated and funded in the national currencies of the
borrowers;
(6)     asset items constituting claims carrying the explicit guarantees
of Zone B central governments and central banks denominated and funded in the
national currency common to the guarantor and the borrower;
(7)     asset items secured to the satisfaction of the competent
authorities, by collateral in the form of Zone A central government or central
bank securities or securities issued by the European Communities or by cash
deposits placed with the lending institution or by certificates of deposit or
similar instruments issued by and lodged with the latter;
(b)        20% weighting
(1)     asset items constituting claims on the EIB;
(2)     asset items constituting claims on multilateral development
banks;
(3)     asset items constituting claims carrying the explicit guarantee
of the EIB;
(4)     asset items constituting claims carrying the explicit
guarantees of multilateral development banks;
(5)     asset items constituting claims on Zone A regional governments
or local authorities, subject to Article 44;
(6)     asset items constituting claims carrying the explicit
guarantees of Zone A regional governments or local authorities, subject to
Article 44;
(7)     asset items constituting claims on Zone A credit institutions
but not constituting such institutions' own funds;
(8)     asset items constituting claims with a maturity of one year or
less, on Zone B credit institutions, other than securities issued by such
institutions which are recognised as components of their own funds;
(9)     asset items carrying the explicit guarantees of Zone A credit
institutions;
(10)   asset items constituting claims with a maturity of one year or
less carrying the explicit guarantees of Zone B credit institutions;
(11)   asset items secured, to the satisfaction of the competent
authorities, by collateral in the form of securities issued by the EIB or by
multilateral development banks;
(12)   cash items in the process of collection;
(c)        50% weighting
(1)     loans fully and completely secured, to the satisfaction of the
competent authorities, by mortgages on residential property which is or will be
occupied or let by the borrower, and loans fully and completely secured, to the
satisfaction of the competent authorities, by shares in Finnish residential
housing companies, operating in accordance with the Finnish Housing Company Act
of 1991 or subsequent equivalent legislation, in respect of residential
property which is or will be occupied or let by the borrower;
         «mortgage-backed securities» which may be treated as loans
referred to in the first subparagraph or in Article 62(1), if the competent
authorities consider, having regard to the legal framework in force in each Member State, that they are equivalent in the light of the credit risk. Without prejudice
to the types of securities which may be included in and are capable of
fulfilling the conditions in this point 1, «mortgage-backed securities» may
include instruments within the meaning of Section B(1)(a) and (b) of the Annex
to Council Directive 93/22/EEC[32].
The competent authorities must in particular be satisfied that:
(i)      such securities are fully and directly backed by a pool of
mortgages which are of the same nature as those defined in the first
subparagraph or in Article 62(1) and are fully performing when the
mortgage-backed securities are created;
(ii)     an acceptable high-priority charge on the underlying
mortgage-asset items is held either directly by investors in mortgage-backed
securities or on their behalf by a trustee or mandated representative in the
same proportion to the securities which they hold;
(2)     prepayments and accrued income: these assets shall be subject
to the weighting corresponding to the counterparty where a credit institution
is able to determine it in accordance with Directive 86/635/EEC. Otherwise,
where it is unable to determine the counterparty, it shall apply a flat-rate
weighting of 50%;
(d)       100% weighting
(1)     asset items constituting claims on Zone B central governments
and central banks except where denominated and funded in the national currency
of the borrower;
(2)     asset items constituting claims on Zone B regional governments
or local authorities;
(3)     asset items constituting claims with a maturity of more than
one year on Zone B credit institutions;
(4)     asset items constituting claims on the Zone A and Zone B
non-bank sectors;
(5)     tangible «Assets» within the meaning of Article 4(10) of
Directive 86/635/EEC;
(6)     holdings of shares, participation and other components of the
own funds of other credit institutions which are not deducted from the own
funds of the lending institutions;
(7)     all other assets except where deducted from own funds.
2. The following treatment shall apply to
off-balance-sheet items other than those covered in paragraph 3. They shall
first be grouped according to the risk groupings set out in Annex II. The full
value of the full-risk items shall be taken into account, 50% of the value of
the medium-risk items and 20% of the medium/low-risk items, while the value of
low-risk items shall be set at zero. The second stage shall be to multiply the
off-balance-sheet values, adjusted as described above, by the weightings
attributable to the relevant counterparties in accordance with the treatment of
asset items prescribed in paragraph 1 and Article 44. In the case of asset sale
and repurchase agreements and outright forward purchases, the weightings shall
be those attaching to the assets in question and not to the counterparties to
the transactions. The portion of unpaid capital subscribed to the European
Investment Fund may be weighted at 20%.
3. The methods set out in Annex III shall be applied
to the off-balance-sheet items listed in Annex IV except for:
–                        
contracts traded on recognised exchanges,
–                        
foreign-exchange contracts (except contracts
concerning gold) with an original maturity of 14 calendar days or less.
Until 31 December 2006, the competent authorities of
Member States may exempt from the application of the methods set out in Annex
III over-the-counter (OTC) contracts cleared by a clearing house where the
latter acts as the legal counterparty and all participants fully collateralise
on a daily basis the exposure they present to the clearing house, thereby
providing a protection covering both the current exposure and the potential
future exposure. The competent authorities must be satisfied that the posted
collateral gives the same level of protection as collateral which complies with
paragraph 1(a)(7) and that the risk of a build-up of the clearing house's
exposures beyond the market value of posted collateral is eliminated. Member
States shall inform the Commission of the use they make of this option.
4. Where off-balance-sheet items carry explicit
guarantees, they shall be weighted as if they had been incurred on behalf of
the guarantor rather than the counterparty. Where the potential exposure
arising from off-balance-sheet transactions is fully and completely secured, to
the satisfaction of the competent authorities, by any of the asset items
recognised as collateral in paragraph 1(a)(7) and (b)(11), weightings of 0% or
20% shall apply depending on the collateral in question.
The Member States may apply a 50% weighting to
off-balance-sheet items which are sureties or guarantees having the character
of credit substitutes and which are fully guaranteed, to the satisfaction of
the competent authorities, by mortgages meeting the conditions set out in
paragraph 1(c)(1), subject to the guarantor having a direct right to such
collateral.
5. Where asset and off-balance-sheet items are given
a lower weighting because of the existence of explicit guarantees or collateral
acceptable to the competent authorities, the lower weighting shall apply only
to that part which is guaranteed or which is fully covered by the collateral.
Article 44
Weighting of claims for regional governments or local
authorities of the Member States
1. Notwithstanding the requirements of Article
43(1)(b), the Member States may fix a weighting of 0% for their own regional
governments and local authorities if there is no difference in risk between
claims on the latter and claims on their central governments because of the
revenue-raising powers of the regional governments and local authorities and
the existence of specific institutional arrangements the effect of which is to
reduce the chances of default by the latter. A zero-weighting fixed in
accordance with these criteria shall apply to claims on and off-balance-sheet
items incurred on behalf of the regional governments and local authorities in
question and claims on others and off-balance-sheet items incurred on behalf of
others and guaranteed by those regional governments and local authorities or
secured, to the satisfaction of the competent authorities concerned, by
collateral in the form of securities issued by those regional governments or
local authorities.
2. The Member States shall notify the Commission if
they believe a zero-weighting to be justified according to the criteria laid down
in paragraph 1. The Commission shall circulate that information. Other Member
States may offer the credit institutions under the supervision of their
competent authorities the possibility of applying a zero-weighting where they
undertake business with the regional governments or local authorities in
question or where they hold claims guaranteed by the latter, including
collateral in the form of securities.
Article 45
Other weighting
1. Without prejudice to Article 44(1) the Member
States may apply a weighting of 20% to asset items which are secured, to the
satisfaction of the competent authorities concerned, by collateral in the form
of securities issued by Zone A regional governments or local authorities, by
deposits placed with Zone A credit institutions other than the lending
institution, or by certificates of deposit or similar instruments issued by
such credit institutions.
2. The Member States may apply a weighting of 10% to
claims on institutions specialising in the inter-bank and public-debt markets
in their home Member States and subject to close supervision by the competent
authorities where those asset items are fully and completely secured, to the
satisfaction of the competent authorities of the home Member States, by a
combination of asset items mentioned in Article 43(1)(a) and (b) recognised by
the latter as constituting adequate collateral.
3. The Member States shall notify the Commission of
any provisions adopted pursuant to paragraphs 1 and 2 and of the grounds for
such provisions. The Commission shall forward that information to the Member
States. The Commission shall periodically examine the implications of those
provisions in order to ensure that they do not result in any distortions of
competition.
Article 46
Administrative bodies and non-commercial undertakings
For the purposes of Article 43 (1)(b), the competent
authorities may include within the concept of regional governments and local
authorities non-commercial administrative bodies responsible to regional
governments or local authorities or authorities which, in the view of the
competent authorities, exercise the same responsibilities as regional and local
authorities.
The competent authorities may also include within the
concept of regional governments and local authorities, churches and religious
communities constituted in the form of a legal person under public law, in so
far as they raise taxes in accordance with legislation conferring on them the
right to do so. However, in this case the option set out in Article 44 shall
not apply.
Article 47
Solvency ratio level
1. Credit institutions shall be required permanently
to maintain the ratio defined in Article 40 at a level of at least 8%.
2. Notwithstanding paragraph 1, the competent
authorities may prescribe higher minimum ratios as they consider appropriate.
3. If the ratio falls below 8% the competent
authorities shall ensure that the credit institution in question takes
appropriate measures to restore the ratio to the agreed minimum as quickly as
possible.
ò new
SECTION 3
Minimum own
funds requirements for credit risk 
Article 76 
Credit institutions shall apply either the
Standardised Approach provided for in Articles 78 to 83 or, if permitted by the
competent authorities in accordance with Article 84, the Internal Ratings Based
Approach provided for in Articles 84 to 89 to calculate their risk-weighted
exposure amounts for the purposes of Article 75(a).
Article 77
“Exposure” for
the purposes of this Section means an asset or off-balance sheet item.
Subsection 1 –
Standardised approach
Article 78
1.                      
Subject to paragraph
2, the exposure value of an asset item shall be its balance-sheet value and the
exposure value of an off-balance sheet item listed in Annex II shall be the
following percentage of its value: 100% if it is a full-risk item, 50% if it is
a medium-risk item, 20% if it is a medium/low-risk item, 0% if its is a
low-risk item. The off-balance sheet items referred to in the first sentence of
this paragraph shall be assigned to risk categories as indicated in Annex II.
2.                      
The exposure value of
a derivative instrument listed in Annex IV shall be determined in accordance
with one of the two methods set out in Annex III with the effects of contracts
of novation and other netting agreements taken into account for the purposes of
those methods in accordance with Annex III.
3.                      
Where an exposure is
subject to funded credit protection, the exposure value applicable to that item
may be modified in accordance with Subsection 3.
4.                      
In the case of a
credit institution using the Financial Collateral Comprehensive Method under
Annex VIII, Part 3, where an exposure takes the form of securities or
commodities sold, posted or lent under a repurchase transaction or under a
securities or commodities lending or borrowing transaction, the exposure value
shall be the value of the securities or commodities determined in accordance
with Article 74(1) and shall be increased by the volatility adjustment
appropriate to such securities or commodities as prescribed in Annex VIII, Part
3, paragraphs 35 to 60.
Article 79
1.           Each
exposure shall be assigned to one of the following exposure classes:
(a)     claims or
contingent claims on central governments or central banks;
(b)     claims or
contingent claims on regional governments or local authorities;
(c)     claims or
contingent claims on administrative bodies and non-commercial undertakings;
(d)     claims or
contingent claims on multilateral development banks;
(e)     claims or
contingent claims on international organisations;
(f)     claims or
contingent claims on institutions;
(g)     claims or
contingent claims on corporates;
(h)     retail
claims or contingent retail claims;
(i)      claims or
contingent claims secured on real estate property;
(j)      past due
items;
(k)     items
belonging to regulatory high-risk categories;
(l)      claims in
the form of covered bonds;
(m)    securitisation
positions;
(n)     short-term
claims on institutions and corporate;
(o)     claims in
the form of collective investment undertakings (CIU);
(p)     other items.
2.           To
be eligible for the retail exposure class referred to in point (h) of paragraph
1, an exposure shall meet the following conditions:
(a)     the exposure
must be either to an individual person or persons, or to a small or medium
sized entity;
(b)     the exposure
must be one of a significant number of exposures with similar characteristics
such that the risks associated with such lending are substantially reduced;
(c)     the total
amount owed to the credit institution and any parent undertaking and its
subsidiaries, including any past due exposure, by the obligor client or group
of connected clients must not, to the knowledge of the credit institution,
exceed EUR 1 million. The credit institution must take reasonable steps to
acquire this knowledge.
Securities shall not
be eligible for the retail exposure class.
Article 80
1.           To
calculate risk-weighted exposure amounts, risk weights shall be applied to all
exposures, unless deducted from own funds, in accordance with the provisions of
Annex VI, Part 1. The application of risk weights shall be based on the
exposure class to which the exposure is assigned and, to the extent specified
in Annex VI, Part 1, its credit quality. Credit quality may be determined by
reference to the credit assessments of External Credit Assessment Institutions
(‘ECAIs’) in accordance with the provisions of Articles 81 to 83 or the credit
assessments of Export Credit Agencies as described in Annex VI, Part 1.
2.           For
the purposes of applying a risk weight, as referred to in paragraph 1, the
exposure value shall be multiplied by the risk weight specified or determined
in accordance with this Subsection.
3.           For
the purposes of calculating risk-weighted exposure amounts for exposures to
institutions, competent authorities shall decide whether to adopt the method
based on the credit quality of the central government of the jurisdiction in
which the credit institution is incorporated or the method based on the credit
quality of the counterparty institution in accordance with Annex VI.
4.           Notwithstanding
paragraph 1, where an exposure is subject to credit protection the risk weight
applicable to that item may be modified in accordance with Subsection 3.
5.           Risk-weighted
exposure amounts for securitised exposures shall be calculated in accordance
with Subsection 4.
6.           Exposures
the calculation of risk-weighted exposure amounts for which is not otherwise
provided for under this Subsection shall be assigned a risk-weight of 100%.
7.           With
the exception of exposures giving rise to liabilities in the form of the items
referred to in points (1) to (8) of Article 57(1), competent authorities may
exempt from the requirements of paragraph 1 of this Article the exposures of a
credit institution to a counterparty which is its parent undertaking, its
subsidiary or a subsidiary of its parent undertaking, provided that the
following conditions are met:
(a)     the
counterparty is an institution or a financial holding company, financial
institution, asset management company or ancillary services undertaking subject
to appropriate prudential requirements;
(b)     the
counterparty is included in the same consolidation as the credit institution on
a full basis;
(c)     the
counterparty is subject to the same risk evaluation, measurement and control
procedures as the credit institution;
(d)     the
counterparty is established in the same Member State as the credit institution;
(e)     there is no
current or foreseen material or legal impediment to the prompt transfer of own
funds or repayment of liabilities from the counterparty to the credit
institution.
In such a case, a
risk weight of 0% shall be applied.
Article 81
1.           An
external credit assessment may be used to determine the risk weight of an
exposure in accordance with Article 80 only if the ECAI which provides it has
been recognised as eligible for those purposes by the competent authorities,
hereinafter “an eligible ECAI’.
2.           Competent
authorities shall recognise an ECAI as eligible for the purposes of Article 80
only if they are satisfied that its assessment methodology complies with the requirements
of objectivity, independence, ongoing review and transparency, and that the
resulting credit assessments meet the requirements of credibility and
transparency. For those purposes; the competent authorities shall take into
account the technical criteria set out in Annex VI, Part 2.
3.           If
an ECAI has been recognised as eligible by the competent authorities of a
Member State, the competent authorities of other Member States may recognise
that ECAI as eligible without carrying out their own evaluation process.
4.           Competent
authorities shall make publicly available an explanation of the recognition
process, and a list of eligible ECAIs.
Article 82
1.           The
competent authorities shall determine, taking into account the technical
criteria set out in Annex VI, Part 2, with which of the credit quality steps
set out in Part 1 of that Annex the relevant credit assessments of an eligible
ECAI are to be associated. Those determinations shall be objective and
consistent.
2.           When
the competent authorities of a Member State have made a determination under
paragraph 1, the competent authorities of other Member States may recognise
that determination without carrying out their own determination process.
Article 83
1.           The
use of ECAI credit assessments for the calculation of a credit institution’s
risk-weighted exposure amounts shall be consistent and in accordance with Annex
VI, Part 3. Credit assessments shall not be used selectively.
2.           Credit
institutions shall use solicited credit assessments. However, with the
permission of the relevant competent authority, they may use unsolicited
assessments.
Subsection 2 -
Internal Ratings Based Approach 
Article 84 
1.           In
accordance with this Subsection, the competent authorities may permit credit institutions
to calculate their risk-weighted exposure amounts using the Internal Ratings
Based Approach (IRB Approach). Explicit permission shall be required in the
case of each credit institution.
2.           Permission
shall be given only if the competent authority is satisfied that the credit
institution's systems for the management and rating of credit risk exposures
are sound and implemented with integrity and, in particular, that they meet the
following standards in accordance with Annex VII, Part 4:
(a)     the credit
institution’s rating systems provide for a meaningful assessment of obligor and
transaction characteristics, a meaningful differentiation of risk and accurate
and consistent quantitative estimates of risk;
(b)     internal
ratings and default and loss estimates used in the calculation of capital
requirements and associated systems and processes play an essential role in the
risk management and decision-making process, and in the credit approval,
internal capital allocation and corporate governance functions of the credit
institution;
(c)     the credit
institution has a credit risk control unit responsible for its rating systems
that is appropriately independent and free from undue influence;
(d)     the credit
institution collects and stores all relevant data to provide effective support
to its credit risk measurement and management process;
(e)     the credit institution
documents its rating systems, the rationale for their design and validates its
rating systems.
Where an EU parent
credit institution and its subsidiaries or an EU parent financial institution
and its subsidiaries use the IRB Approach on a unified basis for the parent and
its subsidiaries, the competent authorities may allow minimum requirements of
Annex VII, Part 4 to be met by the parent and its subsidiaries considered
together.
3.           A
credit institution applying for the use of the IRB Approach shall demonstrate
that it has been using for the IRB exposure classes in question rating systems
that were broadly in line with the minimum requirements set out in this Annex
for internal risk measurement and management purposes for at least three years
prior to its qualification to use the IRB Approach. This requirement shall
apply from the 31 December 2010 onwards.
4.           A
credit institution applying for the use of own estimates of LGDs and/or
conversion factors shall demonstrate that it has been estimating and employing
own estimates of LGDs and/or conversion factors in a manner that was broadly
consistent with the minimum requirements for use of own estimates of those
parameters set out in this Annex for at least three years prior to
qualification to use own estimates of LGDs and/or conversion factors. This
requirement shall apply from the 31 December 2010 onwards.
5.           If
a credit institution ceases to comply with the requirements set out in this Subsection,
it shall either present to the competent authority a plan for a timely return
to compliance or demonstrate that the effect of non-compliance is immaterial.
6.           When
the IRB Approach is intended to be used by the EU parent credit institution and
its subsidiaries, or by the EU parent financial holding company and its
subsidiaries, the competent authorities of the different legal entities shall
co-operate closely as provided for in Articles 129 to 132.
Article 85
1.           Without
prejudice to Article 89, credit institutions and any parent undertaking and its
subsidiaries shall implement the IRB Approach for all exposures.
Subject to the
approval of the competent authorities, implementation may be carried out
sequentially across the different exposure classes, referred to in Article 86,
within the same business unit, across different business units in the same
group or for the use of own estimates of LGDs or conversion factors for the
calculation of risk weights for exposures to corporates, institutions, and
central governments and central banks. 
In the case of the
retail exposure class referred to in Article 86, implementation may be carried
out sequentially across the categories of exposures to which the different
correlations in Annex VII, Part 1, paragraphs 9, 10 and 11 correspond.
2.           Implementation
as referred to in paragraph 1 shall be carried out within a reasonable period
of time to be agreed with the competent authorities. The implementation shall
be carried out subject to strict conditions determined by the competent
authorities. Those conditions shall be designed to ensure that the flexibility
under paragraph 1 is not used selectively with the purpose of achieving reduced
minimum capital requirements in respect of those exposure classes or business
units that are yet to be included in the IRB Approach or in the use of own
estimates of LGDs and conversion factors.
3.           Credit
institutions using the IRB Approach for any
exposure class shall at the same time use the IRB Approach for the equity
exposure class.
4.           Subject
to paragraphs 1 to 3 and Article 89, credit institutions which have obtained
permission under Article 84 to use the IRB Approach shall not revert to the use
of Subsection 1 for the calculation of risk-weighted exposure amounts except
for demonstrated good cause and subject to the approval of the competent
authorities.
5.           Subject
to paragraphs 1 and 2 and Article 89, credit institutions which have obtained
permission under Article 87(9) to use own estimates of LGDs and conversion
factors, shall not revert to the use of LGD values and conversion factors referred
to in Article 87(8) except for demonstrated good cause and subject to the
approval of the competent authorities.
Article 86
1.         Each exposure shall be assigned to one of the
following exposure classes:
(a)     claims or
contingent claims on central governments and central banks;
(b)     claims or
contingent claims on institutions;
(c)     claims or
contingent claims on corporates;
(d)     retail
claims or contingent retail claims;
(e)     equity
claims;
(f)     securitisation
positions;
(g)     other non
credit-obligation assets.
2.         The
following exposures shall be treated as exposures to central governments and
central banks:
(a)     exposures to
regional governments and local authorities which are treated as exposures to
central governments under Subsection 1;
(b)     exposures to
Multilateral Development Banks and International Organisations which attract a
risk weight of 0% under Subsection 1.
3.         The
following exposures shall be treated as exposures to institutions:
(a)     exposures to
regional governments and local authorities which are not treated as exposures
to central governments under Subsection 1;
(b)     exposures to
Public Sector Entities which are treated as exposures to institutions under the
Subsection 1;
(c)     exposures to
Multilateral Development Banks which do not attract a 0% risk weight under Subsection 1.

4.         To be
eligible for the retail exposure class referred to in point (d) of paragraph 1,
exposures shall meet the following criteria:
(a)     they shall
be either to an individual person or persons, or to a small or medium sized entity,
provided in the latter case that the total amount owed to the credit
institution and to any parent undertaking and its subsidiaries by the obligor
client or group of connected clients does not, to the knowledge of the credit
institution, which must have taken reasonable steps to confirm the situation,
exceed EUR 1 million;
(b)     they are
treated by the credit institution in its risk management consistently over time
and in a similar manner;
(c)     they are not
managed individually in a way comparable to exposures in the corporate exposure
class;
(d)     they each
represent one of a significant number of similarly managed exposures.
5.         The
following exposures shall be classed as equity exposures:
(a)     non-debt
exposures conveying a subordinated, residual claim on the assets or income of
the issuer;
(b)     debt
exposures the economic substance of which is similar to the exposures specified
in point (a).
6.         Within
the corporate exposure class, credit institutions shall separately identify as
specialised lending exposures, exposures which possess the following
characteristics: 
(a)     the exposure
is to an entity which was created specifically to finance and/or operate
physical assets;
(b)     the
contractual arrangements give the lender a substantial degree of control over the
assets and the income that they generate; 
(c)     the primary
source of repayment of the obligation is the income generated by the assets
being financed, rather than the independent capacity of a broader commercial
enterprise. 
7.         Any credit obligation
not assigned to the exposure classes referred to in points (a), (b) and (d) to
(f) of paragraph 1 shall be assigned to the exposure class
referred to in point (c) of that paragraph.
8.         The
exposure class referred to in point (g) of paragraph 1 shall include the
residual value of leased properties, if not covered elsewhere in this
Directive.
9.         The
methodology used by the credit institution for assigning exposures to different
exposure classes shall be appropriate and consistent over time.
Article 87
1.         The
risk-weighted exposure amounts for credit risk for exposures belonging to one
of the exposure classes referred to in points (a) to (e) or (g) of Article
86(1) shall, unless deducted from own funds, be calculated in accordance with
Annex VII, Part 1, paragraphs 1 to 25.
2.         The
risk-weighted exposure amounts for dilution risk for purchased receivables
shall be calculated according to Annex VII, Part 1, paragraph 26. 
3.         The
calculation of risk-weighted exposure amounts for credit risk and dilution risk
shall be based on the relevant parameters associated with the exposure in
question. These shall include probability of default (PD), loss given default
(LGD), maturity (M) and the exposure value of the exposure. PD and LGD may be
considered separately or jointly, in accordance with Annex VII, Part 2.
4.         Notwithstanding
paragraph 3, the calculation of risk-weighted exposure amounts for credit risk
for all exposures belonging to the exposure class referred to in point (e) of
Article 86(1) shall be calculated in accordance with Annex VII, Part 1,
paragraphs 15 to 24 subject to approval of competent authorities. Competent
authorities shall only allow a credit institution to use the approach set out
in Annex VII, Part 1, paragraphs 24 to 25, if the credit institution meets the
minimum requirements Annex VII, Part 4, paragraphs 114 to 122.
5.         Notwithstanding
paragraph 3, the calculation of risk weighted exposure amounts for credit risk
for specialised lending exposures may be calculated in accordance with Annex
VII, Part 1, paragraph 5. Competent authorities shall publish guidance on
how institutions should assign risk weights to specialised lending exposures
under Annex VII, Part 1, paragraph 5 and shall approve institutions
assignment methodologies.
6.         For
exposures belonging to the exposure classes referred to in points (a) to (d) of
Article 86(1), credit institutions shall provide their own estimates of PDs in
accordance with Article 84 and Annex VII, Part 4.
7.         For
exposures belonging to the exposure class referred to in point (d) of Article
86(1), credit institutions shall provide own estimates of LGDs and conversion
factors in accordance with Article 84 and Annex VII, Part 4.
8.         For
exposures belonging to the exposure classes referred to in points (a) to (c) of
Article 86(1), credit institutions shall apply the LGD values set out in Annex
VII, Part 2, paragraph 8, and the conversion factors set out in Annex VII,
Part 3, paragraph 11 points (a) to (c).
9.         Notwithstanding
paragraph 8, for all exposures belonging to the exposure classes referred to in
points (a) to (c) of Article 86(1), competent authorities may permit credit
institutions to use own estimates of LGDs and conversion factors in accordance
with Article 84 and Annex VII, Part 4.
10.       The
risk-weighted exposure amounts for securitised exposures and for exposures
belonging to the exposure class referred to in point (f) of Article 86(1) shall
be calculated in accordance with Subsection 4.
11.       Where exposures to a collective
investment undertaking (CIU) meet the criteria set out in Annex VI, Part 1, paragraphs 74 to 75 and
the credit institution is
aware of all 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. 
Where the credit institution does not meet the conditions for using the methods set out in
this Subsection, risk weighted exposure amounts and
expected loss amounts shall be calculated in accordance with the following
approaches:
(a)     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, paragraphs 17 to 19. If, for those purposes; 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.
(b)     for all other underlying exposures, the approach set out in Subsection 1, subject to the following
modifications:
(i)      the exposures
are assigned to the appropriate exposure class and
attributed the risk weight of the credit quality step immediately
above the credit quality step that would normally be assigned to the
exposure;
(ii)     exposures
assigned to the higher credit quality steps, to which a risk weight of
150% would normally be attributed, are assigned a risk weight of 200%.
12.       Where exposures to a CIU do not
meet the criteria set out in Annex VI, Part 1, paragraphs
74 to 75, or the credit
institution is not aware of all of the underlying
exposures of the CIU, the credit institution shall look through to the underlying exposures and
calculate risk-weighted exposure amounts and expected loss amounts in accordance with the approach set out in Annex VII, Part 1,
paragraphs 17 to 19. If, for
those purposes, 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. For these purposes, non-equity exposures are assigned to one of the classes (private equity,
exchange traded equity or other equity) set out in Annex VII, Part 1,
paragraph 17 and unknown exposures are assigned to other equity class. 
Alternatively to
the method described above, credit institutions may rely on a third party to
calculate and report the average risk weighted
exposure amounts based on the CIUs underling exposures and calculated in accordance with the following approaches, provided that the
correctness of the calculation and the report is adequately ensured:
(a)     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, paragraphs 17 to 19. If, for those purposes, 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.
(b)     for all other underlying exposures, the approach set out in Subsection 1, subject to the following
modifications:
(i)      the
exposures are assigned to the appropriate exposure class and
attributed the risk weight of the credit quality step immediately
above the credit quality step that would normally be assigned to the
exposure;
(ii)     exposures assigned to
the higher credit quality steps, to which a risk weight of 150% would
normally be attributed, are assigned a risk
weight of 200%.
Article 88
1.         The
expected loss amounts for exposures belonging to one of the exposure classes
referred to in points (a) to (e) of Article 86(1) shall be calculated in
accordance with the methods set out in Annex VII, Part 1, paragraphs 27 to
33.
2.         The
calculation of expected loss amounts in accordance with Annex VII, Part 1,
paragraphs 27 to 33 shall be based on the same input figures of PD, LGD and the
exposure value for each exposure as being used for the calculation of
risk-weighted exposure amounts in accordance with Article 87.
3.         The
expected loss amounts for securitised exposures shall be calculated in accordance
with Subsection 4. 
4.         The
expected loss amount for exposures belonging to the exposure class referred to in
point (g) of Article 86(1) shall be zero.
5.         The
expected loss amounts for dilution risk of purchased receivables shall be calculated
in accordance with the methods set out in Annex VII, Part 1, paragraph 33.
6.         The
expected loss amounts for exposures referred to in Article 87(11) and (12)
shall be calculated in accordance with the methods set out in Annex VII, Part
1, paragraphs 27 to 33.
Article 89
1.         Subject
to the approval of the competent authorities, credit institutions permitted to
use the IRB Approach in the calculation of risk-weighted exposure amounts and
expected loss amounts for one or more exposure classes may apply Subsection 1
for the following:
(a)     the exposure
class referred to in point (a) of Article 86(1), where the number of material
counterparties is limited and it would be unduly burdensome for the credit
institution to implement a rating system for these counterparties;
(b)     the exposure
class referred to in point (b) of Article 86(1), where the number of material
counterparties is limited and it would be unduly burdensome for the credit
institution to implement a rating system for these counterparties;
(c)     exposures in
non-significant business units as well as exposure classes that are immaterial
in terms of size and perceived risk profile; 
(d)     exposures to
central governments of the home Member State and to their regional governments,
local authorities and administrative bodies, provided that:
(i)      there is no
difference in risk between the exposures to that central government and those
other exposures because of specific public arrangements;
(ii)     exposures
to the central government are associated with credit quality assessment step 1
under Subsection 1.
(e)     exposures of
a credit institution to a counterparty which is its parent undertaking, its
subsidiary or a subsidiary of its parent undertaking provided that the
counterparty is an institution or a financial holding company, financial
institution, asset management company or ancillary services undertaking subject
to appropriate prudential requirements.
f)       equity
exposures to entities whose credit obligations qualify for a zero risk weight
under Subsection 1 (including those publicly sponsored entities where a zero
weight can be applied).
g)      equity
exposures incurred under legislated programmes to promote specified sectors of
the economy that provide significant subsidies for the investment to the credit
institution and involve some form of government oversight and restrictions on
the equity investments. This exclusion is limited to an aggregate of 10% of
original own funds plus additional own funds.
This paragraph shall
not prevent the competent authorities of other Member State to allow the
application of the rules of Subsection 1 for equity exposures which have been
allowed for this treatment in other Member States.
2.         For
the purposes of point (c), the equity exposure class of a credit institution
shall be considered material if their aggregate value, excluding equity
exposures incurred under legislative programmes as referred to in point (g), exceeds,
on average over the preceding year, 10% of the credit institution’s own funds.
If the number of those equity exposures is less than 10 individual holdings,
that threshold shall be 5% of the credit institution’s own funds.
Subsection 3 - Credit risk mitigation 
Article 90
For the purposes
of this Subsection, ‘lending credit institution’ shall mean the credit
institution which has the exposure in question, whether or not deriving from a
loan.
Article 91
Credit institutions using the Standardised Approach
under Articles 78 to 83 or using the IRB Approach under Articles 84 to 89, but
not using their own estimates of LGD and conversion factors under Articles 87
and 88, may recognise credit risk mitigation in accordance with this Subsection
in the calculation of risk-weighted exposure amounts for the purposes of
Article 75 point (a) or as relevant expected loss amounts for the purposes of
the calculation referred to in point (q) of Article 57, and Article 63(3).
Article 92
1.           The
technique used to provide the credit protection together with the actions and
steps taken and procedures and policies implemented by the lending credit
institution shall be such as to result in credit protection arrangements which
are legally effective and enforceable in all relevant jurisdictions.
2.           The
lending credit institution shall take all appropriate steps to ensure the
effectiveness of the credit protection arrangement and to address related
risks.
3.           In
the case of funded credit protection, to be eligible for recognition the assets
relied upon must be sufficiently liquid and their value over time sufficiently
stable to provide appropriate certainty as to the credit protection achieved
having regard to the approach used to calculate risk-weighted exposure amounts
and to the degree of recognition allowed. Eligibility shall be limited to the
assets set out in Annex VIII, Part 1. 
4.           In
the case of funded credit protection, the lending credit institution shall have
the right to liquidate or retain, in a timely manner, the assets from which the
protection derives in the event of the default, insolvency or bankruptcy - or
other credit event set out in the transaction documentation - and, where
applicable, of the custodian holding the collateral. The degree of correlation
between the value of the assets relied upon for protection and the credit
quality of the borrower must not be undue. 
5.           In
the case of unfunded credit protection, to be eligible for recognition the
party giving the undertaking must be sufficiently reliable, and the protection
agreement legally effective in the relevant jurisdictions, to provide
appropriate certainty as to the credit protection achieved having regard to the
approach used to calculate risk-weighted exposure amounts and to the degree of
recognition allowed. Eligibility shall be limited to the protection providers
and types of protection agreement set out in Annex VIII, Part 1.
6.           The
minimum requirements set out in Annex VIII, Part 2 shall be complied with.
Article 93
1.           Where
the requirements of Article 92 are met the calculation of risk-weighted
exposure amounts, and, as relevant, expected loss amounts, may be modified in
accordance with Annex VIII, Parts 3 to 6.
2.           No
exposure in respect of which credit risk mitigation is obtained shall produce a
higher risk-weighted exposure amount or expected loss amount than an otherwise
identical exposure in respect of which there is no credit risk mitigation. 
3.           Where
the risk-weighted exposure amount already takes account of credit protection
under Articles 78 to 83 or Articles 84 to 93, as relevant, the calculation of
the credit protection shall not be further recognised under this Subsection.
Subsection 4 -
Securitisation
Article 94
Where a credit institution uses the Standardised
Approach set out in Subsection 1 for the calculation of risk-weighted exposure
amounts for the exposure class to which the securitised exposures would be
assigned under Article 79, it shall calculate the risk-weighted exposure amount
for a securitisation position in accordance with Annex IX, Part 4, paragraphs 6
to 35. 
In all other cases, it shall calculate the
risk-weighted exposure amount in accordance with Annex IX, Part 4, paragraphs
36 to 74.
Article 95
1.         Where
significant credit risk associated with securitised exposures has been
transferred from the originator credit institution in accordance with the terms
of Annex IX, Part 2, that credit institution may:
(a)     in the case
of a traditional securitisation, exclude from its calculation of risk-weighted
exposure amounts, and, as relevant, expected loss amounts, the exposures which
it has securitised; 
(b)     in the case
of a synthetic securitisation, calculate risk-weighted exposure amounts, and,
as relevant, expected loss amounts, in respect of the securitised exposures in
accordance with Annex IX, part 2.
2.         Where paragraph
1 applies, the originator credit institution shall calculate the risk-weighted
exposure amounts prescribed in Annex IX for the positions that it may hold in
the securitisation. 
Where the
originator credit institution fails to transfer significant credit risk in accordance
with paragraph 1, it need not calculate risk-weighted exposure amounts for any
positions it may have in the securitisation in question.
Article 96
1.         To
calculate the risk-weighted exposure amount of a securitisation position, risk
weights shall be applied to the exposure value of the position in accordance
with Annex IX, based on the credit quality of the position, which may be
determined by reference to an ECAI credit assessment or otherwise, as set out
in Annex IX. 
2.         Where
there is an exposure to different tranches in a securitisation, the exposure to
each tranche shall be considered a separate securitisation position. The
providers of credit protection to securitisation positions shall be considered
to hold positions in the securitisation. Securitisation positions shall include
exposures to a securitisation arising from interest rate or currency derivative
contracts.
3.         Where
a securitisation position is subject to funded or unfunded credit protection
the risk-weight to be applied to that position may be modified in accordance
with Articles 90 to 93, read in conjunction with Annex IX.
4.         Subject
to point (r) of Article 57 and Article 66(2), the risk-weighted exposure amount
shall be included in the credit institution’s total of risk-weighted exposure
amounts for the purposes of Article 75(a).
Article 97
1.         An
ECAI credit assessment may be used to determine the risk weight of a
securitisation position in accordance with Article 96 only if the ECAI has been
recognised as eligible by the competent authorities for this purpose,
hereinafter “an eligible ECAI”. 
2.         The
competent authorities shall recognise an ECAI as eligible for the purposes of
paragraph 1 only if they are satisfied as to its compliance with the
requirements laid down in Article 81, taking into account the technical
criteria in Annex VI, Part 2, and that it has a demonstrated ability in the
area of securitisation, which may be evidenced by a strong market acceptance.
3.         If an
ECAI has been recognised as eligible by the competent authorities of a Member
State for the purposes of paragraph 1, the competent authorities of other
Member States may recognise that ECAI as eligible for those purposes without
carrying out their own evaluation process.
4.         The
competent authorities shall make publicly available an explanation of the
recognition process and a list of eligible ECAIs. 
5.         To be
used for this purpose a credit assessment of an eligible ECAI shall comply with
the principles of credibility and transparency as elaborated in Annex IX, Part
3. 
Article 98
1.         For
the purposes of applying risk weights to securitisation positions, the
competent authorities shall determine with which of the credit quality steps
set out in Annex IX the relevant credit assessments of an eligible ECAI are to
be associated. Those determinations shall be objective and consistent.
2.         When the
competent authorities of a Member State have made a determination under
paragraph 1, the competent authorities of other Member States may recognise
that determination without carrying out their own determination process.
Article 99
The use of ECAI credit assessments for the
calculation of a credit institution’s risk-weighted exposure amounts under
Article 96 shall be consistent and in accordance with Annex IX, Part 3. Credit
assessments shall not be used selectively.
Article 100
1.           Where
there is a securitisation of revolving exposures subject to an early
amortisation provision, the originator credit institution or sponsor credit
institution shall calculate, in accordance with Annex IX, an additional
risk-weighted exposure amount in respect of the risk that the levels of credit
risk to which it is exposed may increase following the operation of the early
amortisation provision.
2.           For
those purposes, a revolving exposure shall be an exposure whereby a customer
may vary the amount drawn within an agreed limit, and an early amortisation
provision shall be a contractual clause which requires, on the occurrence of
defined events, investors’ positions to be redeemed before the originally
stated maturity of the securities issued.
3.           In
the case of securitisations subjects to an early amortisation provision of
retail exposures which are uncommitted and unconditionally cancellable without
prior notice, where the early amortisation is triggered by a quantitative value
in respect of something other than the three months average excess spread, the
competent authorities may apply a treatment which approximates closely to that
prescribed in Annex IX, Part 4, paragraphs 27 to 30 for determining the
conversion figure indicated.
4.           Where
a competent authority intends to apply a treatment in accordance with paragraph
3 in respect of a particular securitisation, it shall first of all inform the
relevant competent authorities of all the other Member States. Before the
application of such a treatment becomes part of the general policy approach of
the competent authority to securitisations containing early amortisation
clauses of the type in question, the competent authority shall consult the
relevant competent authorities of all the other member States and take into
consideration the views expressed. The views expressed in such consultation and
the treatment adopted shall be publicly disclosed by the competent authority in
question.
Article 101
1.         An
originator credit institution or sponsor credit institution shall not, with a
view to reducing potential or actual losses to investors, provide support to
the securitisation beyond its contractual obligations.
2.         If an
originator credit institution or a sponsor credit institution fails to comply
with paragraph 1 in respect of a securitisation, the competent authority shall
require it at a minimum, to hold capital against all of the securitised
exposures as if they had not been securitised. The credit institution shall
disclose publicly that it has provided non-contractual support and the
regulatory capital impact of having done so.
Section 4
Minimum own
funds requirements for operational risk
Article 102
1.         Competent
authorities shall require credit institutions to hold own funds against operational
risk in accordance with the approaches set out in Articles 103, 104 and 105.
2.         Without prejudice to paragraph 4, credit
institutions that use the approach set out in Article 104 shall
not revert to the use of the approach set out in Article 103, except for
demonstrated good cause and subject to approval by the competent authorities.
3.         Without
prejudice to paragraph 4, credit institutions that use the approach set out in
Article 105 shall not revert to the use of the approaches set out in Articles
103 or 104 except for demonstrated good cause and subject to approval by the
competent authorities.
4.         Competent
authorities may allow credit institutions to use a combination of approaches in
accordance with Annex X, Part 4.
Article 103
The capital
requirement for operational risk under the Basic Indicator Approach shall be a
certain percentage of a relevant indicator, in accordance with the parameters
set out in Annex X, Part 1.
Article 104
1.           Under
the Standardised Approach, credit institutions shall divide their activities
into a number of business lines as set out in Annex X, Part 2.
2.           For
each business line, credit institutions shall calculate a capital requirement
for operational risk as a certain percentage of a relevant indicator, in
accordance with the parameters set out in Annex X, Part 2.
3.           For
certain business lines, the competent authorities may under certain conditions
authorise a credit institution to use an alternative indicator for determining
its capital requirement for operational risk.
4.           The
capital requirement for operational risk under the Standardised Approach shall
be the sum of the capital requirements for operational risk across all
individual business lines.
5.           The
parameters for the Standardised Approach are in Annex X, Part 2.
6.           To
qualify for use of the Standardised Approach, credit institutions shall meet
the criteria set out in Annex X, Part 2.
Article 105
1.         Credit
institutions may use Advanced Measurement Approaches based on their own
internal risk measurement systems, provided that the competent authority
expressly approves the use of the models concerned for calculating the own
funds requirement.
2.         Credit
institutions must satisfy their competent authorities that they meet the
qualifying criteria set out in Annex X, Part 3.
3.         When
an Advanced Measurement Approach is intended to be used by an EU parent credit
institution and its subsidiaries or by the subsidiaries of an EU parent
financial holding company, the competent authorities of the different legal
entities shall cooperate closely as provided for in Articles 128 to 132. The
application shall include the elements listed in Annex X, Part 3.
4.         Where
an EU parent credit institution and its subsidiaries or an EU parent financial
institution and its subsidiaries use an Advanced Measurement Approach on a
unified basis for the parent and its subsidiaries, the competent authorities
may allow the qualifying criteria set out in Annex X, Part 3 to be met by
the parent and its subsidiaries considered together.
ê 2000/12/EC
Section 35
Large exposures
ê 2000/12/EC Art
1(24) (adapted)
ð new
Article 106
1.           «eExposures», for the purposes of applying Articles 48, 49 and 50 Ö this
Section Õ , shall mean the assets Ö any asset
Õ or off-balance-sheet
items referred to in Article
43 and in Annexes II and IV thereto Ö Section 3,
Subsection 1 Õ , without
application of the Ö risk Õ weightings or degrees of risk there provided for;.
the risks Ö Exposures
arising from the items Õ referred to in
Annex IV must Ö shall Õ be calculated
in accordance with one of the methods set out in Annex III;.
without application of
the weightings for counterparty risk; all Ö All Õ elements
entirely covered by own funds may, with the agreement of the competent
authorities, be excluded from the determination of exposures, provided that
such own funds are not included in the ð credit institution’s own funds ï calculation of the solvency ratio
ð for the purposes of Article 75ï or ð in the calculation ï of other monitoring ratios provided for in this Directive and in
other Community acts.;
2.           eExposures
shall not include either of the following:
(a)     in the case of foreign exchange transactions, exposures
incurred in the ordinary course of settlement during the 48 hours following
payment, or Ö ; Õ
(b)     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;.
ê 2000/12/EC
Art. 1(1) 3rd subparagraph (adapted)
Article 107
For the purposes of applying the supervision and control of large exposures Ö this
Section Õ , shall be considered as a credit institution, Ö the term
“credit institution” shall cover the following: Õ
(a)          a credit institution according to
the first paragraph, including Ö its Õ branches of a credit institution in third countries; and
(b)          any private or public undertaking, including its branches,
which corresponds to Ö meets Õ the definition
in the first paragraph of “credit institution” and
which has been authorised in a third country;.
ê 2000/12/EC
Art. 48(1) (adapted)
ð new
Article 108
Reporting of
large exposures
1.         A credit institution's exposure to a client or group of
connected clients shall be considered a large exposure where its value is equal
to or exceeds 10% of its own funds.
ð For those purposes, Section 1 may be
read without the inclusion of point (q) of Article 57 and Article 63(3) and
shall be read without the inclusion of Article 66(2). ï
ê 2000/12/EC
Art 48 (4) 1st paragraph (adapted)
Article 109
The competent authorities shall require
that every credit institution have sound administrative and accounting
procedures and adequate internal control mechanisms for the purposes of
identifying and recording all large exposures and subsequent changes to them, Ö in
accordance with Õ as defined and required by this Directive, and for that
of monitoring those exposures in the light of each credit institution's own
exposure policies.
ê 2000/12/EC
Art. 48(2) (adapted)
Article 110
Reporting of
large exposures
21.       A
credit institution shall report every large exposure within
the meaning of paragraph 1to the competent authorities.
Member States shall provide that reporting
is to be carried out, at their discretion, in accordance with one of the
following two methods:
(a)          reporting of all large exposures at least once a year,
combined with reporting during the year of all new large exposures and any
increases in existing large exposures of at least 20% with respect to the
previous communication;
(b)          reporting of all large exposures at least four times a
year.
ê 2000/12/EC
Art. 48.3 (adapted)
ð new
3.2 ð Except in the case of credit
institutions relying on Article 114 for the recognition of collateral in
calculating the value of exposures for the purposes of paragraphs 1, 2 and 3 of
Article 111, ï eExposures exempted under Article 49 Ö 111 Õ (7)ð (3) ï(a), (b), (c), (d), (f), (g) and (h) need not,
however, be reported as laid down in paragraph ð 1 ï 2 and the reporting frequency
laid down in ð point (b) of ï the
second indent to paragraph ð 1 ï 2 may be reduced to twice a
year for the exposures referred to in Article 49 Ö 111 Õ (7)ð (3) ï(e) and (i), and also in paragraphs 8, 9 and 10
ðArticles 115 and 116 ï.
ê 2000/12/EC
Art. 48(4) 2nd subparagraph (adapted)
Where a credit institution invokes
paragraph Ö 2 Õ 3, it shall keep a record of the grounds advanced for at
least one year after the event giving rise to the dispensation, so that the
competent authorities may establish whether it is justified.
ò new
3. Member States may require the reporting of
concentrated exposures to the issuers of collateral taken by the credit institution.
ê 2000/12/EC
Art 49(1) to (5) (adapted)
è1 2004/xx/EC Art. 3.7
ð new
Article 111
Limits on
large exposures
1.           A credit institution may
not incur an exposure to a client or group of connected clients the value of
which exceed 25% of its own funds ð . For these purposes and the
purposes of the other provisions of this Article, Section 1 may be read without
taking into account point (q) of Article 57 and Article 63(3) and shall be read
without the inclusion of Article 66(2).ï
2.           Where that client or group
of connected clients is the parent undertaking or subsidiary of the credit
institution and/or one or more subsidiaries of that parent undertaking, the
percentage laid down in paragraph 1 shall be reduced to 20%. Member States may,
however, exempt the exposures incurred to such clients from the 20% limit if
they provide for specific monitoring of such exposures by other measures or
procedures. They shall inform the Commission and the è1 European Banking Committee ç of the content
of such measures or procedures.
3.           A credit institution may
not incur large exposures which in total exceed 800% of its own funds.
ê 2000/12/EC
Art. 49.4 (adapted)
4. Member States may
impose limits more stringent than those laid down in paragraphs 1, 2 and 3.
ê 2000/12/EC
Art 49(1) to (5)
54.         A credit institution shall at all times comply with the
limits laid down in paragraphs 1, 2 and 3 in respect of its exposures. If in an
exceptional case exposures exceed those limits, that fact must 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 limits.
ò new
Article 112
1.           For
the purposes of Articles 113 to 117, ‘guarantee’ shall include credit
derivatives recognised under Articles 90 to 93 other than credit linked notes.
2.           Subject
to paragraph 3, where, under Articles 113 to 117, the recognition of funded or
unfunded credit protection may be permitted, this shall be subject to
compliance with the eligibility requirements and other minimum requirements,
set out under Articles 90 to 93 for the purposes of calculating risk-weighted
exposure amounts under Articles 78 to 83.
3.           Where
a credit institution relies upon Article 114(2), the recognition of credit
protection shall be subject to the relevant requirements under Articles 84 to
89.
ê 2000/12/EC
Art 49(4) & (6) adapted (adapted)
Article 113
1.         Member States may impose limits more stringent than those
laid down in Article Ö 111 Õ 75 paragraphs 1, 2 and 3.
62.       Member States may fully or partially exempt from the
application of Article Ö 111 Õ 75 paragraphs 1, 2 and 3
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.
ê 2000/12/EC
Art 49(7) (adapted)
ð new
73.
Member States may fully or partially exempt the following exposures from the
application of paragraphs (1), (2) and (3) Ö Article
111 Õ:
(a)              
asset items constituting claims on Zone A
central governments or central banks; ð central governments or central banks
which would unsecured receive a 0% risk weighting under Articles 78 to 83; ï
(b)              
asset items constituting claims on the European Communitiesð international organisations or
multilateral development banks which would unsecured receive a 0% risk weight
under Articles 78 to 83; ï
(c)              
asset items constituting claims carrying the
explicit guarantees of Zone A central governments or central banks or of the European
Communities ð central governments, central banks,
international organisations or multilateral development banks, where unsecured
claims on the entity providing the guarantee would achieve a 0% risk weight
under Articles 78 to 83; ï
(d)             
other exposures attributable to, or guaranteed
by, Zone A central
governments or central banks or the European Communities ð central governments, central banks,
international organisations, or multilateral development banks where unsecured
claims on the entity to which the exposure is attributable or by which it is
guaranteed would receive a 0% risk weight under Articles 78 to 83ï;
(e)              
asset items constituting claims on and other
exposures to Zone
B central governments or central banks ð not mentioned in paragraph a)
above ï which are denominated and, where applicable, funded in the national
currencies of the borrowers;
(f)               
asset items and other exposures secured, to the
satisfaction of the competent authorities, by collateral in the form of ð debt securities issued by ïZone A central governments or central banks, securities, or securities issued by the European
Communities or by Member State regional or local authorities for which Article 44
lays down a zero weighting for solvency purposes ð international organisations,
multilateral development banks or Member States’ regional governments or local
authorities, which securities constitute claims on their issuer which would
receive a 0% risk weighting under Articles 78 to 83ï;
(g)              
asset items and other exposures secured, to the
satisfaction of the competent authorities, by collateral in the form of cash
deposits placed with the lending Ö credit Õ institution
or with a credit institution which is the parent undertaking or a subsidiary of
the lending institution;
(h)              
asset items and other exposures secured, to the
satisfaction of the competent authorities, by collateral in the form of
certificates of deposit issued by the lending Ö credit Õ institution or
by a credit institution which is the parent undertaking or a subsidiary of the
lending Ö credit Õ institution
and lodged with either of them;
(i)                
asset items constituting claims on and other
exposures to credit
institutions, with a maturity of one year or less, but not constituting such
institutions' own funds;
(j)                
asset items constituting claims on and other
exposures to those institutions which are not credit institutions but which
fulfil the conditions referred to in Article 45(2)ð Annex VI, Part 1, paragraph 82 ï, with a maturity of one year or less, and secured in accordance
with the same paragraph;
(k)              
bills of trade and other similar bills, with a
maturity of one year or less, bearing the signatures of other credit
institutions;
(l)                
debt securities as defined in Article 22(4) of Directive 85/611/EEC;ð covered bonds as defined in Articles
78 to 83;ï
ê 2000/12/EC
(adapted)
(m)            
pending subsequent coordination, holdings in the
insurance companies referred to in Article 51(3) Ö 122(1) Õ up to 40% of
the own funds of the credit institution acquiring such a holding;
(n)              
asset items constituting claims on regional or
central credit institutions with which the lending Ö credit Õ 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;
ê 2000/12/EC
(o)              
exposures secured, to the satisfaction of the
competent authorities, by collateral in the form of securities other than those
referred to in (f); provided that those securities
are not issued by the credit institution itself, its parent company or one of
their subsidiaries, or by the client or group of connected clients in question.
The securities used as collateral must be valued at market price, have a value
that exceeds the exposures guaranteed and be either traded on a stock exchange
or effectively negotiable and regularly quoted on a market operated under the
auspices of recognised professional operators and allowing, to the satisfaction
of the competent authorities of the Member State of origin of the credit
institution, for the establishment of an objective price such that the excess
value of the securities may be verified at any time. The excess value required
shall be 100% it shall, however, be 150% in the case of shares and 50% in the
case of debt securities issued by credit institutions, Member State regional or
local authorities other than those referred to in Article 44, and in the case
of debt securities issued by the EIB and multilateral development banks
Securities used as collateral may not constitute credit institutions' own
funds;
ê 2000/12/EC
(p)              
loans secured, to the satisfaction of the
competent authorities, 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 and leasing
transactions 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, in all cases up to 50% of the value of the residential property concerned; 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. For the purposes of this point
residential property shall mean a residence to be occupied or let by the
borrower;
ò new
(q)              
the following, where
they would receive a 50% risk weight under Articles 78 to 83, and only up to
50% of the value of the property concerned:
(i)      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; 
(ii)     exposures
related to property leasing transactions concerning offices or other commercial
premises;
For the purposes of point
(ii), until 31 December 2011, the competent authorities of each Member State may allow credit institutions to recognise 100% of the value of the property
concerned. At the end of this period, this treatment shall be reviewed. Member
states shall inform the Commission of the use they make of this preferential
treatment.
ê 2000/12/EC
(adapted)
(qr)    50% of the medium/low-risk
off-balance-sheet items referred to in Annex II;
(rs)     subject to the competent authorities'
agreement, guarantees other than loan guarantees which have a legal or
regulatory basis and are given for their members by mutual guarantee schemes
possessing the status of credit institutions, subject to a weighting of 20% of
their amount.
Member States shall
inform the Commission of the use they make of this option in order to ensure
that it does not result in distortions of competition;
(st)     the low-risk off-balance-sheet items
referred to in Annex II, to the extent that an agreement has been concluded
with the client or group of connected clients under which the exposure may be
incurred only if it has been ascertained that it will not cause the limits
applicable under Ö Article
111(1) to (3) Õ paragraphs 1, 2 and 3 to be exceeded.
ò new
Cash received under a
credit linked note issued by the credit institution and loans and deposits of a
counterparty to or with the credit institution which are subject to an
on-balance sheet netting agreement recognised under Articles 90 to 93 shall be
deemed to fall under point (g).
ê 2000/12/EC
Art 49(o) 2nd & 3rd sentences (adapted)
ð new
Ö For the
purposes of point (o), the Õ The securities used as collateral must be valued at
market price, have a value that exceeds the exposures guaranteed and be either
traded on a stock exchange or effectively negotiable and regularly quoted on a
market operated under the auspices of recognised professional operators and
allowing, to the satisfaction of the competent authorities of the Member State of origin of the credit institution, for the establishment of an objective
price such that the excess value of the securities may be verified at any time.
The excess value required shall be 100%. iIt shall, however, be 150% in the case of
shares and 50% in the case of debt securities issued by credit institutions, Member State regional Ö governments Õ or local
authorities other than those referred to in Article 44
Ö sub-point
(f) Õ, and in the
case of debt securities issued by the EIB and
multilateral development banks ð other than
those receiving a 0% risk weighting under the Standardised Approach. Where there is a mismatch between the maturity of
the exposure and the maturity of the credit protection, the collateral shall
not be recognised. ï Ö Securities
used as collateral may not constitute credit institutions' own funds. Õ
Ö For the
purposes of point (p) , the Õ 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. For the purposes of this point Ö (p), Õ residential
property shall mean a residence to be occupied or let by the borrower;.
Member States shall inform the Commission of
any exemption granted Ö under point
(s) Õ the use they make of this optionin order to ensure that
it does not result in distortion of competition;.
ò new
Article 114
1.         Subject
to paragraph 3, for the purposes of calculating the value of exposures for the
purposes of Article 111(1) to (3) Member States may, in respect of credit
institutions using the Financial Collateral (Comprehensive Method) under
Articles 90 to 93, in the alternative to availing of the full or partial
exemptions permitted under points (f), (g), (h), and (o) of Article 113(3),
permit such credit institutions to use a value lower than the value of the
exposure, but no lower than the total of the fully-adjusted exposure values of
their exposures to the client or group of connected clients.
For these
purposes ‘fully adjusted exposure value’ means that calculated under Articles 90
to 93 taking into account the credit risk mitigation, volatility adjustments,
and any maturity mismatch (E*).
Where this
paragraph is applied to a credit institution, points (f), (g), (h), and (o) of
Article 113(3) shall not apply to the credit institution in question.
2.         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 may 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 113(3).
Competent
authorities shall be satisfied as to the suitability of the estimates produced
by the credit institution for use for the reduction of the exposure value for
the purposes of compliance with the provisions of Article 111.
Where a credit
institution is permitted to use its own estimates of the effects of financial
collateral, it must do so on a consistent basis to the satisfaction of the
competent authorities. In particular, this approach must be adopted for all
large exposures.
Credit
institutions permitted to use own estimates of LGDs and conversion factors for
an exposure class under Articles 84 to 89 which does not calculate the value of
their exposures using the method referred to in the first subparagraph, may be
permitted to use the approach set out in paragraph 9(1) above or the approach
set out in point (o) of Article 113(3) above for calculating the value of
exposures. A credit institution shall use only one of these two methods.
3.         A
credit institution which is permitted to use the methods described in
paragraphs 1 and 2 in calculating the value of exposures for the purposes of
Article 111(1) to (3) shall conduct periodic stress tests of their credit risk
concentrations including in relation to the realisable value of any collateral
taken.
These shall
address risks arising from potential changes in market conditions that could
adversely impact the credit institutions’ adequacy of own funds and risks
arising from the realisation of collateral in stressed situations.
The credit
institution shall satisfy the competent authorities that the stress tests
carried out are adequate and appropriate for the assessment of such risks.
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 under paragraphs 2 and 3 as
appropriate, the value of collateral permitted to be recognised in calculating
the value of exposures for the purposes of Article 111(1) to (3) shall be
reduced accordingly.
Such credit
institutions shall include the following in their strategies to address
concentration risk:
(a)          policies
and procedures to address risks arising from maturity mismatches between
exposures and any credit protection on those exposures;
(b)          policies
and procedures relating to concentration risk arising from the application of
credit risk mitigation techniques, and in particular large indirect credit
exposures (e.g. to a single issuer of securities taken as collateral).
4.         Where
the effects of collateral are recognised under the terms of paragraphs 1 or 2
above, Member States may treat any covered part of the exposure as having been
incurred to the collateral issuer rather than to the client.
ê 2000/12/EC
Art 49 (8) & (9) (adapted)
ð new
Article 115
81.       For
the purposes of Ö Article
111(1) to (3) Õparagraphs 1, 2 and 3, Member States may apply a
weighting of 20% to asset items constituting claims on Member State regional Ö governments Õ and local
authorities ð where
those claims would receive a 20% risk weight under Article 78 to 83 and to
other exposures to or guaranteed by such governments
and authorities claims on which receive a 20% risk weight under Article 78 to 83. ïand to other
exposures to or guaranteed by such authorities; subject to the conditions laid
down in Article 44, however, Member States may reduce that rate to 0%.
ð However,
Member States may reduce that rate to 0% in respect of to asset items
constituting claims on Member States’ regional governments and local
authorities where those claims would receive a 0% risk weight under Article 78 to 83 and to other exposures to or
guaranteed by such governments and authorities claims on which receive a 0%
risk weight under Article 78 to 83. ï
9.2.      For
the purposes of Ö Article
111(1) to (3) Õ paragraphs 1, 2 and 3, Member States may apply a
weighting of 20% to asset items constituting claims on and other exposures to credit
institutions with a maturity of more than one but not more than three years and
a weighting of 50% to asset items constituting claims on credit
institutions with a maturity of more than three years, provided that the latter
are represented by debt instruments that were issued by a credit
institution and that those debt instruments are, in the opinion of the
competent authorities, effectively negotiable on a market made up of
professional operators and are subject to daily quotation on that market, or
the issue of which was authorised by the competent authorities of the Member
State of origin of the issuing credit institutions. In no case may any
of these items constitute own funds.
ê 2000/12/EC
Art 49 (10) (adapted)
Article 116
10.By way of derogation from paragraphs 7 (i)
and 9 Ö Article
113(3)(i) and Article 115(2) Õ, Member States
may apply a weighting of 20% to asset items constituting claims on and other
exposures to credit institutions, regardless of their maturity.
ê 2000/12/EC
Art. 49 (11) (adapted)
Article 117
111.       Where
an exposure to a client is guaranteed by a third party, or by collateral in the
form of securities issued by a third party under the conditions laid down in paragraph
7 Ö Article 113(3)Õ (o), Member
States may:
(a)     treat the exposure as having been incurred to the Ö guarantor Õ third party rather than to the client, if the exposure is
directly and unconditionally guaranteed by that third party, to the
satisfaction of the competent authorities,;
(b)     treat the exposure as having been incurred to the third party
rather than to the client, if the exposure defined in sub-paragraph
7 Ö Article
113(3) Õ (o) is
guaranteed by collateral under the conditions there laid down.
ò new
2.           Where
Member States apply the treatment provided for in point (a) of paragraph 1:
(a)     where the
guarantee is denominated in a currency different from that in which the
exposure is denominated the amount of the exposure deemed to be covered will be
calculated in accordance with the provisions on the treatment of currency
mismatch for unfunded protection in Annex VIII;
(b)     a mismatch
between the maturity of the exposure and the maturity of the protection will be
treated in accordance with the provisions on the treatment of maturity mismatch
in Annex VIII;
(c)     partial
coverage may be recognised in accordance with the treatment set out in Annex
VIII.
ê 2000/12/EC
Art 49 (2) (adapted)
12. By 1 January 1999 at the latest, the Council shall, on the basis of a report from the
Commission, examine the treatment of interbank exposures provided for in paragraphs
7(i), 9 and 10. The Council shall decide on any changes to be made on a
proposal from the Commission.
ê 2000/12/EC
Art 50 (adapted)
ð new
Article 118
Supervision
on a consolidated or unconsolidated basis of large exposures
1. If the credit institution is neither a parent
undertaking nor a subsidiary, compliance with the obligations imposed in
Articles 48 and 49 or in any other Community provision applicable to this area
shall be monitored on an unconsolidated basis.
2. In the other cases, compliance with the
obligations imposed in Articles 48 and 49 or in any other Community provision
applicable to this area shall be monitored on a consolidated basis in
accordance with Articles 52 to 56.
3. Member States may waive monitoring on an
individual or subconsolidated basis of compliance with the obligations imposed
in Articles 48 and 49 or in any other Community provision applicable to this
area by a credit institution which, as a parent undertaking, is subject to monitoring
on a consolidated basis and by any subsidiary of such a credit institution
which is subject to their authorisation and supervision and is covered by
monitoring on a consolidated basis.
Member States also waive such monitoring where the
parent undertaking is a financial holding company established in the same Member State as the credit institution, provided that company is subject to the same
monitoring as credit institutions.
In the cases referred to in the first and second
subparagraphs.
ð Where compliance by a credit
institution on an individual or sub-consolidated basis with the obligations
imposed in this Section is disapplied under Article 69(1), or the provisions of
Article 70 are applied in the case of parent credit institutions in a Member State, ï measures must be
taken to ensure the satisfactory allocation of risks within the group.
ò new
Article 119
By 31 December 2007, the Commission shall submit to the European Parliament and to the
Council a report on the functioning of this Section, together with any
appropriate proposals.
ê 2000/12/EC
Section 6
Qualifying holdings outside the
financial sector
ê 2000/12/EC
Art. 51 (1) & (2) (adapted)
Article 120
Limits to
non-financial qualifying holdings
1.         No credit institution may have a
qualifying holding the amount of which exceeds 15% of its own funds in an
undertaking which is neither a credit institution, nor a financial institution,
nor an undertaking carrying on an activity referred to in the second
subparagraph of Article 43(2)(f) of Directive 86/635/EEC.
2.         The total amount of a credit
institution's qualifying holdings in undertakings other than credit
institutions, financial institutions or undertakings carrying on activities
referred to in the second subparagraph of Article 43(2)(f) of Directive
86/635/EEC may not exceed 60% of its own funds.
ê 2002/87/EC
Art. 29(5) (adapted)
5. The Member States
need not apply the limits laid down in paragraphs 1 and 2 to holdings in
insurance companies as defined in Directive 73/239/EEC and Directive
79/267/EEC, or in reinsurance companies as defined in Directive 98/78/EC.
ê 2000/12/EC
Art. 51(4) (adapted)
4. Shares held
temporarily during a financial reconstruction or rescue operation or during the
normal course of underwriting or in an institution's own name on behalf of
others shall not be counted as qualifying holdings for the purpose of
calculating the limits laid down in paragraphs 1 and 2. Shares which are not
financial fixed assets as defined in Article 35(2) of Directive 86/635/EEC
shall not be included.
ê 2000/12/EC
Art. 51 (5)
53.       The
limits laid down in paragraphs 1 and 2 may be exceeded only in exceptional
circumstances. In such cases, however, the competent authorities shall require
a credit institution either to increase its own funds or to take other
equivalent measures.
ê 2000/12/EC
Art. 51 (6) (adapted)
6. The Member States
may provide that the competent authorities shall not apply the limits laid down
in paragraphs 1 and 2 if they provide that 100% of the amounts by which a
credit institution's qualifying holdings exceed those limits must be covered by
own funds and that the latter shall not be included in the calculation of the
solvency ratio. If both the limits laid down in paragraphs 1 and 2 are
exceeded, the amount to be covered by own funds shall be the greater of the
excess amounts.
ê 2000/12/EC
Art. 51 (4)
Article 121
4.Shares held temporarily during a financial reconstruction or rescue
operation or during the normal course of underwriting or in an institution's
own name on behalf of others shall not be counted as qualifying holdings for
the purpose of calculating the limits laid down in paragraphs 1 and 2. Shares
which are not financial fixed assets as defined in Article 35(2) of Directive
86/635/EEC shall not be included.
ê 2002/87/EC
Art. 29(5)
Article 122
31.         The Member States need not apply the limits laid down in
paragraphs 1 and 2 to holdings in insurance companies as defined in Directive
73/239/EEC and Directive 79/267/EEC, or in reinsurance companies as defined in
Directive 98/78/EC.
ê 2000/12/EC
Art. 51(6) (adapted)
62.         The Member States may provide that the competent
authorities are not to apply the limits laid down in Ö Article
120(1) and (2) Õ paragraphs 1 and 2 if they provide that 100% of the
amounts by which a credit institution's qualifying holdings exceed those limits
must be covered by own funds and that the latter shall not be included in the
calculation of the solvency ratio. If both the limits laid down in Ö Article
120(1) and (2) Õ paragraphs 1 and 2 are exceeded, the amount to be
covered by own funds shall be the greater of the excess amounts.
ò new
CHAPTER 3
CREDIT
INSTITUTIONS' ASSESSMENT PROCESS 
Article 123
Credit institutions shall have in place sound, effective and complete
strategies and processes to assess and maintain on an ongoing basis the
amounts, types and distribution of internal capital that they consider adequate
to cover the nature and level of the risks to which they are or might be
exposed.
These strategies and processes shall be subject to regular internal review
to ensure that they remain comprehensive and proportionate to the nature, scale
and complexity of the activities of the credit institution concerned.
ê 2000/12/EC
(adapted)
CHAPTER 34
SUPERVISION Ö AND
DISCLOSURE BY COMPETENT AUTHORITIES Õ ON A CONSOLIDATED BASIS
ê 2000/12/EC (new)
è1 2002/87/EC Art. 29.6
Article 52
Supervision on a consolidated basis of credit
institutions
1. Every credit institution which has a credit
institution or a financial institution as a subsidiary or which holds a
participation in such institutions shall be subject, to the extent and in the
manner prescribed in Article 54, to supervision on the basis of its
consolidated financial situation. Such supervision shall be exercised at least
in the areas referred to in paragraphs 5 and 6.
2. Every credit institution the parent undertaking of
which is a financial holding company shall be subject, to the extent and in the
manner prescribed in Article 54, to supervision on the basis of the
consolidated financial situation of that financial holding company. Such
supervision shall be exercised at least in the areas referred to in paragraphs
5 and 6. è1 Without prejudice to Article 54a, the consolidation of
the financial situation of the financial holding company shall not in any way
imply that the competent authorities are required to play a supervisory role in
relation to the financial holding company on a stand-alone basis. ç
ê 2000/12/EC
Art. 52.3
3. The Member
States or the competent authorities responsible for exercising supervision on a
consolidated basis pursuant to Article 53 may decide in the cases listed below
that a credit institution, financial institution or auxiliary banking services
undertaking which is a subsidiary or in which a participation is held need not
be included in the consolidation:
–                        
if the
undertaking that should be included is situated in a third country where there
are legal impediments to the transfer of the necessary information,
–                        
if, in the
opinion of the competent authorities, the undertaking that should be included
is of negligible interest only with respect to the objectives of monitoring
credit institutions and in all cases if the balance-sheet total of the
undertaking that should be included is less than the smaller of the following
two amounts: EUR 10 million or 1% of the balance-sheet total of the parent
undertaking or the undertaking that holds the participation. If several
undertakings meet the above criteria, they must nevertheless be included in the
consolidation where collectively they are of non-negligible interest with
respect to the aforementioned objectives, or
–                        
if, in the
opinion of the competent authorities responsible for exercising supervision on
a consolidated basis, the consolidation of the financial situation of the
undertaking that should be included would be inappropriate or misleading as far
as the objectives of the supervision of credit institutions are concerned.
ê 2000/12/EC
Art. 52 (5) to (8
5. Supervision of solvency, and of the adequacy of
own funds to cover market risks and control of large exposures shall be
exercised on a consolidated basis in accordance with this Article and Articles
53 to 56. Member States shall adopt any measures necessary, where appropriate,
to include financial holding companies in consolidated supervision, in
accordance with paragraph 2.
Compliance with the limits set in Article 51(1) and
(2) shall be supervised and controlled on the basis of the consolidated or
subconsolidated financial situation of the credit institution.
6. The competent authorities shall ensure that, in
all the undertakings included in the scope of the supervision on a consolidated
basis that is exercised over a credit institution in implementation of
paragraphs 1 and 2, there are adequate internal control mechanisms for the
production of any data and information which would be relevant for the purposes
of supervision on a consolidated basis.
7. Without prejudice to specific provisions contained
in other directives, Member States may waive application, on an individual or
subconsolidated basis, of the rules laid down in paragraph 5 to a credit
institution that, as a parent undertaking, is subject to supervision on a consolidated
basis, and to any subsidiary of such a credit institution which is subject to
their authorisation and supervision and is included in the supervision on a
consolidated basis of the credit institution which is the parent company. The
same exemption option shall be allowed where the parent undertaking is a
financial holding company which has its head office in the same Member State as the credit institution, provided that it is subject to the same supervision
as that exercised over credit institutions, and in particular the standards
laid down in paragraph 5.
In both cases set out in the first subparagraph,
steps must be taken to ensure that capital is distributed adequately within the
banking group.
If the competent authorities apply those rules individually
to such credit institutions, they may, for the purpose of calculating own
funds, make use of the provision in the last subparagraph of Article 3(2).
8. Where a credit institution the parent of which is
a credit institution has been authorised and is situated in another Member
State, the competent authorities which granted that authorisation shall apply
the rules laid down in paragraph 5 to that institution on an individual or,
when appropriate, a subconsolidated basis.
ê 2000/12/EC
Art. 52.9 (adapted)
è1 2004/xx/EC Art. 3.9
9. Notwithstanding
the requirements of paragraph 8, the competent authorities responsible for
authorising the subsidiary of a parent undertaking which is a credit
institution may, by bilateral agreement, delegate their responsibility for
supervision to the competent authorities which authorised and supervise the
parent undertaking so that they assume responsibility for supervising the
subsidiary in accordance with this Directive. The Commission must be kept
informed of the existence and content of such agreements. è1 The competent authority
concerned shall forward such information to the competent authorities of the
other Member States. ç
ò new
section 1 - supervision
Article 124
1.           Taking into account the technical criteria set out in Annex
XI, the competent authorities shall review the arrangements, strategies,
processes and mechanisms implemented by the credit institutions to comply with
this Directive and evaluate the risks to which the credit institutions are or
might be exposed.
2.           The scope of the review and evaluation referred to in
paragraph 1 shall be that of the requirements of this Directive.
3.           On the basis of the review and evaluation referred to in
paragraph 1, the competent authorities shall determine whether the
arrangements, strategies, processes and mechanisms implemented by the credit
institutions and the own funds held by these ensure a sound management and
coverage of their risks.
4.           Competent authorities shall establish the frequency and
intensity of the review and evaluation referred to in paragraph 1 having regard to the
systemic importance, nature, scale and complexity of the activities of the
credit institution concerned. The review and evaluation shall be updated at
least on an annual basis.
5.           The review and evaluation performed by competent
authorities shall include the exposure of credit institutions to the interest
rate risk arising from non-trading activities. Measures shall be required in
the case of institutions whose economic value declines by more than 20% of
their own funds as a result of a sudden and unexpected change in interest rates
the size of which shall be prescribed by the competent authorities and shall
not differ between credit institutions.
ê 2000/12/EC
Art 53(1) and (2) first sub-paragraph (adapted)
ð new
Article 125
Competent
authorities responsible for exercising
1.           Where a parent undertaking
is a ð parent ï credit institution ð in a Member State or an EU
parent credit institution ï, supervision on a consolidated basis shall be exercised by the
competent authorities that authorised it under Article 4Ö 6 Õ.
2.           Where the parent of a
credit institution is a ð parent ï financial holding company ð in a Member State or an EU
parent financial holding company ï, supervision on a consolidated basis shall be exercised by the
competent authorities which authorised that credit institution under Article 4Ö 6 Õ.
ê 2000/12/EC
Art. 53 (2) second and third sub-paragraph and (3)
ð new
Article 126
3.1.        However wWhere credit institutions authorised in two or
more Member States have as their parent the same ð parent ï financial holding company ð in a Member State or the same EU
parent financial holding company ï , supervision on a consolidated basis shall be exercised by the
competent authorities of the credit institution authorised in the Member State
in which the financial holding company was set up.
If no credit institution subsidiary has been authorised in the Member
State in which the financial holding company was set up, the competent
authorities of the Member States concerned (including those of the Member State
in which the financial holding company was set up) shall seek to reach
agreement as to who amongst them will exercise supervision on a consolidated
basis. In the absence of such agreement, supervision on a consolidated basis
shall be exercised by the competent authorities that authorised the credit
institution with the greatest balance-sheet total; if that figure is the same,
supervision on a consolidated basis shall be exercised by the competent
authorities which first gave the authorisation referred to in Article 4.
3. The competent authorities concerned may by common agreement waive
the rules laid down in the first and second subparagraph of paragraph 2.
ò new
Where credit
institutions authorised in two or more Member States have as their parents more
than one financial holding company with head offices in different Member States
and there is a credit institution in each of these States, supervision on a
consolidated basis shall be exercised by the competent authority of the credit
institution with the largest balance sheet total.
2.           Where
more than one credit institution authorised in the Community has as its parent
the same financial holding company and none of these credit institutions has
been authorised in the Member State in which the financial holding company was
set up, supervision on a consolidated basis shall be exercised by the competent
authority that authorised the credit institution with the largest balance sheet
total, which shall be considered, for the purposes of this Directive, as the
credit institution controlled by an EU parent financial holding company.
ê 2000/12/EC
Art 53(4)
4. The agreements referred to in the third
subparagraph of paragraph 2 and in paragraph 3 shall provide for procedures for
cooperation and for the transmission of information such that the objectives of
supervision on a consolidated basis can be attained. 
ò new
3.           In
particular cases, the competent authorities may by common agreement waive the
criteria referred to in paragraphs 1 and 2 if their application would be
inappropriate, taking into account the credit institutions and the relative
importance of their activities in different countries, and appoint a different
competent authority to exercise supervision on a consolidated basis. In these
cases, before taking their decision, the competent authorities shall give the
EU parent credit institution, or EU parent financial holding company, or credit
institution with the largest balance sheet, as appropriate, an opportunity to
state its opinion on that decision.
4.           The
competent authorities shall notify the Commission of any agreement falling
within paragraph 3
ê 2000/12/EC
Art. 52(2) last sentence (adapted)
ð new
Article 127
1.           ð Member States shall adopt any
measures necessary, where appropriate, to include financial holding companies
in consolidated supervision. Without prejudice to Article 135, ï the consolidation of the financial situation of the financial
holding company shall not in any way imply that the competent authorities are
required to play a supervisory role in relation to the financial holding
company Ö on a
stand-alone basis Õ standing alone.
ê 2000/12/EC
Art. 52 (4) (adapted)
42.         When the competent
authorities of a Member State do not include a credit institution subsidiary in
supervision on a consolidated basis under one of the cases provided for in the second and third indents of paragraph 3 Ö points
(b) and (c) of Article 73(1) Õ, the competent
authorities of the Member State in which that credit institution subsidiary is
situated may ask the parent undertaking for information which may facilitate
their supervision of that credit institution.
ê 2000/12/EC
Art. 52 (10) (adapted)
103.       Member
States shall provide that their competent authorities responsible for
exercising supervision on a consolidated basis may ask the subsidiaries of a
credit institution or a financial holding company, which are not included within the scope of
supervision on a consolidated basis for the information referred to in Article 55 Ö 137 Õ. In such a
case, the procedures for transmitting and verifying the information laid down
in that Article shall apply.
ê 2000/12/EC
Art 53(5)
Article 128
5Where Member States have more than one competent authority for the
prudential supervision of credit institutions and financial institutions,
Member States shall take the requisite measures to organise coordination
between such authorities.
ò new
Article 129
1.           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 shall carry out the
following tasks:
(a)     supervisory
overview and assessment of compliance with the requirements laid down in
Articles 71, 72(1), 72(2) and 73(3);
(b)     coordination
of the gathering and dissemination of relevant or essential information in
going concern and emergency situations;
(c)     planning and
coordination of supervisory activities in going concern as well as in emergency
situations, including in relation to the activities in Article 124, in
cooperation with the competent authorities involved, and in relation to
Articles 43 and 141.
2.           In the case of applications for the
permissions referred to in Articles 84(1), 87(9) and 105, respectively,
submitted by an EU parent credit institution and its subsidiaries, or jointly
by the subsidiaries of an EU parent financial holding company, the competent
authorities shall work together, in full consultation, to determine whether or
not to grant the permission sought and to determine the terms and conditions,
if any, to which such permission should be subject.
An application as
referred to in the first subparagraph shall be submitted only to the competent
authority referred to in paragraph 1. 
The competent
authorities shall in a single document agree together, within no more than six
months, their determination on the application. This document shall be provided
to the applicant. In the absence of a determination within six months, the competent
authority referred to in paragraph 1 shall make its own determination on the
application.
Article 130
1.           Where
an emergency situation arises, which potentially jeopardises the stability,
including the integrity, of the financial system, the competent authorities
responsible for the exercise of supervision on a consolidated basis shall alert
as soon as is practicable, subject to Title V, Chapter 1, Section 2, the
authorities referred to in Article 49(a) and Article 50. This obligation shall
apply to all competent authorities identified under Articles 125 and 126 in
relation to a particular group, and to the competent authority identified under
paragraph 1 of Article 129.
2.           The
competent authority responsible for supervision on a consolidated basis shall,
when it needs information which has already been given to another competent
authority, contact this authority whenever possible in order to prevent
duplication of reporting to the various authorities involved in supervision.
Article 131
In order to
facilitate and establish effective supervision, the competent authority
responsible for supervision on a consolidated basis and the other competent
authorities shall have written coordination and cooperation arrangements in
place.
Under these
arrangements additional tasks may be entrusted to the competent authority
responsible for supervision on a consolidated basis and procedures for the
decision-making process and for cooperation with other competent authorities,
may be specified.
ê 2000/12/EC
Art. 52 (9) (adapted)
Notwithstanding the
requirements of paragraph 8, the Ö The Õ competent
authorities responsible for authorising the subsidiary of a parent undertaking
which is a credit institution may, by bilateral agreement, delegate their
responsibility for supervision to the competent authorities which authorised
and supervise the parent undertaking so that they assume responsibility for
supervising the subsidiary in accordance with this Directive. The Commission
must be kept informed of the existence and content of such agreements. It shall
forward such information to the competent authorities of the other Member
States and to the Banking Advisory Committee. 
ò new
Article 132
1.           The
competent authorities shall cooperate closely with each other. They shall
provide one another with any information which is essential or relevant for the
exercise of the other authorities’ supervisory tasks under this Directive. In
this regard, the competent authorities shall communicate on request all
relevant information and shall communicate on their own initiative all
essential information.
In particular,
competent authorities responsible for consolidated supervision of EU companies
shall ensure that relevant information is provided to competent authorities in
other Member States who supervise subsidiaries of these parents. In determining
the extent of relevant information, the importance of these subsidiaries within
the financial system in those Member States shall be taken into account.
The essential
information referred to in the first subparagraph shall include, in particular,
the following items:
(a)     identification
of the group structure of all major credit institutions in a group, as well as
of the competent authorities of the credit institutions in the group;
(b)     procedures
for the collection of information from the credit institutions in a group, and
the verification of that information;
(c)     adverse
developments in credit institutions or in other entities of a group, which
could seriously affect the credit institutions;
(d)     major
sanctions and exceptional measures taken by competent authorities in accordance
with this Directive, including the imposition of an additional capital charge
under Article 136 and the imposition of any limitation on the use of the
Advanced Measurement Approach for the calculation of the own funds requirements
under Article 105.
2.           The
competent authorities responsible for the supervision of credit institutions
controlled by an EU parent credit institution shall contact the competent
authority referred to in Article 129(1) when they need information regarding
the implementation of approaches and methodologies set out in this Directive
that may already be available to that competent authority.
3.           The
competent authorities concerned shall, prior to their decision, consult each
other with regard to the following items, where these decisions are of
importance for other competent authorities’ supervisory tasks:
(a)     changes in
the shareholder, organisational or management structure of credit institutions
in a group, which require the approval or authorisation of competent
authorities;
(b)     major
sanctions or exceptional measures taken by competent authorities, including the
imposition of an additional capital charge under Article 136 and the imposition
of any limitation on the use of the Advances Measurement Approaches for the
calculation of the own funds requirements under Article 105.
For the purposes of
point (b), the competent authority responsible for supervision on a
consolidated basis shall always be consulted.
However, a competent
authority may decide not to consult in cases of urgency or where such
consultation may jeopardise the effectiveness of the decisions. In this case,
the competent authority shall, without delay, inform the other competent
authorities.
ê 2000/12/EC
Art 54 (1) (adapted)
Article 133
Form and
extent of consolidation
1.           The competent authorities
responsible for exercising supervision on a
consolidated basis Ö shall Õ must, for the purposes of supervision, require full
consolidation of all the credit institutions and financial institutions which
are subsidiaries of a parent undertaking.
However, Ö the
competent authorities may require only Õproportional
consolidation may be prescribed where, in Ö their Õ the opinion of the competent
authorities, the liability of a parent undertaking holding a share of
the capital is limited to that share of the capital Ö in view Õ because of the liability of the other shareholders or
members whose solvency is satisfactory. The liability of the other shareholders
and members must be clearly established, if necessary by means of formal signed
commitments.
ê 2002/87/EC
Art. 29(7)(a)
In the case where undertakings are linked by a
relationship within the meaning of Article 12 (1) of Directive 83/349/EEC, the
competent authorities shall determine how consolidation is to be carried out.
ê 2000/12/EC
Art 54(2) & (3) (adapted)
2.           The competent authorities
responsible for carrying out supervision on a
consolidated basis Ö shall Õ must, in order to do so, require the proportional
consolidation of participations in credit institutions and financial
institutions managed by an undertaking included in the consolidation together
with one or more undertakings not included in the consolidation, where those
undertakings' liability is limited to the share of the capital they hold.
3.           In the case of
participations or capital ties other than those referred to in paragraphs 1 and
2, the competent authorities shall determine whether and how consolidation is
to be carried out. In particular, they may permit or require use of the equity
method. That method shall not, however, constitute inclusion of the
undertakings concerned in supervision on a consolidated basis.
ê 2000/12/EC
Art. 54(4) 1st paragraph (adapted)
Article 134
41.       Without
prejudice to Ö Article 133 Õ paragraphs 1, 2 and 3, the competent authorities shall
determine whether and how consolidation is to be carried out in the following
cases:
(a)     where, in the opinion of the competent authorities, a credit
institution exercises a significant influence over one or more credit
institutions or financial institutions, but without holding a participation or
other capital ties in these institutions,;
(b)     where two or more credit institutions or financial institutions
are placed under single management other than pursuant to a contract or clauses
of their memoranda or articles of association.
ê 2002/87/EC Art.
29(7)(b)
---------
ê 2000/12/EC Art
54(4) 2nd paragraph
In particular, the competent authorities
may permit, or require use of, the method provided for in Article 12 of
Directive 83/349/EEC. That method shall not, however, constitute inclusion of
the undertakings concerned in consolidated supervision.
ê 2000/12/EC
Art 54(5) (adapted)
ð new
52        Where
consolidated supervision is required pursuant to Article
52 (1) and (2) ÖArticles 125
and 126 Õ, ancillary banking
services undertakings ð and asset management companies as
defined in Directive 2002/87/EC ï shall be included in consolidations in the cases, and in accordance
with the methods, laid down in Ö Article
133 and paragraphs 1 Õ to 4 of this Article.
ê 2002/87/EC
Art. 29(8) (adapted)
Article 135
Management
body of financial holding companies
The Member States shall require that
persons who effectively direct the business of a financial holding company Ö be Õ of
sufficiently good repute and have sufficient experience to perform those
duties.
ò new
Article 136
1.         Competent
authorities shall require any credit institution that does not meet the requirements of this Directive to take the necessary actions or steps at
an early stage to address the situation.
For those
purposes, the measures
available to the competent authorities shall include the following:
(a)          obliging
credit institutions to hold
own funds in excess of the minimum level laid down in Article 75;
(b)          reinforcing
the arrangements and strategies implemented to comply with Articles 22 and 123;
(c)          requiring
credit institutions to apply a
specific provisioning policy or treatment of assets in terms of own funds
requirements;
(d)          restricting or limiting the business,
operations or network of credit
institutions;
(e)          reducing
the risk inherent in activities, products and systems by credit institutions.
The adoption of
these measures shall be subject to Title V, Chapter 1, Section 2.
2.         A
specific own funds requirement in excess of the minimum level laid down in
Article 75 shall be imposed by the competent authorities at least on the credit
institutions which have in place inadequate arrangements, processes, mechanisms
and strategies for the management and coverage of their risks, if the sole application of other measures is unlikely to
reinforce those arrangements within an appropriate timeframe.
ê 2000/12/EC
Art 55(1) (adapted)
Article 137
Information
to be supplied by mixed-activity holding companies and their subsidiaries
1.           Pending further
coordination of consolidation methods, Member States shall provide that, where
the parent undertaking of one or more credit institutions is a mixed-activity
holding company, the competent authorities responsible for the authorisation
and supervision of those credit institutions shall, by approaching the
mixed-activity holding company and its subsidiaries either directly or via
credit institution subsidiaries, require them to supply any information which
would be relevant for the purpose of supervising the credit institution
subsidiaries.
ê 2000/12/EC
Art. 55(2) (adapted)
2.           Member States shall
provide that their competent authorities may carry out, or have carried out by
external inspectors, on-the-spot inspections to verify information received
from mixed-activity holding companies and their subsidiaries. If the
mixed-activity holding company or one of its subsidiaries is an insurance
undertaking, the procedure laid down in Article 56(4)
Ö 140(1) Õ may also be
used. If a mixed-activity holding company or one of its subsidiaries is
situated in a Member State other than that in which the credit institution
subsidiary is situated, on-the-spot verification of information shall be
carried out in accordance with the procedure laid down in Article 56(7) Ö 140(1) Õ.
ê 2002/87/EC
Art. 29(9) (adapted)
Article 138
Intra-group
transactions with mixed-activity holding companies
1.         Without prejudice to the provisions ofTitle V, Chapter 2, Section 3 Ö 5 Õ, this Directive, Member States shall provide that, where
the parent undertaking of one or more credit institutions is a mixed-activity
holding company, the competent authorities responsible for the supervision of
these credit institutions shall exercise general supervision over transactions
between the credit institution and the mixed-activity holding company and its
subsidiaries.
2.         Competent authorities shall
require credit institutions to have in place adequate risk management processes
and internal control mechanisms, including sound reporting and accounting
procedures, in order to identify, measure, monitor and control transactions
with their parent mixed-activity holding company and its subsidiaries
appropriately. Competent authorities shall require the reporting by the credit
institution of any significant transaction with these entities other than the
one referred to in Article 48 Ö 110 Õ . These
procedures and significant transactions shall be subject to overview by the
competent authorities.
Where these intra-group transactions are a
threat to a credit institution's financial position, the competent authority
responsible for the supervision of the institution shall take appropriate
measures. 
ê 2000/12/EC
Art. 56 (1) to (3) (adapted)
Article 139
Measures to
facilitate supervision on a consolidated basis
1.         Member States shall take the
necessary steps to ensure that there are no legal impediments preventing the Ö exchange,
as between Õ undertakings
included within the scope of supervision on a consolidated basis,
mixed-activity holding companies and their subsidiaries, or subsidiaries of the
kind covered in Article 52(10) Ö 127(3) Õ, Ö of Õ from exchanging amongst themselves any information which
would be relevant for the purposes of supervision in accordance with Articles 52 to 55 Ö 124 to 138 Õ and this
Article.
2.         Where a parent undertaking and
any of its subsidiaries that are credit institutions are situated in different
Member States, the competent authorities of each Member State shall communicate
to each other all relevant information which may allow or aid the exercise of
supervision on a consolidated basis.
Where the competent authorities of the Member
State in which a parent undertaking is situated do not themselves exercise
supervision on a consolidated basis pursuant to Article
53 Ö Articles
125 and 126 Õ , they may be
invited by the competent authorities responsible for exercising such
supervision to ask the parent undertaking for any information which would be
relevant for the purposes of supervision on a consolidated basis and to
transmit it to these authorities. 
3.         Member States shall authorise
the exchange between their competent authorities of the information referred to
in paragraph 2, on the understanding that, in the case of financial holding
companies, financial institutions or ancillary banking
services undertakings, the collection or possession of information shall not in
any way imply that the competent authorities are required to play a supervisory
role in relation to those institutions or undertakings standing alone.
Similarly, Member States shall authorise their
competent authorities to exchange the information referred to in Article 55 Ö 137 Õ on the
understanding that the collection or possession of information does not in any
way imply that the competent authorities play a supervisory role in relation to
the mixed-activity holding company and those of its subsidiaries which are not
credit institutions, or to subsidiaries of the kind covered in Article 52(10) Ö 127(3) Õ.
ê 2000/12/EC
Art 56(4) to (6) adapted (adapted)
Article 140
41.       Where
a credit institution, financial holding company or a mixed-activity holding
company controls one or more subsidiaries which are insurance companies or
other undertakings providing investment services which are subject to
authorisation, the competent authorities and the authorities entrusted with the
public task of supervising insurance undertakings or those other undertakings
providing investment services shall cooperate closely. Without prejudice to
their respective responsibilities, those authorities shall provide one another
with any information likely to simplify their task and to allow supervision of
the activity and overall financial situation of the undertakings they
supervise.
52.       Information
received, in the framework of supervision on a consolidated basis, and in
particular any exchange of information between competent authorities which is
provided for in this Directive, shall be subject to the obligation of
professional secrecy defined in Ö Title V,
Chapter 1, Section 2 Õ Article 30.
63.       The
competent authorities responsible for supervision on a consolidated basis shall
establish lists of the financial holding companies referred to in Article 52(2) Ö 71(2) Õ. Those lists
shall be communicated to the competent authorities of the other Member States
and to the Commission.
ê 2000/12/EC
Art 56(7) (adapted)
è1 2002/87/EC Art. 29.10
Article 141
7.Where, in applying this Directive, the competent authorities of one
Member State wish in specific cases to verify the information concerning a
credit institution, a financial holding company, a financial institution, an
ancillary banking
services undertaking, a mixed-activity holding company, a subsidiary of the
kind covered in Article 55 Ö 137 Õ or a
subsidiary of the kind covered in Article 52(10) Ö 127(3) Õ, situated in
another Member State, they Ö shall Õ must ask the competent authorities of that other Member
State to have that verification carried out. The authorities which receive such
a request must, within the framework of their competence, act upon it either by
carrying out the verification themselves, by allowing the authorities who made
the request to carry it out, or by allowing an auditor or expert to carry it
out.è1 The competent authority which made the request
may, if it so wishes, participate in the verification when it does not carry
out the verification itself. ç
ê 2000/12/EC
Art 56(8) (adapted)
Article 142
8.Without prejudice to their provisions of criminal law, Member States
shall ensure that penalties or measures aimed at ending observed breaches or
the causes of such breaches may be imposed on financial holding companies and
mixed-activity holding companies, or their effective managers, that infringe
laws, regulation or administrative provisions enacted to implement Articles 52 to 55 Ö 124 to 141 Õ and this Article.
In certain cases,
such measures may require the intervention of the courts. 
The competent authorities shall cooperate
closely to ensure that Ö those Õ the abovementioned penalties or measures produce the
desired results, especially when the central administration or main
establishment of a financial holding company or of a mixed-activity holding
company is not located at its head office.
ê 2002/87/EC
Art. 29(11) (adapted)
è1 2004/xx/EC Art. 3.10
Article 143
Third-country
parent undertakings
1.         Where a credit institution, the parent undertaking of which
is a credit institution or a financial holding company, the head office of
which is Ö in a
third country Õ outside the Community, is not subject to consolidated
supervision under Article 52
ÖArticles 125
and 126 Õ, the competent
authorities shall verify whether the credit institution is subject to
consolidated supervision by a third-country competent authority which is
equivalent to that governed by the principles laid down in Article 52 Ö this
Directive Õ. 
The verification shall be carried out by the
competent authority which would be responsible for consolidated supervision if the fourth sub paragraph Ö 3 Õ were to apply,
at the request of the parent undertaking or of any of the regulated entities
authorised in the Community or on its own initiative. That competent authority
shall consult the other competent authorities involved.
2.         è1 The Commission may request the European Banking
Committee to ç give general
guidance as to whether the consolidated supervision arrangements of competent
authorities in third countries are likely to achieve the objectives of
consolidated supervision as defined in this Chapter, in relation to credit
institutions, the parent undertaking of which has its head office Ö in a
third country Õ outside the Community. The Committee shall keep any such
guidance under review and take into account any changes to the consolidated
supervision arrangements applied by such competent authorities.
The competent authority carrying out the
verification specified in the Ö first Õ second subparagraph Ö of
paragraph 1 Õ shall take
into account any such guidance. For this purpose the competent authority shall
consult the Committee before taking a decision.
3.         In the absence of such equivalent supervision, Member
States shall apply the provisions of Article 52 Ö this Directive Õ to the credit institution by analogy Ö or shall allow their competent
authorities to apply other appropriate supervisory techniques which achieve the
objectives of supervision on a consolidated basis of credit institutions Õ.
As an alternative,
Member States shall allow their competent authorities to apply other
appropriate supervisory techniques which achieve the objectives of the
supervision on a consolidated basis of credit institutions. 
Those Ö supervisory
techniques Õ methods must Ö , after
consultation with the other competent authorities involved, Õ be agreed upon
by the competent authority which would be responsible for consolidated
supervision, after consultation with the other competent
authorities involved. 
Competent authorities may in particular require
the establishment of a financial holding company which has its head office in
the Community, and apply the provisions on consolidated supervision to the
consolidated position of that financial holding company. 
The Ö supervisory
techniques Õ methods must Ö be
designed to Õ achieve the
objectives of consolidated supervision as defined in this Chapter and must be
notified to the other competent authorities involved and the Commission.
ò new
section 2
Disclosure by competent
authorities
Article 144
1.         Competent
authorities shall disclose the following information:
(a)          the
texts of laws, regulations, administrative rules and general guidance adopted
in their Member State in the field of prudential regulation;
(b)          the
manner of exercise of the options and discretions available in Community
legislation;
(c)          the general criteria
and methodologies they use in the review and evaluation referred to in Article 124;
(d)          without
prejudice to the provisions laid down in Title V, Chapter 1, Section 2,
aggregate statistical data on key aspects of the implementation of the
prudential framework in each Member State.
The disclosures
provided for in the first subparagraph shall be sufficient to enable a
meaningful comparison of the approaches adopted by the competent authorities of
the different Member States.
CHAPTER 5
DISCLOSURE BY
CREDIT INSTITUTIONS
Article 145
1.         For the purposes of this Directive, credit institutions shall
publicly disclose the information laid down in Annex XII, Part 2, subject to
the provisions laid down in Article 146.
2.         Recognition by the competent authorities under Chapter 2,
Section 3, Subsections 2 and 3 and Article 105 of the instruments and
methodologies referred to in Annex XII, Part 3 shall be subject to the public
disclosure by credit institutions of the information laid down therein.
3.         Credit institutions shall adopt a formal policy to comply with
the disclosure requirements laid down in paragraphs 1 and 2, and have policies
for assessing the appropriateness of their disclosures, including their
verification and frequency.
Article 146
1.         Notwithstanding Article 145, competent authorities shall permit credit institutions not to make one or
more disclosures listed in Annex XII, Part 2 if the credit institution concerned
considers that the information provided by such disclosures is not, in the
light of the criterion specified in Annex XII, Part 1, paragraph 1, to be regarded
as material.
2.         Notwithstanding Article 145, competent authorities shall permit credit institutions not to publish one
or more items of information included in the disclosures listed in Annex XII, Parts 2 and 3 if the credit
institution concerned considers that those items would include information which, in the light of the criteria
specified in Annex XII, Part 1, paragraphs 2 and 3, is to be regarded as
proprietary or confidential.
3.         In the exceptional cases referred to in paragraph 2, the
credit institution concerned shall state in its disclosures the fact that the
specific items of information are not disclosed, the reason for non-disclosure,
and publish more general information about the subject matter of the disclosure
requirement.
Article 147
1.         Credit institutions shall publish the disclosures required under Article 145
on an annual basis at a minimum. Disclosures shall be published as soon as
practicable.
2.         Credit institutions shall also determine whether more frequent
publication than is provided for in paragraph 1 is necessary in the light of the
criteria set out in Annex XII, Part 1, paragraph 4.
Article 148
1.         Competent authorities shall permit credit institutions to determine the
appropriate medium, location and means of verification to comply effectively
with the disclosure requirements laid down in Article 145. To the degree
feasible,
all
disclosures shall be provided in one medium or location.
2.         Equivalent disclosures made by credit institutions under
accounting, listing or other requirements may be deemed to constitute compliance
with Article 145. If disclosures are not included in the financial statements, credit
institutions shall indicate where they can be found.
Article 149
Notwithstanding Articles 146 to 148, Member States shall empower the
competent authorities to require credit institutions:
(a)          to make one or more of the disclosures referred to in Annex XII, Parts 2 and 3;
(b)          to publish one or more disclosures more frequently than
annually, and to set
deadlines for publication;
(c)          to use specific media and locations for disclosures other
than the financial statements; 
(d)          to use specific means of verification for the disclosures
not covered by statutory audit.
ê 2004/xx/EC Art.
3.11
-----
ê 2000/12/EC 
TITLE VI
POWERS OF EXECUTION
ê 2000/12/EC
Art. 60 (adapted)
ð new
Article 150
Technical
adaptations
1.           Without prejudice,
regarding own funds, to the report referred to in
the second subparagraph of Article 34(3) ð proposal that the Commission is to
submit pursuant to Article 62 ï, the technical adaptations ð amendments ï in the following areas shall be adopted in accordance with the
procedure Ö referred
to Õ laid down in Ö Article
151 Õ paragraph 2:
(a)     clarification of the definitions in order to take account, in
the application of this Directive, of developments on financial markets;
(b)     clarification of the definitions to ensure uniform application
of this Directive in the Community;
(c)     the alignment of terminology on, and the framing of definitions
in accordance with, subsequent acts on credit institutions and related matters;
the definition of «Zone A» in Article 1(14),
the definition of «multilateral development banks» in Article 1(19),
(d)     amendments
to the list in Article 2
(e)     alteration of the amount of initial capital prescribed in Article
Ö 9 Õ 5 to take account of developments in the economic and
monetary field;
(f)      expansion of the content of the list referred to in Articles Ö 23 and 24 Õ 18 and 19 and set out in Annex I or adaptation of the
terminology used in that list to take account of developments on financial
markets;
(g)     the areas in which the competent authorities must exchange
information as listed in Article Ö 42 Õ 28;
(h)     ð amendments to Article 56 to 67 in
order to take into account developments in accounting standards or
requirements set out in Community legislation set out Community legislation; ï
(i)      amendment of the Ö list Õ definitions of the assets Ö exposure
classes Õ listed in Article 43 Ö Articles 79
and 86 Õ in order to
take account of developments on financial markets;
(j)      ð the amount specified in Article
79(2)(c) and in Article 86(4)(a) to take into account the effects of inflation; ï
(k)     the list and classification of off-balance-sheet items in
Annexes II and IV and their treatment in the calculation
of the ratio as described in Articles 42, 43 and 44 and Annex III ð in the determination of exposure
values for the purposes of Title V, Chapter 2, Section 3 ï;
(l)      ð adjustment of the provisions in
Annexes V to XII in order to take account of developments on financial markets
in particular new financial products, or in accounting standards or
requirements set out in Community legislation; ï
Ö 2.     The
Commission may adopt the following implementing measures in accordance with the
procedure in Article 151. Õ
(a)     ðspecification of the size of sudden and
unexpected changes in the interest rates referred to in Article 124(5); ï
(b)     a temporary reduction in the minimum ratio
Ö level of
own funds laid down Õ prescribed in Article 47 Ö 75 Õ the weighting Ö risk
weights laid down Õ prescribed in Article 43 Ö Title V,
Chapter 2, Section 3 Õ in order to
take account of specific circumstances;
(c)     ð without prejudice to the report
referred to in Article 119 ï, clarification of exemptions provided for in Article 49(5) to (10) Ö 111(4),
113, 115 and 116 Õ;
(d)     ð specification of the key aspects on
which aggregate statistical data are to be disclosed under Article 144 (1)
(d) ï;
(e)     ð specification of the format,
structure, contents list and annual publication date of the disclosures
provided for in Article 114; ï
ê 2004/xx/EC
Art. 3.12 (adapted)
Article 151
1.           The Commission shall be assisted
by the European Banking Committee instituted
by Commission Decision 2004/10/EC (hereinafter referred to as "the
Committee"), composed of
representatives of the Member States and chaired by the representative of the
Commission.
2.           Where
reference is made to this paragraph Ö Article Õ, the "comitology" procedure laid down in Article
5 of Decision 1999/468/EC shall apply, in compliance with Article 7 (3) and
Article 8 thereof.
The period provided for in Article 5(6) of
Decision 1999/468/EC shall be three months.
ê 2000/12/EC
TITLE VII
TRANSITIONAL AND FINAL PROVISIONS
CHAPTER 1
TRANSITIONAL PROVISIONS
ê 2000/12/EC
Art 60(2) (adapted)
Article 61
Transitional
provisions regarding Article 36 
Denmark may allow its
mortgage credit institutions organised as cooperative societies or funds before
1 January 1990 and converted into public limited liability companies to
continue to include joint and several commitments of members, or of borrowers
as referred to in Article 36(1) claims on whom are treated in the same way as
such joint and several commitments, in their own funds, subject to the
following limits:
(a)        the basis
for calculation of the part of joint and several commitments of borrowers shall
be the total of the items referred to in Article 35 (2)(1) and (2), minus those
referred to in Article 35(2)(9), (10) and (11);
b)         the basis
for calculation on 1 January 1991 or, if converted at a later date, on the date
on conversion, shall be the maximum basis for calculation. The basis for
calculation may never exceed the maximum basis for calculation
c)         the
maximum basis for calculation shall, from 1 January 1997, be reduced by half of
the proceeds from any issue of new capital, as defined in Article 35(2)(1),
made after that date; and
(d)       the maximum
amount of joint and several commitments of borrowers to be included as own
funds must never exceed:
            50% in
1991 and 1992,
            45% in
1993 and 1994,
            40% in
1995 and 1996,
            35% in
1997,
            30% in
1998,
            20% in
1999,
            10% in
2000, and
            0% after 1 January 2001, of the basis for calculation.
ê 2000/12/EC
Article 62
Transitional provisions regarding Article 43
1. Until 31 December 2006, the competent authorities of the Member States may authorise their credit institutions to apply a 50%
risk weighting to loans fully and completely secured to their satisfaction by
mortgages on offices or on multi-purpose commercial premises situated within
the territory of those Member States that allow the 50% risk weighting, subject
to the following conditions:
(i)         the 50% risk weighting applies to the
part of the loan that does not exceed a limit calculated according to either
(a) or (b):
(a)     50% of the market value of the property in question.
         The market value of the property must be calculated by two
independent valuers making independent assessments at the time the loan is
made. The loan must be based on the lower of the two valuations.
         The property shall be revalued at least once a year by one
valuer. For loans not exceeding EUR 1 million and 5% of the own funds of
the credit institution, the property shall be revalued at least every three
years by one valuer;
(b)     50% of the market value of the property or 60% of the mortgage
lending value, whichever is lower, in those Member States that have laid down
rigorous criteria for the assessment of the mortgage lending value in statutory
or regulatory provisions.
         The mortgage lending value shall means the value of the
property as determined by a valuer making a prudent assessment of the future
marketability of the property by taking into account long-term sustainable
aspects of the property, the normal and local market conditions, the current
use and alternative appropriate uses of the property. Speculative elements
shall not be taken into account in the assessment of the mortgage lending
value. The mortgage lending value shall be documented n a transparent and clear
manner.
         At least every three years or if the market falls by more than
10% the mortgage lending value and in particular the underlying assumptions
concerning the development of the relevant market, shall be reassessed.
            In both (a) and (b) «market value» shall
mean the price at which the property could be sold under private contract
between a willing seller and an arm's-length buyer on the date of valuation, it
being assumed that the property is publicly exposed to the market, that market
conditions permit orderly disposal and that a normal period, having regard to
the nature of the property, is available for the negotiation of the sale;
(ii)        the 100% risk weighting applies to the
part of the loan that exceeds the limits set out in (i);
(iii)       the property must be either used or let
by the owner.
The first subparagraph shall not prevent the
competent authorities of a Member State, which applies a higher risk weighting
in its territory, from allowing, under the conditions defined above, the 50%
risk weighting to apply for this type of lending in the territories of those
Member States that allow the 50% risk weighting.
The competent authorities of the Member States may
allow their credit institutions to apply a 50% risk weighting to the loans
outstanding on 21 July 2000 provided that the conditions listed in this
paragraph are fulfilled. In this case the property shall be valued according to
the assessment criteria laid down above not later than 21 July 2003.
For loans granted before 31 December 2006, the 50% risk weighting remains applicable until their maturity, if the credit
institution is bound to observe the contractual terms.
Until 31 December 2006, the competent authorities of
the Member State may also authorise their credit institutions to apply a 50%
risk weighting to the part of the loans fully and completely secured to their
satisfaction by shares in Finnish housing companies operating in accordance
with the Finnish Housing Company Act of 1991 or subsequent equivalent
legislation, provided that the conditions laid down in this paragraph are
fulfilled.
Member States shall inform the Commission of the use
they make of this paragraph.
2. Member States may apply a 50% risk weighting to
property leasing transactions concluded before 31 December 2006 and concerning assets for business use situated in the country of the head office and governed
by statutory provisions whereby the lessor retains full ownership of the rented
asset until the tenant exercises his option to purchase. Member States shall
inform the Commission of the use they make of this paragraph.
3. Article 43(3) shall not affect the competent
authorities' recognition of bilateral contracts for novation concluded
concerning:
–                        
Belgium, before 23 April 1996,
–                        
Denmark, before 1 June 1996,
–                        
Germany, before 30 October 1996,
–                        
Greece, before 27 March 1997,
–                        
Spain, before 7 January 1997,
–                        
France, before 30 May 1996,
–                        
Ireland, before 27 June 1996,
–                        
Italy, before 30 July 1996,
–                        
Luxembourg, before 29 May 1996,
–                        
the Netherlands, before 1 July 1996,
–                        
Austria, before 30 December 1996,
–                        
Portugal, before 15 January 1997,
–                        
Finland, before 21 August 1996,
–                        
Sweden, before 1 June 1996, and
–                        
United Kingdom, before 30 April 1996.
Article 63
Transitional provisions regarding Article 47
1. A credit institution, the minimum ratio of which
has not reached the 8% prescribed in Article 47(1), by 1 January 1991, must gradually approach that level by successive stages. It may not allow the ratio to
fall below the level reached before that objective has been attained. Any
fluctuation should be temporary and the competent authorities should be
apprised of the reasons for it.
ê 2000/12/EC,
Art. 62 (2) and (3) (adapted)
2. For not more than
five years after 1 January 1993, the Member States may fix a weighting of 10%
for the bonds defined in Article 22(4) of Directive 85/611/EEC and maintain if
for credit institutions when and if they consider it necessary, to avoid grave
disturbances in the operation of their markets. Such exceptions shall be
reported to the Commission.
3. For not more than
seven years after 1 January 1993, Article 47(1) shall not apply to the
Agricultural Bank of Greece. However, the latter must approach the level
prescribed in Article 47(1) by successive stages according to the method
described in paragraph 1 of this Article.
ê 2000/12/EC
(adapted)
è1 2004/xx/EC Art. 3.13
Article 64
Transitional
provisions regarding Article 49
1. If, on 5 February
1993, a credit institution had already incurred an exposure or exposures
exceeding either the large exposure limit or the aggregate large exposure limit
laid down in Article 49, the competent authorities shall require the credit
institution concerned to take steps to have that exposure or those exposures
brought within the limits laid down in Article 49.
2. The process of
having such an exposure or exposures brought within authorised limits shall be
devised, adopted, implemented and completed within the period which the
competent authorities consider consistent with the principle of sound
administration and fair competition. The competent authorities shall inform the
Commission and the è1 European Banking Committee ç of the schedule for the general process adopted.
3. A credit
institution may not take any measure which would cause the exposures referred
to in paragraph 1 to exceed their level on 5 February 1993
4. The period
applicable under paragraph 2 shall expire no later than 31 December 2001. Exposures with a longer maturity, for which the lending institution is bound to
observe the contractual terms, may be continued until their maturity.
ê 2000/12/EC
Art. 64 (5) to (7) (new)
è1 2004/xx/EC Art. 3.13
5. Until 31 December 1998, Member States may increase the limit laid down in Article 49(1) to 40% and the limit laid down in
Article 49(2) to 30%. In such cases and subject to paragraphs 1 to 4, the time
limit for bringing the exposures existing at the end of this period within the
limit laid down in Article 49 shall expire on 31 December 2001.
6. In the case of credit institutions the own funds
of which do not exceed EUR 7 million and only in the case of such institutions,
Member States may extend the time limits laid down in paragraph 5 by five
years. Member States that avail themselves of the option provided for in this
paragraph shall take steps to prevent distortions of competition and shall
inform the Commission and the è1 European Banking Committee ç thereof.
7. In the cases referred to in paragraphs 5 and 6, an
exposure may be considered a large exposure if its value is equal to or exceeds
15% of own funds.
ê 2000/12/EC
Art. 64 (8) (adapted)
8. Until 31 December 2001 Member States may substitute a frequency of at least twice a year for the
frequency of notification of large exposures referred to in the second indent
of Article 48(2).
ê 2000/12/EC
Art. 64 (9)
9. Member States may fully or partially exempt from
the application of Article 49(1), (2) and (3) exposures incurred by a credit
institution consisting of mortgage loans as defined in Article 62(1) concluded
before 1 January 2002 as well as property leasing transactions as defined in
Article 62(2) concluded before 1 January 2002, in both cases up to 50% of the
value of the property concerned.
The same treatment applies to loans secured, to the
satisfaction of the competent authorities, by shares in Finnish residential
housing companies, operating in accordance with the Finnish Housing Company Act
of 1991 or subsequent equivalent legislation which are similar to the mortgage
loans referred to in the first subparagraph.
ê 2000/12/EC
Art. 65 (adapted)
Article 65
Transitional
provisions regarding Article 51
Credit institutions
which, on 1 January 1993, exceeded the limits laid down in Articles 51(1) and
(2) shall have until 1 January 2003 to comply with them.
ò new
Article 152
1.         Credit
institutions calculating risk-weighted exposure amounts in accordance with
Articles 84 to 89 or using the Advanced Measurement Approaches as specified in
Article 105 for the calculation of their capital requirements for operational
risk shall during the first, second and third twelve-month periods after the
date specified in Article 157 provide own funds which are at all times more
than or equal to the amounts indicated in paragraphs 2, 3 and 4.
2.         For
the first twelve-month period referred to in paragraph 1, the amount of own
funds shall be 95% of the total minimum amount of own funds that would be
required to be held during that period by the credit institution under Article
4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior
to the date specified in Article 157 of this Directive.
3.         For
the second twelve-month period referred to in paragraph 1, the amount of own
funds shall be 90% of the total minimum amount of own funds that would be
required to be held during that period by the credit institution under Article
4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior
to the date specified in Article 157 this Directive.
4.         For
the third twelve-month period referred to in paragraph 1, the amount of own
funds shall be 80% of the total minimum amount of own funds that would be
required to be held during that period by the credit institution under Article
4 of Directive 93/6/EEC as that Directive and Directive 2000/12/EC stood prior
to the date specified in Article 157 of this Directive.
5.         Compliance
with the requirements of paragraphs 1 to 4 shall be on the basis of amounts of
own funds fully adjusted to reflect differences in the calculation of own funds
under Directive 2000/12/EC and Directive 93/6/EEC as those Directives stood
prior to the date specified in Article 157 of this Directive and the
calculation of own funds under this Directive deriving from the separate
treatments of expected loss and unexpected loss under Articles 84 to 89 of this
Directive.-
6.         For
the purposes of paragraphs 1 to 5 of this Article, Articles 68 to 73 shall
apply.
7.         Until
31 December 2007 credit institutions may treat the articles constituting the
Standardised Approach set out in Title V, Chapter 2, Section 3, Subsection 1 as
being replaced by Articles 42 to 46 of Directive 2000/12/EC as those articles
stood prior to the date referred to in Article 157.
8.         Where
the discretion referred to in paragraph 7 is exercised the following shall
apply concerning the provisions of Directive 2000/12/EC:
(a)     the
provisions of that Directive referred to in Articles 42 to 46 shall apply as
they stood prior to the date referred to in Article 157;
(b)     ‘risk-adjusted
value’ as referred to in Article 42(1) of that Directive shall mean ‘risk-weighted
exposure amount’;
(c)     the figures
produced by Article 42(2) of that Directive shall be considered risk-weighted
exposure amounts;
(d)     ‘credit
derivatives’ shall be included in the list of ‘Full risk’ items in Annex II of
that Directive;
(e)     the
treatment set out in Article 43(3) of that Directive shall apply to derivative
instruments listed in Annex IV of that Directive whether on- or off-balance
sheet and the figures produced by the treatment set out in that Annex shall be
considered risk-weighted exposure amounts;
9.         Where
the discretion referred to in paragraph 7 is exercised the following shall
apply in relation to the treatment of exposures for which the Standardised
Approach is used:
(a)     Title V, Chapter
2, Section 3, Subsection 3 relating to the recognition of credit risk
mitigation shall not apply;
(b)     Title V,
Chapter 2, Section 3, Subsection 4 concerning the treatment of securitisation
may be disapplied by competent authorities;
(b)     The
following provisions of Annex XII setting out disclosure requirements for
credit institutions shall not apply:
(i)      Part 2,
paragraph 4(b),
(ii)     Part 2,
paragraph 6,
(iii)    Part 2,
paragraph 10.
10.       Where
the discretion referred to in paragraph 7 is exercised the capital requirement
for operational risk under Article 75(e) shall be reduced by the percentage
representing the ratio of the value of the credit institution’s exposures for
which risk-weighted exposure amounts are calculated in accordance with the
discretion referred to in paragraph 7 to the total value of its exposures.
11.       Where a
credit institution calculates risk-weighted exposure amounts for all of its
exposures in accordance with the discretion referred to in paragraph 7,
Articles 48 to 50 of Directive 2000/12/EC relating to large exposures may apply
as they stood prior to the date referred to in Article 157; 
12.         Where
the discretion referred to in paragraph 7 is exercised, references to Articles
46 to 52 of this Directive shall be read as references to Articles 42 to 46 of
Directive 2000/12/EC as those articles stood prior to the date referred to in
Article 157.
Article 153
In the
calculation of risk-weighted exposure amounts for exposures arising from
property leasing transactions concerning offices or other commercial premises
situated in their territory and meeting the criteria set out in Annex VI, Part
1, paragraph 51, the competent authorities may, until 31 December 2012 allow a
50% risk weighting to be applied without the application of Annex VI, Part 1,
paragraphs 55 and 56.
Until 31 December 2010, competent authorities may, for the purpose of defining the secured
portion of a past due loan for the purposes of Annex VI, recognise collateral
other than eligible collateral as set out under Articles 90 to 93.
Article 154
1.           The
requirements in Article 84(3) and (4) shall apply from the 31 December 2009.
2.           Until
 31 December 2010 the exposure weighted average LGD for all retail exposures
secured by residential properties and not benefiting from guarantees from
central governments shall not be lower than 10%.
3.           Until
 31 December 2017, the competent authorities of the Member States may exempt
from the IRB treatment certain equity exposures held at 31 December 2007. 
The exempted position
shall be measured as the number of shares as of that date and any additional
arising directly as a result of owning those holdings, as long as they do not
increase the proportional share of ownership in a portfolio company. 
If an acquisition
increases the proportional share of ownership in a specific holding the exceeding
part of the holding shall not be subject to the exemption. Nor shall the
exemption apply to holdings that were originally subject to the exemption, but
have been sold and then bought back. 
Equity exposures
covered by this transitional provision shall be subject to the capital
requirements calculated in accordance with Title V, Chapter 2, Section 3,
Subsection 1.
4.           Until
 31 December 2011, for corporate exposures the competent authorities of each Member State may set the number of days past due that all credit institutions in its
jurisdiction shall abide by under the definition of default set out in Annex
VII, Part 4, paragraph 44 for exposures to such counterparts situated within
this Member State. The specific number shall fall within 90- up to a figure of
180 days if local conditions make it appropriate. For exposures to such
counterparts situated in the territories of other Member States, the competent
authorities shall set a number of days past due which is not higher than the
number set by the competent authority of the respective Member State.
5.           In
respect of the observation period referred to in Annex VII, Part 4, paragraph
66, Member States may allow credit institutions which are not permitted to use
own estimates of LGDs or conversion factors to have, when they implement the
IRB Approach, but at the latest at the 31 December 2007, relevant data covering
a period of two years. Until 31 December 2010 the period to be covered shall
increase by one year each year.
6.           In
respect of the observation period referred to in Annex VII, Part 4, paragraphs
71, 85 and 94 Member States may allow credit institutions to have, when they
implement the IRB Approach, but at the latest at the 31 December 2007, relevant
data covering a period of two years. Until 31 December 2010 the period to be covered shall increase by one year each year.
Article 155
Until 31 December
2012, for credit institutions the relevant indicator for the trading and sales
business line of which represents at least 50% of the total of the relevant
indicators for all of its business lines accordance with Annex X, Part 2,
paragraphs 1 to 8, Member States may apply a percentage of 15% to the business
line “trading and sales”.
ê 2000/12/EC
CHAPTER 2
FINAL PROVISIONS
ò new
Article 156
The Commission,
in cooperation with Member States, and taking into account the contribution of
the European Central Bank, shall periodically monitor whether this Directive
taken as a whole, together with Directive [93/6/EEC], has significant effects
on the economic cycle and, in the light of that examination, shall consider
whether any remedial measures are justified.
Based on that
analysis and taking into account the contribution of the European Central Bank,
the Commission shall draw up a biennial report and submit it to the European
Parliament and to the Council, together with any appropriate proposals.
Article 157
1.         Member
States shall adopt and publish, by 31 December 2006 at the latest, the laws,
regulations and administrative provisions necessary to comply with Articles 4,
22, 57, 61, 62, 63, 64, 66, 68 to 106, 108, 110 to 115, 117 to 119, 123 to 127,
129 to 132, 133, 136, 144 to 149, 152 to 155 and the Annexes II, III, V to XII.
They shall forthwith communicate to the Commission the text of those provisions
and a correlation table between those provisions and this Directive. 
Notwithstanding
paragraph 2, they shall apply those provisions from 31 December 2006. 
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.
They shall also include a statement that references in existing laws,
regulations and administrative provisions to the directive[s] repealed by this Directive
shall be construed as references to this Directive. Member States shall
determine how such reference is to be made and how that statement is to be
formulated. 
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.
2.         Member
States shall apply, by 31 December 2007 at the latest, and not earlier, the
laws regulations and administrative provisions necessary to comply with
Articles 87(9) and 105. 
ê 2000/12/EC
Art. 66 (adapted)
Article 66 
Commission
information
Member States
shall communicate to the Commission the text of the main laws, regulations and administrative provisions Ö of national law Õ which they adopt in the field covered by this Directive.
ê 2000/12/EC
Art 67 (adapted)
Article 158
1. Directives
73/183/EEC, 77/780/EEC, 89/299/EEC, 89/646/EEC, 89/647/EEC, 92/30/EEC and
92/121/EEC, Directive 2000/12/EC as amended
by the Directives set out in Annex V Ö XV Õ , Part A, are Ö is Õ hereby
repealed without prejudice to the obligations of the Member States concerning
the deadlines for transposition of the said Directives listed in Annex V Ö XV Õ , Part B.
2. References to the repealed Directives
shall be construed as references to this Directive and should be read in
accordance with the correlation table in Annex VI Ö XVI Õ.
ê 2000/12/EC Art
68 (adapted)
Article 159
Implementation
This Directive shall enter into force on
the 20th day following its publication in the Official Journal of the Ö Union Õ European Communities.
ê 2000/12/EC
Art. 69 (adapted)
Article 160
Addressees
This Directive is addressed to the Member
States.
Done at Brussels, […].
                                                                       For
the European Parliament
                                                                       The
President
                                                                       
                                                                       For
the Council
                                                                       The
President
                                                                       
ê 2000/12/EC
ANNEX I
LIST
OF ACTIVITIES SUBJECT TO MUTUAL RECOGNITION
1. Acceptance of deposits and other
repayable funds
2. Lending including,
inter alia: consumer credit, mortgage credit, factoring, with or without
recourse, financing of commercial transactions (including forfeiting).[33]
3. Financial leasing
4. Money transmission services
5. Issuing and administering means of
payment (e.g. credit cards, travellers' cheques and bankers' drafts)
6. Guarantees and commitments
7. Trading for own account or for account
of customers in:
(a)        money market instruments
(cheques, bills, certificates of deposit, etc.)
(b)        foreign exchange;
(c)        financial futures and options;
(d)       exchange and interest-rate
instruments;
(e)        transferable securities
8. Participation in securities issues and
the provision of services related to such issues
9. Advice to undertakings on capital
structure, industrial strategy and related questions and advice as well as
services relating to mergers and the purchase of undertakings
10. Money broking
11. Portfolio management and advice
12. Safekeeping and administration of
securities
13. Credit reference services
14. Safe custody services
ê 2004/39/EC
Art. 68 (adapted)
The services and activities provided for in
Section A and B of annex I of Directive 2004/39/EC of the
European Parliament and of the Council of 21 April 2004 on markets in financial
instruments[34]
when referring to the financial instruments provided for in Section C of Annex
I of that Directive are subject to mutual recognition according to this
Directive. 
ê 2000/12/EC
ANNEX II
ê 2000/12/EC
ð new
CLASSIFICATION
OF OFF-BALANCE-SHEET ITEMS
Full risk:
–                        
Guarantees having the character of credit
substitutes,
–                        
ð Credit derivatives ï
–                        
Acceptances,
–                        
Endorsements on bills not bearing the name of
another credit institution,
–                        
Transactions with recourse,
–                        
Irrevocable standby letters of credit having the
character of credit substitutes,
–                        
Assets purchased under outright forward purchase
agreements,
–                        
Forward forward deposits,
–                        
The unpaid portion of partly-paid shares and
securities,
–                        
ð Asset sale and repurchase agreements
as defined in Article 12(3) and (5) of Directive 86/635/EEC, ï 
–                        
Other items also carrying full risk.
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 or acceptance facilities) with an original
maturity of more than one year,
–                        
Note issuance facilities (NIFs) and revolving
underwriting facilities (RUFs),
–                        
Other items also carrying medium risk ð and as communicated to the
Commission ï .
Medium/low risk:
–                        
Documentary credits in which underlying shipment
acts as collateral and other self-liquidating transactions,
–                        
ð Undrawn credit facilities
(agreements to lend, purchase securities, provide guarantees or acceptance
facilities) with an original maturity of up to and including one year which may
not be cancelled unconditionally at any time without notice or that do not
effectively provide for automatic cancellation due to deterioration in a
borrower’s creditworthiness, ï
–                        
Other items also carrying medium/low risk ð and as communicated to the
Commission ï .
Low risk:
–                        
Undrawn credit facilities (agreements to lend, purchase securities,
provide guarantees or acceptance facilities) with an original maturity of up to
and including one year or which may be cancelled unconditionally at any time
without notice,ð Undrawn credit facilities
(agreements to lend, purchase securities, provide guarantees or acceptance
facilities) which may be cancelled unconditionally at any time without notice,
or that do effectively provide for automatic cancellation due to deterioration
in a borrower’s creditworthiness. Retail credit lines may be considered as
unconditionally cancellable if the terms permit the credit institution to cancel
them to the full extent allowable under consumer protection and related
legislation; ï
–                        
Other items also carrying low risk ð and as communicated to the
Commission ï .
The Member States undertake to inform the Commission
as soon as they have agreed to include a new off-balance-sheet item in any of
the last indents under each category of risk. Such items will be definitively
classified at Community level once the procedure laid down in Article 59 has
been completed.
ê 2000/12/EC
ANNEX III
ê 2000/12/EC
(adapted)
ð new
THE
TREATMENT OF OFF-BALANCE-SHEET
ITEMS ð DERIVATIVE INSTRUMENTS ï
1. CHOICE OF THE METHOD
To measure the credit risks associated with
ð determine the exposure value
of ï the contracts listed in points 1 and 2 of Annex IV, credit
institutions may choose, subject to the consent of the competent authorities,
one of the methods set out Ö in this Annex Õ below. Credit institutions which have to comply with
Article 6(1) Ö 33(1) and
(2) Õ of Directive
93/6/EEC[35]
must use method 1 set out Ö in this
Annex Õ below. To measure the credit risks associated with
ð determine the exposure value
for ï the contracts listed in point 3 of Annex IV all credit institutions
must use method 1 set out Ö in this
Annex Õ below.
ò new
Contracts traded
on recognised exchanges, and foreign-exchange contracts (except contracts
concerning gold) with an original maturity of 14 calendar days or less are
exempt from the application of the methods set out in this Annex and shall be
attributed an exposure value of zero.
Competent
authorities may exempt from the application of the methods set out in this
Annex and attribute an exposure value of zero to over-the-counter (OTC)
contracts cleared by a clearing house where the latter acts as the legal
counterparty and all participants fully collateralise on a daily basis the
exposure they present to the clearing house, thereby providing a protection
covering both the current exposure and the potential future exposure.
The posted
collateral must:
(a)     qualify for
a 0% risk weight, or
(b)     be cash
deposits placed with the lending institution, or
(c)     be
certificates of deposit or similar instruments issued by and lodged with the
latter.
The competent
authorities must be satisfied that the risk of a build-up of the clearing
house's exposures beyond the market value of posted collateral is eliminated.
ê 2000/12/EC
(adapted)
2. METHODS
Method 1: the «mark to market»
approach
Step (a):           by attaching current
market values to contracts (mark to market), the current replacement cost of
all contracts with positive values is obtained.
Step (b):          to obtain a figure for
potential future credit exposure[36],
Ö except in
the case of single-currency «floating/floating» interest rate swaps in which only
the current replacement cost will be calculated, Õ the notional
principal amounts or underlying values are multiplied by the following percentages Ö in Table
1 Õ :
 TABLE 1[37][38] 
 Residual maturity[39] || Interest-rate contracts || Contracts concerning foreign-exchange rates and gold || Contracts concerning equities || Contracts concerning precious metals except gold || Contracts concerning commodities other than precious metals 
 One year or less || 0% || 1% || 6% || 7% || 10% 
 Over one year, less than five years || 0,5% || 5% || 8% || 7% || 12% 
 Over five years || 1,5% || 7,5% || 10% || 8% || 15% 
For the purpose of calculating the potential
future exposure in accordance with step (b) the competent authorities may allow
credit institutions until 31 December 2006 to apply the following percentages
instead of those prescribed in Table 1 provided that the institutions make use
of the option set out in Article 11a of Directive 93/6/EEC for contracts within
the meaning of paragraph 3(b) and (c) of Annex IV:
 TABLE 1a 
 Residual maturity || Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products 
 One year or less || 2% || 2,5% || 3% || 4% 
 Over one year, less than five years || 5% || 4% || 5% || 6% 
 Over five years || 7,5% || 8% || 9% || 10% 
ê 2000/12/EC
(adapted)
Step (c):           the sum of current
replacement cost and potential future credit exposure is multiplied by the risk weightings allocated to the
relevant counterparties in Article 43 Ö is the
exposure value. Õ
ê 2000/12/EC
(adapted)
Method 2: the «original exposure»
approach
Step (a):           the notional principal
amount of each instrument is multiplied by the percentages given Ö in Table
2 Õ below:
 TABLE 2 
 Original maturity[40] || Interest-rate contracts || Contracts concerning foreign-exchange rates and gold 
 One year or less || 0,5% || 2% 
 More than one year but not exceeding two years || 1% || 5% 
 Additional allowance for each additional year || 1% || 3% 
ê 2000/12/EC
ð new
Step (b):          the original exposure
thus obtained is
multiplied by the risk weightings allocated to the relevant counterparties in
Article 43ðshall be the exposure valueï
For methods 1 and 2 the competent
authorities must ensure that the notional amount to be taken into account is an
appropriate yardstick for the risk inherent in the contract. Where, for
instance, the contract provides for a multiplication of cash flows, the
notional amount must be adjusted in order to take into account the effects of the
multiplication on the risk structure of that contract.
ê 2000/12/EC
(adapted)
3. CONTRACTUAL NETTING (CONTRACTS FOR
NOVATION AND OTHER NETTING AGREEMENTS)
(a) Types of netting that competent
authorities may recognise
For the purpose of this Ö section Õ point 3 «counterparty» means any entity (including
natural persons) that has the power to conclude a contractual netting
agreement.
The competent authorities may recognise as
risk-reducing the following types of contractual netting:
(i)           bilateral contracts for novation
between a credit institution and its counterparty under which mutual claims and
obligations are automatically amalgamated in such a way that this novation
fixes one single net amount each time novation applies and thus creates a
legally binding, single new contract extinguishing former contracts;
(ii)          other bilateral agreements
between a credit institution and its counterparty.
(b) Conditions for recognition
The competent authorities may recognise contractual
netting as risk-reducing only under the following conditions:
(i)           a credit institution must have a
contractual netting agreement with its counterparty which creates a single
legal obligation, covering all included transactions, such that, in the event
of a counterparty's failure to perform owing to default, bankruptcy,
liquidation or any other similar circumstance, the credit institution would
have a claim to receive or an obligation to pay only the net sum of the
positive and negative mark-to-market values of included individual
transactions;
(ii)          a credit institution must have
made available to the competent authorities written and reasoned legal opinions
to the effect that, in the event of a legal challenge, the relevant courts and
administrative authorities would, in the cases described under (i), find that
the credit institution's claims and obligations would be limited to the net
sum, as described in (i), under:
–              
the law of the jurisdiction in which the
counterparty is incorporated and, if a foreign branch of an undertaking is
involved, also under the law of the jurisdiction in which the branch is
located;
–              
the law that governs the individual transactions
included; , and
–              
the law that governs any contract or agreement
necessary to effect the contractual netting;
(iii)         a credit institution must have
procedures in place to ensure that the legal validity of its contractual
netting is kept under review in the light of possible changes in the relevant
laws.
The competent authorities must be
satisfied, if necessary after consulting the other competent authorities
concerned, that the contractual netting is legally valid under the law of each
of the relevant jurisdictions. If any of the competent authorities are not
satisfied in that respect, the contractual netting agreement will not be
recognised as risk-reducing for either of the counterparties.
The competent authorities may accept
reasoned legal opinions drawn up by types of contractual netting.
No contract containing a provision which
permits a non-defaulting counterparty to make limited payments only, or no
payments at all, to the estate of the defaulter, even if the defaulter is a net
creditor (a «walkaway» clause), may be recognised as risk-reducing.
The competent authorities may recognise as
risk-reducing contractual-netting agreements covering foreign-exchange
contracts with an original maturity of 14 calendar days or less written options
or similar off-balance-sheet items to which this Annex does not apply because
they bear only a negligible or no credit risk. If, depending on the positive or
negative market value of these contracts, their inclusion in another netting
agreement can result in an increase or decrease of the capital requirements,
competent authorities must oblige their credit institution to use a consistent
treatment.
(c) Effects of recognition
(i) Contracts for novation
The single net amounts fixed by contracts
for novation, rather than the gross amounts involved, may be weighted. Thus, in
the application of method 1, in
–                        
step (a): the current replacement cost, and in
–                        
step (b): the notional principal amounts or
underlying values
may be obtained taking account of the
contract for novation. In the application of method 2, in step (a) the notional
principal amount may be calculated taking account of the contract for novation;
the percentages of Table 2 must apply.
(ii) Other netting agreements
In application of method 1:
–                        
in step (a) the current replacement cost for the
contracts included in a netting agreement may be obtained by taking account of
the actual hypothetical net replacement cost which results from the agreement;
in the case where netting leads to a net obligation for the credit institution
calculating the net replacement cost, the current replacement cost is
calculated as «0»,
–                        
in step (b) the figure for potential future
credit exposure for all contracts included in a netting agreement may be
reduced according to the following equation: PCEred = 0.4 * PCEgross
+ 0.6 * NGR * PCEgross
 where: 
 — || PCEred || = || the reduced figure for potential future credit exposure for all contracts with a given counterparty included in a legally valid bilateral netting agreement 
 — || PCEgross || = || the sum of the figures for potential future credit exposure for all contracts with a given counterparty which are included in a legally valid bilateral netting agreement and are calculated by multiplying their notional principal amounts by the percentages set out in Table 1 
 — || NGR || = || «net-to-gross ratio»: at the discretion of the competent authorities either: (i)           separate calculation: the quotient of the net replacement cost for all contracts included in a legally valid bilateral netting agreement with a given counterparty (numerator) and the gross replacement cost for all contracts included in a legally valid bilateral netting agreement with that counterparty (denominator), or (ii)          aggregate calculation: the quotient of the sum of the net replacement cost calculated on a bilateral basis for all counterparties taking into account the contracts included in legally valid netting agreements (numerator) and the gross replacement cost for all contracts included in legally valid netting agreements (denominator).               If Member States permit credit institutions a choice of methods, the method chosen is to be used consistently. 
For the calculation of the potential future
credit exposure according to the above formula perfectly matching contracts
included in the netting agreement may be taken into account as a single
contract with a notional principal equivalent to the net receipts. Perfectly
matching contracts are forward foreign-exchange contracts or similar contracts
in which a notional principal is equivalent to cash flows if the cash flows
fall due on the same value date and fully or partly in the same currency.
In the application of method 2, in step (a)
–                        
perfectly matching contracts included in the
netting agreement may be taken into account as a single contract with a
notional principal equivalent to the net receipts, the notional principal
amounts are multiplied by the percentages given in Table 2,
–                        
for all other contracts included in a netting
agreement, the percentages applicable may be reduced as indicated in Table 3: 
 TABLE 3 
 Original maturity[41] || Interest-rate contracts || Foreign-exchange contracts 
 One year or less || 0.35% || 1.50% 
 More than one year but not more than two years || 0.75% || 3.75% 
 Additional allowance for each additional year || 0.75% || 2.25% 
ê 2000/12/EC
ANNEX IV
ê 2000/12/EC
ð new
TYPES
OF OFF-BALANCE-SHEET
ITEMS ð DERIVATIVES ï
ê 2000/12/EC
(adapted)
1. Interest-rate contracts:
(a)        single-currency interest rate
swaps;
(b)        basis-swaps;
(c)        forward rate agreements;
(d)       interest-rate futures;
(e)        interest-rate options purchased;
(f)        other contracts of similar
nature.
2. Foreign-exchange contracts and contracts
concerning gold:
(a)        cross-currency interest-rate
swaps;
(b)        forward foreign-exchange
contracts;
(c)        currency futures;
(d)       currency options purchased;
(e)        other contracts of a similar
nature;
(f)        contracts concerning gold of a
nature similar to (a) to (e).
3. Contracts of a nature similar to those
in points 1(a) to (e) and 2(a) to (d) concerning other reference items or
indices concerning:
(a)        equities;
(b)        precious metals except gold;
(c)        commodities other than precious
metals;
(d)       other contracts of a similar
nature. Step (b):   to obtain a figure for potential
future credit exposure[42],
the notional principal amounts or underlying values are multiplied by the
following percentages:
é
ò new
ANNEX V TO
XII
[OMISSIS]
ò new
ANNEX XIII
PART A
REPEALED
DIRECTIVES TOGETHER WITH THEIR SUCCESSIVE AMENDMENTS
(referred to
in Article 158)
Directive
2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions
Directive
2000/28/EC of the European Parliament and of the Council of 18 September 2000 amending Directive 2000/12/EC relating to the taking up and pursuit of
the business of credit institutions
Directive
2002/87/EC of the European Parliament and of the Council of 16 December 2002 on
the supplementary supervision of credit institutions, insurance undertakings
and investment firms in a financial conglomerate and amending Council
Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and
93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament
and of the Council,
Only Art. 29.1(a)(b),
Art. 29.2,, Art. 29.4(a)(b), Art. 29.5, Art. 29.6, Art. 29.7 (a) (b), Art.
29.8, Art. 29.9, Art. 29.10, Art. 29.11
Directive
2004/39/EC of the European Parliament and of the Council of 21 April 2004 on
markets in financial instruments amending Council Directives 85/611/EEC
and 93/6/EEC and Directive 2000/12/EC of the European Parliament and
of the Council and repealing Council Directive 93/22/EEC
Only Art. 68
Commission
Directive 2004/69/EC of 27 April 2004 amending Directive 2000/12/EC of the
European Parliament and of the Council as regards the definition of "multilateral
development banks" (Text with EEA relevance)
Directive
2004/39/EC of the European Parliament and of the Council of 21 April 2004 on
amending Council Directives 73/239/EEC, 85/611/EEC, 91/675/EEC, 92/49/EEC,
93/6/EEC and 94/19/EC and Directives 98/78/EC, 2000/12/EC, 2001/34/EC,
2002/83/EC and 2002/87/EC, in order to establish a new financial services
committee organisational structure.
Only Article 3
NON-REPEALED
MODIFICATIONS
Act of accession 2003
PART B
DEADLINES
FOR IMPLEMENTATION
(referred to
in Article 158)
 Directive ||   || Deadline for implementation 
 Directive 2000/12/EC ||   || ----- 
 Directive 2000/28/EC ||   || 27.4.2002 
 Directive 2002/87/EC, ||   || 11.8.2004 
 Directive 2004/39/EC ||   || Not yet available 
 Directive 2004/69/EC ||   || 30.6.2004 
 Directive 2004/xx/EC ||   || Not yet available 
ANΝΕΧ
XIV
CORRELATION TABLE
 This Directive || Directive 2000/12/EC || Directive 2000/28/EC || Directive 2001/87/EC || Directive 2004/69/EC || Directive 2004/xx/EC 
 Article 1 || Article 2(1) and (2) ||   ||   ||   ||   
 Article 2(1) || Article 2(3) Act of Accession ||   ||   ||   ||   
 Article 2(2) || Article 2(4) ||   ||   ||   ||   
 Article 3 || Article 2(5) and (6) ||   ||   ||   ||   
 Article 3 (1) final sentence ||   ||   ||   ||   || Article 3.2 
 Article 4.1 (1) || Article 1(1) ||   ||   ||   ||   
 Article 4.1 (2) to (5) ||   || Article 1(2) to (5) ||   ||   ||   
 Article 4.1 (7) to (9) ||   || Article 1(6) to (8) ||   ||   ||   
 Article 4 .1 (10) ||   ||   || Article 29.1 (a) ||   ||   
 Article 4.1 (11) to (14) || Article 1 (10), (12) and (13) ||   ||   ||   ||   
 Article 4.1 (21) and (22) ||   ||   || Article 29.1 (b) ||   ||   
 Article 4.1 (23) || Article 1 (23) ||   ||   ||   ||   
 Article 4.1 (45 to (47) || Article 1 (25 to (27) ||   ||   ||   ||   
 Article 4 .2 || Article 1(1) second sub-paragraph ||   ||   ||   ||   
 Article 5 || Article 3 ||   ||   ||   ||   
 Article 6 || Article 4 ||   ||   ||   ||   
 Article 7 || Article 8 ||   ||   ||   ||   
 Article 8 || Article 9 ||   ||   ||   ||   
 Article 9 (1) || Article 5(1) and 1(11) ||   ||   ||   ||   
 Article 9 (2) || Article 5(2) ||   ||   ||   ||   
 Article 10 || Article 5 (3) to (7) ||   ||   ||   ||   
 Article 11 || Article 6 ||   ||   ||   ||   
 Article 12 || Article 7 ||   ||   ||   ||   
 Article 13 || Article 10 ||   ||   ||   ||   
 Article 14 || Article 11 ||   ||   ||   ||   
 Article 15 (1) || Article 12 ||   ||   ||   ||   
 Article 15 (2) and (3) ||   ||   || Article 29.2 ||   ||   
 Article 16 || Article 13 ||   ||   ||   ||   
 Article 17 || Article 14 ||   ||   ||   ||   
 Article 18 || Article 15 ||   ||   ||   ||   
 Article 19 (1) || Article 16 (1) ||   ||   ||   ||   
 Article 19 (2) ||   ||   || Article 29.3 ||   ||   
 Article 20 || Article 16(3) ||   ||   ||   ||   
 Article 21 || Article 16 (4) to (6) ||   ||   ||   ||   
 Article 22 || Article 17 ||   ||   ||   ||   
 Article 23 || Article 18 ||   ||   ||   ||   
 Article 24 (1) || Article 19 paragraphs (1) to (3) ||   ||   ||   ||   
 Article 24 (2) || Article 19 paragraph (6) ||   ||   ||   ||   
 Article 24 (3) || Article 19 paragraph (4) ||   ||   ||   ||   
 Article 25 (1) to (3) || Article 20 (1) to (3) 1 and 2 sub-paragraph ||   ||   ||   ||   
 Article 25 (3) || Article 19 paragraph (5) ||   ||   ||   ||   
 Article 25 (4) || Article 20 (3) 3 sub-paragraph ||   ||   ||   ||   
 Article 26 || Article 20 (4) to (7) ||   ||   ||   ||   
 Article 27 || Article 1 (3) final clause ||   ||   ||   ||   
 Article 28 || Article 21 ||   ||   ||   ||   
 Article 29 || Article 22 ||   ||   ||   ||   
 Article 30 || Article 22 (2) to (4) ||   ||   ||   ||   
 Article 31 || Article 22 (5) ||   ||   ||   ||   
 Article 32 || Article 22 (6) ||   ||   ||   ||   
 Article 33 || Article 22 (7) ||   ||   ||   ||   
 Article 34 || Article 22 (8) ||   ||   ||   ||   
 Article 35 || Article 22 (9) ||   ||   ||   ||   
 Article 36 || Article 22 (10) ||   ||   ||   ||   
 Article 37 || Article 22 (11) ||   ||   ||   ||   
 Article 38 || Article 24 ||   ||   ||   ||   
 Article 39 (1) and (2) || Article 25 ||   ||   ||   ||   
 Article 39 (2) ||   ||   ||   ||   || Article 3.8 
 Article 40 || Article 26 ||   ||   ||   ||   
 Article 41 || Article 27 ||   ||   ||   ||   
 Article 42 || Article 28 ||   ||   ||   ||   
 Article 43 || Article 29 ||   ||   ||   ||   
 Article 44 || Article 30(1) to (3) ||   ||   ||   ||   
 Article 45 || Article 30(4) ||   ||   ||   ||   
 Article 46 || Article 30(3) ||   ||   ||   ||   
 Article 47 || Article 30(5) ||   ||   ||   ||   
 Article 48 || Article 30(6) and (7) ||   ||   ||   ||   
 Article 49 || Article 30(8) ||   ||   ||   ||   
 Article 50 || Article 30(9) 1 and 2 paragraphs ||   ||   ||   ||   
 Article 51 || Article 30(9) 3 paragraph ||   ||   ||   ||   
 Article 52 || Article 30(10) ||   ||   ||   ||   
 Article 53 || Article 31 ||   ||   ||   ||   
 Article 54 || Article 32 ||   ||   ||   ||   
 Article 55 || Article 33 ||   ||   ||   ||   
 Article 56 || Article 34(1) ||   ||   ||   ||   
 Article 57 || Article 34(2) 1 paragraph Article 34(1) point 2 final sentence ||   || Article 29.4(a) ||   ||   
 Article 58 ||   ||   || Article 29.4 (b) ||   ||   
 Article 59 ||   ||   || Article 29.4 (b) ||   ||   
 Article 60 ||   ||   || Article 29.4 (b) ||   ||   
 Article 61 || Article 34(3) and (4) ||   ||   ||   ||   
 Article 63 || Article 35 ||   ||   ||   ||   
 Article 64 || Article 36 ||   ||   ||   ||   
 Article 65 || Article 37 ||   ||   ||   ||   
 Article 66 (1) and (2) || Article 38 (1) and (2) ||   ||   ||   ||   
 Article 67 || Article 39 ||   ||   ||   ||   
 Article 73 || Article 52(3) ||   ||   ||   ||   
 Article 106 || Article 1(24) ||   ||   ||   ||   
 Article 107 || Article 1(1) 3 sub-paragraph ||   ||   ||   ||   
 Article 108 || Article 48(1) ||   ||   ||   ||   
 Article 109 || Article 48 (4) 1 paragraph ||   ||   ||   ||   
 Article 110 || Article 48(2) to (4)2 sub-paragraph ||   ||   ||   ||   
 Article 111 || Article 49 (1) to (5) ||   ||   ||   ||   
 Article 113 (1) to (3) || Article 49 (4) (6) and (7) ||   ||   ||   ||   
 Article 115 (1) and (2) || Article 49(8) and (9) ||   ||   ||   ||   
 Article 116 || Article 49(10) ||   ||   ||   ||   
 Article 117 || Article 49(11) ||   ||   ||   ||   
 Article 118 || Article 50 ||   ||   ||   ||   
 Article 120 || Article 51(1)(2)(5) ||   ||   ||   ||   
 Article 121 || Article 51(4) ||   ||   ||   ||   
 Article 122 (1) and (2) || Art. 51 (6) ||   || Article 29(5) ||   ||   
 Article 125 || Article 53(1) and (2) ||   ||   ||   ||   
 Article 126 || Article 53 (3) ||   ||   ||   ||   
 Article 128 || Article 53(5) ||   ||   ||   ||   
 Article 133 (1) || Article 54(1) ||   || Article 29(7)(a) ||   ||   
 Article 133 (2) and (3) || Article 54 (2) and (3) ||   ||   ||   ||   
 Article 134(1) || Article 54(4) first paragraph ||   ||   ||   ||   
 Article 134 (2) || Article 54(4) second paragraph ||   ||   ||   ||   
 Article 135 ||   ||   || Article 29(8) ||   ||   
 Article 137 || Article 55(1) and (2) ||   ||   ||   ||   
 Article 138 ||   ||   || Article 29(9) ||   ||   
 Article 139 || Article 56(1) to (3) ||   ||   ||   ||   
 Article 140 || Article 56(4) to (6) ||   ||   ||   ||   
 Article 141 || Article 56 (7) ||   || Article 29(10) ||   ||   
 Article 142 || Article 56(8) ||   ||   ||   ||   
 Article 143 ||   ||   || Article 29(11) ||   || Art. 3.10 
 Article 150 || Article 60(1) ||   ||   ||   ||   
 Article 151 || Article 60(2) ||   ||   ||   || Art. 3.10 
 Article 158 || Art. 67 ||   ||   ||   ||   
 Article 159 || Art. 68 ||   ||   ||   ||   
 Article 160 || Article 69 ||   ||   ||   ||   
 Annex I || Annex I ||   ||   ||   ||   
 Annex I final clause ||   ||   ||   || Article 68 ||   
 Annex II || Annex II ||   ||   ||   ||   
 Annex III || Annex III ||   ||   ||   ||   
 Annex IV || Annex IV ||   ||   ||   ||   
[1]               The Basel Committee on Banking Supervision was
established by the central bank Governors of the Group of Ten (G-10) countries.
It consists of representatives of the authority responsible for prudential
supervision of banks from the following countries: Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. The European
Commission, along with the European Central Bank, participates as an observer.
[2]               While formally agreed by the authorities of the G-10
group of industrialised countries for application to internationally active
banks, the 1988 Accord has been applied throughout the world to banks of all
sizes and levels of complexity.
[3]               OJ S167 of 29/08/2002,
[4]               Available on Commission website - http://europa.eu.int/comm/internal_market/regcapital/index_en.htm
[5]               OJ C 157,
25.5.1998, p. 13 Ö […] Õ .
[6]               Opinion of the European
Parliament of 18 January 2000 (not yet published in the Official Journal) Ö […] Õ and Council
Decision of 13 March 2000 (not yet published in the
Official Journal) Ö […] Õ .
[7]               OJ L 126, 26.5.2000, p.1, as
last amended by the Act of Accession 2003
[8]               OJ L 126, 26.5.2000, p.1, as
last amended by the Act of Accession 2003
[9]               OJ L 126, 26.5.2000, p.1, as
last amended by the Act of Accession 2003
[10]             OJ L 126, 26.5.2000, p.1, as last
amended by the Act of Accession 2003
[11]             OJ L 126, 26.5.2000, p.1, as last
amended by the Act of Accession 2003
[12]             OJ L 126, 26.5.2000, p.1, as last
amended by the Act of Accession 2003
[13]             OJ L 126, 26.5.2000, p.1, as last
amended by the Act of Accession 2003
[14]             OJ L 126, 26.5.2000, p.1 as last amended by Directive
2004/xx/EC (OJ L, […])
[15]             OJ L 3, 7.1.2004, p. 28 
[16]             OJ L 372, 31.12.1986, p. 1.
[17]             OJ L 193, 18.7.1983, p. 1. Directive
as last amended by Directive Ö 2003/51/EC
(OJ L 178, 17.7.2003, p. 16). Õ
[18]             OJ L 243, 11.9.2002, p. 1.
[19]             Ö OJ L 184,
17.7.1999, p. 23. Õ
[20]             OJ L 275, 27.10.2000, p. 39.
[21]             OJ L 141, 11.6.1993, p. 1.
[22]             OJ L 222, 14.8.1978, p.11.
[23]             OJ L 35, 11.2.2003, p. 1.
[24]             Council Directive 88/627/EEC of 12 December 1988 on the information to be published when a major holding in a listed
company is acquired or disposed of (OJ L 348, 17.12.1988, p. 62).
[25]             OJ L 184 , 6.7.2001, p. 1.
[26]             OJ L 126, 12.5.1984, p. 20.
[27]             OJ L 222, 14.8.1978, p. 11, as
last amended by Directive 1999/60/EC (OJ L 62, 26.6.1999, p. 65).
[28]             OJ L 375, 31.12.1985, p. 3, as
last amended by Directive 95/26/EC (OJ L 168, 18.7.1995, p. 7).
[29]             Ö OJ L 228,
16.8.1973, p. 3 Õ
[30]             Ö OJ L 63,
13.3.1979, p. 1 Õ
[31]             OJ L 330, 5.12.1998, p. 1.
[32]             Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field (OJ L 141, 11.6.1993, p. 27). Directive as
last amended by Directive 97/9/EC (OJ L 84, 26.3.1997, p. 22).
[33]             Including, inter
alia: consumer credit, mortgage credit, factoring, with or without
recourse, financing of commercial transactions (including forfeiting).
[34]             OJ n° L 145 of 30.04.2004, p. 1
[35]             Council
Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investment firms
and credit institutions (OJ L 141, 11.6.1993, p. 1). Directive amended by
Directive 98/33/EC (OJ L 204, 21.7.1998, p. 29).
[36]             Except in
the case of single-currency «floating/floating» interest rate swaps in which
only the current replacement cost will be calculated.
[37]             Contracts which do not fall
within one of the five categories indicated in this table shall be treated as
contracts concerning commodities other than precious metals.
[38]             For contracts with multiple
exchanges of principal, the percentages have to be multiplied by the number of
remaining payments still to be made according to the contract.
[39]             For contracts that are
structured to settle outstanding exposure following specified payment dates and
where the terms are reset such that the market value of the contract is zero on
these specified dates, the residual maturity would be equal to the time until
the next reset date. In the case of interest-rate contracts that meet these
criteria and have a remaining maturity of over one year, the percentage shall
be no lower than 0,5%.
[40]             In the case of interest-rate
contracts, credit institutions may, subject to the consent of their competent
authorities, choose either original or residual maturity.
[41]             In the case of interest-rate
contracts, credit institutions may, subject to the consent of their competent
authorities, choose either original or residual maturity.
[42]             Except in
the case of single-currency «floating/floating» interest rate swaps in which
only the current replacement cost will be calculated.
EN
 || COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 14.7.2004
COM(2004) 486 final
2004/0155
(COD)
2004/0159 (COD)
Volume II
 
Proposal for
DIRECTIVES OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL 
Re-casting Directive 2000/12/EC of the
European Parliament and of the Council of 20 March 2000 relating to the taking
up and pursuit of the business of credit institutions and Council Directive
93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and
credit institutions.
(presented by the Commission)
{SEC(2004) 921}
ê 93/6/EEC
(adapted)
2004/0159 (COD)
Proposal for a
COUNCIL DIRECTIVE Ö OF THE
EUROPEAN PARLIAMENT AND OF THE COUNCIL Õ
on the capital adequacy of investment
firms and credit institutions
(recast)
Ö THE
EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Õ
Having regard to the Treaty establishing
the European Economic Community, and in particular
the first and third sentences of Article 57 Ö 47 Õ (2) thereof,
Having regard to the proposal from the
Commission[1],
In cooperation with
the European Parliament[2],
Having regard to the opinion of the
European Economic and Social Committee[3],
Ö Having
regard to the opinion of the Committee of the Regions[4], Õ
Ö Acting in
accordance with the procedure laid down in Article 251 of the Treaty[5], Õ
Whereas:
ò new
(1)              
Council Directive
93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and
credit institutions[6] has been substantially amended several times.
Since further amendments are to be made, it should be recast in the interests
of clarity.
ê 93/6/EEC
Recitals 1 (adapted)
(2)              
Whereas the main
Ö One of
the Õ objectives of Council
Directive 93/22/EEC of 10 May 1993 on investment services
in the securities field [7]
Ö 2004/39/EC of
the European Parliament and of the Council of 21 April 2004 on markets in
financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and
Directive 2000/12/EC of 20 March 2000 relating to the taking up and pursuit of
credit institutions[8]
and repealing Council Directive 93/22/EEC[9]
Õ is to allow
investment firms authorized by the competent authorities of their home Member
States and supervised by the same authorities to establish branches and provide
services freely in other Member States;. whereas tThat Directive accordingly provides for the
coordination of the rules governing the authorizsation
and pursuit of the business of investment firms;.
ê 93/6/EEC
Recital 2 (adapted)
(3)              
Whereas tThat
Directive does not, however, establish common standards for the own funds of
investment firms nor indeed does it establish the amounts of the initial
capital of such firms; whereas Ö neither
does Õ it does not establish a common framework for monitoring the
risks incurred by the same firms;. whereas it refers, in
several of its provisions, to another Community initiative, the objective of
which would be precisely to adopt coordinated measures in those fields;
ê 93/6/EC
Recital 3 (adapted)
(4)              
Whereas the approach that has been adopted is Ö It is
appropriate Õ to effect only
the essential harmonization harmonisation that is necessary and sufficient
to secure the mutual recognition of authorization
authorisation and of prudential supervision systems; whereas
the adoption of Ö In order
to achieve mutual recognition within the framework of the internal financial
market, Õ measures Ö should be
laid down Õ to coordinate
the definition of the own funds of investment firms, the establishment of the
amounts of their initial capital and the establishment of a common framework
for monitoring the risks incurred by investment firms are
essential aspects of the harmonization necessary for the achievement of mutual
recognition within the framework of the internal financial market;.
ò new
(5)              
Since the objective of
the proposed action cannot be sufficiently achieved by the Member States and
can, therefore, by reason of the scale and the effects of the action, 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 confines itself to the minimum required in order to achieve
those objectives and does not go beyond what is necessary for that purpose.
ê 93/6/EEC
Recital 4
(6)              
Whereas iIt is
appropriate to establish different amounts of initial capital depending on the
range of activities that investment firms are authorized to undertake;.
ê 93/6/EC
Recital 5 (adapted)
(7)              
Whereas Existing investment firms should be
permitted, under certain conditions, to continue their business even if they do
not comply with the minimum amount of initial capital fixed for new Ö investment Õ firms;.
ê 93/6/EEC
Recital 6 (adapted)
(8)              
Whereas theMember States may Ö should Õ also Ö be able
to Õ establish
rules stricter than those provided for in this Directive;.
ê 93/6/EC
Recital 7 (adapted)
Whereas this
Directive forms part of the wider international effort to bring about
approximation of the rules in force regarding the supervision of investment
firms and credit institutions (hereinafter referred to collectively as
«institutions»);
ò new
(9)              
The smooth operation
of the internal market requires not only legal rules but also close and regular
cooperation and significantly enhanced convergence of regulatory and
supervisory practices between the competent authorities of the Member States.
ê 93/6/EEC
Recital 8 (adapted)
Whereas common basic
standards for the own funds of institutions are a key feature in an internal
market in the investment services sector, since own funds serve to ensure the
continuity of institutions and to protect investors;
ò new
(10)          
Since investment firms
face in respect of their trading book business the same risks as credit
institutions, it is appropriate for the pertinent provisions of Directive
2000/12/EC to apply equally to investment firms.
ê 93/6/EEC
Recital 9 (adapted)
ð new
(11)          
Whereas in a common
financial market, institutions, whether they are
ð The own funds of ï investment firms or credit institutions, ð (hereinafter referred to
collectively as «institutions») can serve to absorb losses which are not
matched by a sufficient volume of profits, to ensure the continuity of
institutions and to protect investors. The own funds also serve as an important
yardstick for the competent authorities, in particular for the assessment of
the solvency of institutions and for other prudential purposes. Furthermore,
institutions, whether they are investment firms or credit institutions, in the
internal market ï engage in direct competition with one Ö each Õ another. ð Therefore, in order to strengthen
the Community financial system and to prevent distortions of competition, it is
appropriate to lay down common basic standards for own funds. ï
ê 93/6/EC
Recital 10 (adapted)
Whereas it is
therefore desirable to achieve equality in the treatment of credit institutions
and investment firms;
ò new
(12)          
For these purposes, it
is appropriate for the definition of own funds laid down in Directive
2000/12/EC to serve as a basis and to provide for supplementary specific rules
which take into account the different scope of market risk related capital
requirements.
ê 93/6/EEC
Recital 11 (adapted)
(13)          
Whereas, aAs
regards credit institutions, common standards are Ö have Õ already Ö been Õ established
for the supervision and monitoring of Ö different
types of Õ credit risks in Council Directive 89/647/EEC of 18 December 1989 on a solvency
ratio for credit institutions[10]
Öby Directive
2000/12/EC Õ;.
ò new
(14)          
In that respect, the
provisions on minimum capital requirements should be considered in conjunction
with other specific instruments also harmonising the fundamental techniques of
the supervision of institutions.
ê 93/6/EEC
Recital 12
(15)          
Whereas iIt is
necessary to develop common standards for market risks incurred by credit
institutions and provide a complementary framework for the supervision of the
risks incurred by institutions, in particular market risks, and more especially
position risks, counterparty/settlement risks and foreign-exchange risks;.
ê 93/6/EC
Recital 13 (adapted)
(16)          
Whereas iIt is
necessary to introduce Ö provide
for Õ the concept of
a «trading book» comprising positions in securities and other financial
instruments which are held for trading purposes and are subject mainly to
market risks and exposures relating to certain financial services provided to
customers;.
ê 93/6/EEC
Recital 14 (adapted)
(17)          
Whereas it is desirable
that Ö With a
view to reduce the administrative burden for Õ institutions
with negligible trading-book business, in both absolute and relative terms, Ö such
institutions Õ should be able
to apply Directive 89/647/EEC Ö [2000/12/EC] Õ , rather than
the requirements imposed in Annexes I and II to this Directive;.
ê 93/6/EC
Recital 15 (adapted)
(18)          
Whereas It is important that
monitoring of settlement/delivery risks should take account of the existence of
systems offering adequate protection that reduces Ö reducing Õ that risk;.
ê 93/6/EEC
Recital 16 (adapted)
(19)          
Whereas, in any case, institutions must Ö should Õ comply with
this Directive as regards the coverage of the foreign-exchange risks on their
overall business; Ö . Õ whereas lLower
capital requirements should be imposed for positions in closely correlated
currencies, whether statistically confirmed or arising out of binding
intergovernmental agreements, with a view in particular
to the creation of the European Monetary Union;.
ê 93/6/EC
Recital 17 (adapted)
(20)          
Whereas tThe
existence, in all institutions, of internal
systems for monitoring and controlling interest-rate risks on all of their business Ö of
institutions Õ is a
particularly important way of minimizing
minimising such risks; Ö . Õ whereas, cConsequently,
such systems must be subject to overview Ö should be
supervised Õ by the
competent authorities;.
ê 93/6/EEC
Recital 18 (adapted)
(21)          
Whereas Council Directive 92/121/EEC of 21 December
1992 on the monitoring and control of large exposures of credit institutions[11]
Ö Since Directive
[2000/12/EC] Õ is not aimed at establishing Ö does not
establish Õ common rules
for monitoring Ö and
control of Õ large
exposures in activities which are principally subject to market risks Ö , it is
therefore appropriate to provide for such rules Õ ; whereas that Directive makes
reference to another Community initiative intended to adopt the requisite
coordination of methods in that field;.
ê 93/6/EEC
Recital 19 (adapted)
Whereas it is
necessary to adopt common rules for the monitoring and control of large exposures
incurred by investment firms;
ò new
(22)          
Operational risk is a
significant risk faced by institutions requiring coverage by own funds. It is
essential to take account of the diversity of institutions in the EU by providing
alternative approaches.
ê 93/6/EEC
Recitals 20 to 22 (adapted)
Whereas the own funds
of credit institutions have already been defined in Council Directive
89/299/EEC of 17 April 1989 on the own funds of credit institutions [12] ;
Whereas the basis for
the definition of the own funds of institutions should be that definition;
Whereas, however,
there are reasons why for the purposes of this Directive the definition of the
own funds of institutions may differ from that in the aforementioned Directive
in order to take account of the particular characteristics of the activities
carried on by those institutions which mainly involve market risks;
ê 93/6/EEC
Recital 23 (adapted)
(23)          
Whereas Council Directive 92/30/EEC of 6 April 1992 on the supervision of credit institutions on a consolidated basis[13]Ö Directive
[2000/12/EC] Õ states
the principle of consolidation; Ö . Õ whereas iIt does
not establish common rules for the consolidation of financial institutions
which are involved in activities principally subject to market risks;. whereas that Directive makes reference to another Community
initiative intended to adopt coordinated measures in that field;
ò new
(24)          
In order to ensure
adequate solvency of institutions within a group it is essential that the
minimum capital requirements apply on the basis of the consolidated financial
situation of the group. In order to ensure that own funds are appropriately
distributed within the group and available to protect investments where needed,
the minimum capital requirements should apply to individual institutions within
a group, unless this objective can be effectively otherwise achieved.
ê 93/6/EEC
Recital 24 (adapted)
(25)          
Whereas Directive 92/30/EEC Ö [2000/12/EC] Õ does not apply
to groups which include one or more investment firms but no credit institutions;. whereas it was, however, felt desirable to provide aA common
framework for the introduction of the supervision of investment firms on a
consolidated basis Ö should
therefore be provided for Õ ;.
ò new
(26)          
Institutions should
ensure that they have internal capital which, having regard to the risks to
which they are or might be exposed, is adequate in quantity, quality and
distribution. Accordingly, institutions should have strategies and processes in
place for assessing and maintaining the adequacy of their internal capital.
(27)          
Competent authorities
should evaluate the adequacy of own funds of institutions, having regard to the
risks to which the latter are exposed.
(28)          
In order for the
internal market to operate effectively it is essential that there should be
significantly enhanced convergence in implementation and application of the
provisions of harmonised Community legislation.
(29)          
For the same reason and
to ensure that Community institutions which are active in several Member States
are not disproportionately burdened as a result of the continued
responsibilities of individual Member State competent authorities for
authorisation and supervision, it is essential to significantly enhance the
cooperation between competent authorities. In this context the role of the
consolidated supervisor should be strengthened.
(30)          
In order for the internal
market to operate with increasing effectiveness and for citizens of the
Community to be afforded adequate levels of transparency it is necessary that
competent authorities disclose publicly and in a way which allows for
meaningful comparison the manner in which the requirements of this Directive
are implemented.
(31)          
In order to strengthen
market discipline and stimulate institutions to improve their market strategy,
risk control and internal management organisation, appropriate public
disclosures by institutions should be provided for.
ê 93/6/EEC
Recital 25 (adapted)
ð new
(32)          
Whereas technical
adaptations to the detailed rules laid down in this Directive may from time to
time be necessary to take account of new developments in the investment
services field; whereas the Commission will accordingly propose such
adaptations as are necessary ð The measures necessary for the
implementation of this Directive 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 Commission[14]. ï;
ê 93/6/EEC
Recital 26
Whereas the
Council should, at a later stage, adopt provision for the adaptation of this Directive
to technical progress in accordance with Council Decision 87/373/EEC of 13 July
1987 laying down the procedures for the exercise of implementing powers
conferred on the Commission[15];
whereas meanwhile the Council itself, on a proposal from the Commission, should
carry out such adaptations;
ê 93/6/EEC
Recital 27 (adapted)
Whereas provision
should be made for the review of this Directive within three years of the date
of its application in the light of experience, developments on financial
markets and work in international fora of regulatory authorities; whereas that
review should also include the possible review of the list of areas that may be
subject to technical adjustment;
ê 93/6/EEC
Recital 28
Whereas this
Directive and Directive 93/22/EEC on investment services in the securities
field are so closely interrelated that their entry into force on different
dates could lead to the distortion of competition;
ò new
(33)          
In order to avoid
disruption to markets and to ensure continuity in overall levels of own funds, it
is appropriate to provide for specific transitional arrangements.
(34)          
This Directive
respects the fundamental rights and observes the principles recognised in
particular by the Charter of Fundamental Rights of the European Union as
general principles of Community law.
(35)          
The
obligation to transpose this Directive into national law should be confined to
those provisions which represent a substantive change as compared with the
earlier Directives. The obligation to transpose the provisions which are
unchanged arises under the earlier Directives.
(36)          
This
Directive should be without prejudice to the obligations of the Member States
relating to the time-limits for transposition into national law of the
Directives set out in Annex VIII, Part B.
ê 93/6/EEC
(adapted)
HASHAVE ADOPTED
THIS DIRECTIVE:
Ö CHAPTER I Õ
Ö Subject
matter, scope and definitions Õ
Ö Section 1 Õ
Ö Subject
matter and scope Õ
ê 93/6/EEC
(adapted)
Article 1
1.         Ö This
directive lays down the capital adequacy requirements applying to investment firms
and credit institutions, the rules for their calculation and the rules for their
prudential supervision. Õ Member States
shall apply the requirements of this Directive to investment firms and credit
institutions as defined in Article 2.
2.         A Member State may impose
additional or more stringent requirements on the investment firms and credit
institutions that it has authorizsed.
ò new
Article 2
1.         Subject
to Articles 18, 20, 28 to 32, 34 and 39 of this Directive, Articles 68 to 73 of
Directive [2000/12/EC] shall apply mutatis mutandis to investment firms.
In addition, Articles
71 to 73 of Directive [2000/12/EC] shall apply in the following situations:
(a)     an
investment firm has as a parent a parent credit institution in a Member State; 
(b)     a credit
institution has as a parent a parent investment firm in a Member State.
Where a financial
holding company has as subsidiary both a credit institution and an investment
firm, requirements on the basis of the consolidated financial situation of the
financial holding company shall apply to the credit institution.
ê 93/6/EEC
Art 7 (1) and (2) (adapted)
Article 7
General Principles
1.         The
capital requirements imposed in Articles 4 and 5 for institutions which are
neither parent undertakings nor subsidiaries of such undertakings shall be
applied on a solo basis.
2.         The
requirements imposed in Articles 4 and 5 for:
–                        
any
institution which has a credit institution within the meaning of Directive
92/30/EEC, an investment firm or another financial institution as a subsidiary
or which holds a participation in such an entity, and
–                        
any
institution the parent undertaking of which is a financial holding company
shall be
applied on a consolidated basis in accordance with the methods laid down in the
abovementioned Directive and in paragraphs 7 to 14 of this Article.
ê 93/6/EEC
Art. 7 (3) (adapted)
è1 2004/xx/EC Art. 1
ð new
2.         When a group covered by paragraph 2
Ö paragraph
1Õdoes not
include a credit institution, Directive 92/30/EEC Ö [2000/12/EC] Õ shall apply,
subject to the following adaptations:
–                        
« financial
holding company » shall means a financial institution, the subsidiary
undertakings of which are either exclusively or mainly investment firms or
other financial institutions, at least one of which is an investment firm, and
which is not a mixed financial holding company within the meaning of Directive
2002/87/EC of the European Parliament and of the Council of 16 December 2002 on
the supplementary supervision of credit institutions, insurance undertakings
and investment firms in a financial conglomerate[16],
–                        
«mixed-activity holding
company » shall means a parent undertaking, other than a financial holding
company or an investment firm or a mixed financial holding company within the
meaning of Directive 2002/87/EC, the subsidiaries of which include at least one
investment firm,
–                        
-         competent
authorities shall means the national authorities
which are empowered by law or regulation to supervise investment firms
–                        
the second subparagraph of
Article 3 (5) of Directive 92/30/EEC shall not apply,
ð (a) every reference to credit
institutions shall be construed as a reference to investment firms; ï
(b)     in Articles 4 Ö 125 Õ (1) and (2) and 7 Ö 140 (2) Õ (5) of Directive 92/30/EEC Ö [2000/12/EC] Õ each reference
to Ö other
articles of Õ Directive
77/780/EEC Ö [2000/12/EC] Õ shall be Ö construed
as Õ replaced by a reference to Directive 93/22/EEC Ö 2004/39/EC Õ ;
(c)     for the purpose of Article 3 (9) and 8 Ö 39(3) Õ of Directive 92/30/EEC Ö [2000/12/EC] Õ the references
to the è1 European Banking Committee ç shall be Ö construed
as Õ substituted by references to the Council and the Commission;
(d)     Ö by
derogation to Article 140(1) of Directive [2000/12/EC], where a group does not
include a credit institution, Õ the first
sentence of Ö that Õ Article 7 shall be replaced by the following: «Where an
investment firm, a financial holding company or a mixed-activity holding
company controls one or more subsidiaries which are insurance companies, the
competent authorities and the authorities entrusted with the public task of
supervising insurance undertakings shall cooperate closely».
ê 93/6/EEC
Art 7 (4)
4. The competent authorities required or mandated to
exercise supervision of groups covered by paragraph 3 on a consolidated basis
may, pending further coordination on the supervision of such groups on a
consolidated basis and where the circumstances justify it, waive that
obligation provided that each investment firm in such a group:
(i)           uses the definition of own funds given in paragraph 9 of
Annex V;
(ii)          meets the requirements imposed in Articles 4 and 5 on a
solo basis;
(iii)         sets up systems to monitor and control the sources of
capital and funding of all other financial institutions within the group.
ê 93/6/EC
Art. 7 (5) and (6) (adapted)
5. The competent authorities
shall require investment firms in a group which has been granted the waiver
provided for in paragraph 4 5 to notify them of those the risks including those
associated with the composition and sources of their capital and funding, which
could undermine their financial positions, including those associated with the
composition and sources of their capital and funding. If the competent
authorities then consider that the financial positions of those investment
firms is not adequately protected, they shall require them to take measures
including, if necessary, limitations on the transfer of capital from such firms
to group entities.
6. Where the
competent authorities waive the obligation of supervision on a consolidated
basis provided for in paragraph 4 5 they shall take other appropriate measures
to monitor the risks, namely large exposures, of the whole group, including any
undertakings not located in a Member State.
ê 93/6/EEC
(adapted)
Ö SECTION 2Õ
DEFINITIONS
ê 93/6/EEC Art.
2 (1) (adapted)
ð new
Article 3
1.         For the purposes of this
Directive ð the following definitions shall
apply: ï
(a)1.  credit
institutions shall mean Ö means credit institutions
as defined in Article 4(1) of Directive [2000/12/EC]; Õ; all institutions that satisfy the definition in the first
indent of Article 1 of the First Council Directive (77/780/EEC) of 12 December
1977 on the coordination of laws, regulations and administrative provisions
relating to the taking up and pursuit of the business of credit institutions[17]
which are subject to the requirements imposed by Directive 89/647/EEC;
ê 2004/39/EC
Art. 67.2 (adapted)
ð new
(b)     investment
firms shall mean Ö means Õ all institutions that satisfy the
definition Ö as
defined in Article 4(1) of Directive 2004/39/EC Õ of the European Parliament and of the Council of 21 April 2004
on markets in financial instruments, which are subject to the
requirements imposed by the same Ö that Õ Directive,
excluding:
(a)(i)  credit institutions;
(b)(ii) local
firms as defined in 20 Ö point (p)
of paragraph 1 of this Article; Õ, and
(c)(iii)   firms
which ð are ï only ð authorised to provide the service of
investment advice and/or ï receive and transmit orders from investors without in both cases holding money or securities belonging to
their clients and which for that reason may not at any time place themselves in
debit with their clients;
ê 93/6/EEC
Art 2(3) to (4) (adapted (adapted)
3. (c) institutions
shall mean Ömeans Õ credit
institutions and investment firms;
4. (d) recognizzed
third-country investment firms shall mean Ömeans Õ firms Ö meeting
the following conditions: Õ
Ö (i)   firms Õ which, if they
were established within the Community, would be covered by the definition of
investment firm;
Ö (ii)  firms Õ in 2 which are authoriszed in a third country;
Ö (iii) firms Õ and which are subject to and comply with prudential
rules considered by the competent authorities as at least as stringent as those
laid down in this Directive;
ê 93/6/EEC (adapted)
ð new
5. (e) financial instruments
shall mean Ömeans Õ the instruments listed in Section B of the Annex to
Directive 93/22/EECð any contract that gives rise to both
a financial asset of one party and a financial liability or equity instrument of
another party ï;
ê 93/6/EEC
Art. 2(6) (7)
6.           the trading book of an institution shall consist of: 
(a)     its proprietary positions in financial instruments, commodities
and commodity derivatives which are held for resale and/or which are taken on
by the institution with the intention of benefiting in the short term from
actual and/or expected differences between their buying and selling prices, or
from other price or interest-rate variations, and positions in financial instruments,
commodities and commodity derivatives, arising from matched principal broking,
or positions taken in order to hedge other elements of the trading book;
(b)     the exposures due to the unsettled transactions, free
deliveries and over-the-counter (OTC) derivative instruments referred to in
paragraphs 1, 2, 3 and 5 of Annex II, the exposures due to repurchase
agreements and securities and commodities lending which are based on securities
or commodities included in the trading book as defined in (a) referred to in
paragraph 4 of Annex II, those exposures due to reverse repurchase agreements
and securities-borrowing and commodities-borrowing transactions described in
the same paragraph, provided the competent authorities so approve, which meet
either conditions (i), (ii), (iii) and (v) or conditions (iv) and (v) as
follows:
(i)      the exposures are marked to market daily following the
procedures laid down in Annex II;
(ii)     the collateral is adjusted in order to take account of
material changes in the value of the securities or commodities involved in the
agreement or transaction in question, according to a rule acceptable to the
competent authorities;
(iii)    the agreement or transaction provides for the claims of the
institution to be automatically and immediately offset against the claims of
its counter-party in the event of the latter's defaulting;
(iv)    the agreement or transaction in question is an
interprofessional one;
(v)     such agreements and transactions are confined to their accepted
and appropriate use and artificial transactions, especially those not of a
short-term nature, are excluded; and
(c)     those exposures in the form of fees, commission, interest,
dividends and margin on exchange-traded derivatives which are directly related
to the items included in the trading book referred to in paragraph 6 of Annex
II.
              Particular items shall be included in or excluded from
the trading book in accordance with objective procedures including, where
appropriate, accounting standards in the institution concerned, such procedures
and their consistent implementation being subject to review by the competent
authorities;
ê 93/6/EEC
Art 2(7) (adapted)
7.           parent
undertaking, subsidiary undertaking, and financial institution shall be defined
in accordance with Article 1 of Directive 92/30/EEC;
ê 93/6/EEC
Art 2(8) (adapted)
8.           financial
holding company shall mean a financial institution the subsidiary undertakings
of which are either exclusively or mainly credit institutions, investment firms
or other financial institutions, one of which at least is a credit institution
or an investment firm;
ò new
(f)     parent
investment firm in a Member State means an investment firm which has an
institution or another financial institution as a subsidiary or which holds a
participation in such entities, and which is not itself a subsidiary of another
institution authorised in the same Member State, or of a financial holding
company set up in the same Member State, and in which no other institution
authorised in the same Member State holds a participation;
(g)     EU parent
investment firm means a parent investment firm in a Member State which is
not a subsidiary of another institution authorised in any Member State, or of a
financial holding company set up in any Member State, and in which no other
institution authorised in any Member State holds a participation;
ê 93/6/EEC
Art 2 (9) (adapted)
9.           risk
weightings shall mean the degrees of credit risk applicable to the relevant
counter-parties under Directive 89/647/EEC. However assets constituting claims
on and other exposures to investment firms or recognized third-country
investment firms and exposures incurred to recognized clearing houses and
exchanges shall be assigned the same weighting as that assigned where the
relevant counterparty is a credit institution;
ê 98/33/EC
Art. 3.1 (adapted)
10(h) over-the-counter
(OTC) derivative instruments shall mean Ömeans Õ the off balance sheet items Ö falling
within the list in Annex IV to Directive [2000/12/EC] other than those
items to which an exposure value of zero is attributed under paragraph 2 of
Annex III of that Directive; Õ to which according to the first subparagraph of Article 6(3) of
Directive 89/647/EEC the methods set out in Annex II to the said Directive
shall be applied;
ê 93/6/EEC
(adapted)
11.(i) regulated
market shall mean Ömeans Õ a market that satisfies the definition given in Article 1 (13) of
Directive 93/22/EEC; Ö as
defined in Article 4(14) of Directive 2004/39/EC Õ;
ê 93/6/EEC
(adapted)
12.         qualifying
items shall mean long and short positions in the assets referred to in
Article 6 (1) (b) of Directive 89/647/EEC and in debt instruments issued by
investment firms or by recognized third-country investment firms. It shall also
mean long and short positions in debt instruments provided that such
instruments meet the following conditions: such instruments must firstly be
listed on at least one regulated market in a Member State or on a stock
exchange in a third country provided that that exchange is recognized by the
competent authorities of the relevant Member State; and secondly both be
considered by the institution concerned to be sufficiently liquid and, because
of the solvency of the issuer, be subject to a degree of default risk which is
comparable to or lower than that of the assets referred to in Article 6 (1) (b)
of Directive 89/647/EEC; the manner in which the instruments are assessed shall
be subject to scrutiny by the competent authorities, which shall overturn the
judgment of the institution if they consider that the instruments concerned are
subject to too high a degree of default risk to be qualifying items.
              Notwithstanding
the foregoing and pending further coordination, the competent authorities shall
have the discretion to recognize as qualifying items instruments which are
sufficiently liquid and which, because of the solvency of the issuer, are
subject to a degree of default risk which is comparable to or lower than that
of the assets referred to in Article 6 (1) (b) of Directive 89/647/EEC. The
default risk associated with such instruments must have been evaluated at such
a level by at least two credit-rating agencies recognized by the competent
authorities or by only one such credit-rating agency so long as they are not
rated below such a level by any other credit-rating agency recognized by the
competent authorities.
              The
competent authorities may, however, waive the condition imposed in the
preceding sentence if they judge it inappropriate in the light of, for example,
the characteristics of the market, the issuer, the issue, or some combination
of those characteristics.
              Furthermore,
the competent authorities shall require the institutions to apply the maximum
weighting shown in Table 1 in paragraph 14 of Annex I to instruments which show
a particular risk because of the insufficient solvency of the issuer or
liquidity.
              The
competent authorities of each Member State shall regularly provide the Council
and the Commission with information concerning the methods used to evaluate the
qualifying items, in particular the methods used to assess the degree of
liquidity of the issue and the solvency of the issuer;
13.         central
government items shall mean long and short positions in the assets referred to
in Article 6 (1) (a) of Directive 89/647/EEC and those assigned a weighting of
0 % in Article 7 of the same Directive;
ê 93/6/EEC
Art 2 (14) (adapted)
14.(j) convertible
shall mean Ömeans Õ a security
which, at the option of the holder, may be exchanged for another security, usually the equity of the issue;
ê 98/31/EC
Art. 1.1(b) (adapted)
15.(k)  «warrant»
shall mean Ömeans Õ a security
which gives the holder the right to purchase an underlying at a stipulated
price until or at the warrants’ expiry date Ö of the
warrant and which Õ may be settled
by the delivery of the underlying itself or by cash settlement;
16. (l)            «stock
financing» shall mean Ömeans Õ positions
where physical stock has been sold forward and the cost of funding has been
locked in until the date of the forward sale;
ê 98/31/EC
Art. 1.1(c) (adapted)
17.(m) «repurchase
agreement» and «reverse repurchase agreement» shall mean
Ö mean Õ any agreement
in which an institution or its counter-party transfers securities or
commodities or guaranteed rights relating to title to securities or commodities
where that guarantee is issued by a recognised exchange which holds the rights
to the securities or commodities and the agreement does not allow an
institution to transfer or pledge a particular security or commodity to more
than one counter-party at one time, subject to a commitment to repurchase them – (or
substituted securities or commodities of the same description) - at
a specified price on a future date specified, or to be specified, by the
transferor, being a repurchase agreement for the institution selling the
securities or commodities and a reverse repurchase agreement for the
institution buying them;
ê 93/6/EEC
Art 2(17) 2nd paragraph
              A reverse repurchase agreement shall be considered an
interprofessional transaction when the counter-party is subject to prudential
coordination at Community level or is a Zone A credit institution as defined in
Directive 89/647/EEC or is a recognized third-country investment firm or when
the agreement is concluded with a recognized clearing house or exchange;
ê 98/31/EC
Art. 1.1(d) (adapted)
18.(n)            «securities
or commodities lending» and «securities or commodities borrowing» shall mean Ö mean Õ any
transaction in which an institution or its counter-party transfers securities
or commodities against appropriate collateral subject to a commitment that the
borrower will return equivalent securities or commodities at some future date
or when requested to do so by the transferor, that transaction being securities
or commodities lending for the institution transferring the securities or
commodities and being securities or commodities borrowing for the institution
to which they are transferred;
ê 98/31/EC
Art. 1.1(d)
              Securities or commodities borrowing shall be
considered an interprofessional transaction when the counter-party is subject
to prudential coordination at Community level or is a Zone A credit institution
as defined in Directive 89/647/EEC or is a recognised third-country investment
firm or when the transaction is concluded with a recognised clearing house or
exchange;
ê 93/6/EEC
Art 2(19) (adapted)
19.(o)            clearing
member shall mean Ömeans Õ a member of
the exchange or the clearing house which has a direct contractual relationship
with the central counterparty (market guarantor); non-clearing
members must have their trades routed through a clearing member;
ê 93/6/EEC
Art 2(20) (adapted)
ð new
20.(p)            local
firm shall mean Ömeans Õ a firm dealing
only for its on own account ð on markets ï in a financial-futures or
options exchange ð or other derivatives and on cash
markets for the sole purpose of hedging positions on derivatives markets or
which deals ï for the accounts of or making a price to other members ð of those markets ï the
same exchange and ð which are ï guaranteed by a clearing
members of the same exchange ð markets, where ï Rresponsibility for ensuring the performance of
contracts entered into by such a firms must be
Ö is Õ assumed by a clearing members of the same exchange ð markets; ï , and such
contracts must be taken into account in the calculation of the clearing
member's overall capital requirements so long as the local firm's positions are
entirely separate from those of the clearing member;
ê 93/6/EEC
Art 2(21) (adapted)
21.(q)            delta
shall mean Ömeans Õ the expected
change in an option price as a proportion of a small change in the price of the
instrument underlying the option;
ê 93/6/EEC
Art 2(22) (adapted)
22.         for the purposes of paragraph 4 of Annex I, long
position shall mean a position in which an institution has fixed the interest
rate it will receive at some time in the future, and short position shall
mean a position in which it has fixed the interest rate it will pay at some
time in the future;
ê 93/6/EEC
Art 2(23) (adapted)
23.(r)
own funds shall mean Ömeans Õ own funds as
defined in Directive 89/299/EEC Ö [2000/12/EC] Õ.This definition may, however, be amended in the circumstances
described in Annex V;
ê 93/6/EC
Art. 2 (24) and (25) (adapted)
24.       initial
capital shall mean items 1 and 2 of Article 2(1) of Directive 89/299/EEC;
25        original
own funds shall mean the sum of items 1, 2 and 3, less the sum of items 9, 10
and 11 of Article 2 (1) of Directive 89/299/EEC;
ê 93/6/EEC Art
2 (26)
26.(s) capital
shall mean own funds;.
ê 93/6/EEC
Art 2(27) (adapted)
27.     modified duration
shall be calculated using the formula set out in paragraph 26 of Annex I.
ò new
For the purposes of
applying supervision on a consolidated basis, the term investment firm shall
include recognised third-country investment firms.
For the purposes of
point (e) of the first subparagraph, financial instruments shall include both
primary financial instruments or cash instruments, and derivative financial
instruments the value of which is derived from the price of an underlying
financial instrument or a rate or an index or the price of an underlying other
item and include as a minimum the instruments specified in Section C of Annex I
of Directive 2004/39/EC.
ê 93/6/EEC Art
2 (7) and (8) (adapted)
2.         Ö The terms Õ“parent undertaking”,“subsidiary
undertaking”,Ö ”asset
management company” Õ and “financial institution” shall be Ö cover
undertakings Õ defined in accordance with Ö as such
in Article 4Õ Article 1 of Directive 92/30/EEC
Ö[2000/12/EC] Õ.
Ö The terms Õ “financial holding company”, Ö “parent
financial holding company in a Member State”, “EU parent financial holding
company” and “ancillary services undertaking” Õ shall mean a financial institution the subsidiary undertaking
of which are either exclusively or mainly credit institutions, investment firms
or other financial institutions, one of which at least is a credit institution
or an investment firm Ö shall
cover undertakings defined as such in Article 4 of Directive [2000/12/EC],
save that every reference to credit institutions shall be read as a reference
to institutions. Õ
ò new
3.         For
the purposes of applying Directive [2000/12/EC] to groups covered by Article
2(1), which do not include a credit institution, the following definitions
shall apply:
ê 2002/87/EC
Art. 26 (adapted)
1.(a)  «financial
holding company » means a financial institution, the subsidiary undertakings of
which are either exclusively or mainly investment firms or other financial
institutions, at least one of which is an investment firm, and which is not a
mixed financial holding company within the meaning of Directive 2002/87/EC[18] of
the European Parliament and of the Council.;
2. (b) «mixed-activity
holding company » means a parent undertaking, other than a financial holding
company or an investment firm or a mixed financial holding company within the
meaning of Directive 2002/87/EC, the subsidiaries of which include at least one
investment firm;
3. (c) “competent authorities” means the
national authorities which are empowered by law or regulation to supervise
investment firms.
ê 93/6/EEC
(adapted)
Ö CHAPTER
II Õ
INITIAL CAPITAL
ê 93/6/EEC Art
2(24) (adapted)
Article 4
1. Initial capital shall
mean Ömeans points
(a) and (b) Õ items 1 and 2 of Article Ö 57 Õ 2 (1) of Directive 89/299/EEC
Ö[2000/12/EC]Õ.
ê 93/6/EEC
Art. 3(1) and (2) (adapted)
Article 5
1.         Investment firms Ö that do
not deal in any financial instruments for their own account or underwrite
issues of financial instruments on a firm commitment basis, but Õ which hold
clients' money and/or securities and which offer one or more of the following
services, shall have initial capital of ECU Ö EUR Õ 125 000:
(a)     the reception and transmission of investors' orders for
financial instruments;
(b)     the execution of investors' orders for financial instruments;
(c)     the management of individual portfolios of investments in
financial instruments.
provided that they do not
deal in any financial instruments for their own account or underwrite issues of
financial instruments on a firm commitment basis.
The holding of
non-trading-book positions in financial instruments in order to invest own
funds shall not be considered as dealing for the purposes set out in the first
paragraph or for the purposes of paragraph 2.
2.         The competent authorities may,
however, allow an investment firm which executes investors' orders for
financial instruments to hold such instruments for its own account if Ö the
following conditions are met Õ :
(a)     such positions arise only as a result of the firm's failure to
match investors' orders precisely;
(b)     the total market value of all such positions is subject to a
ceiling of 15 % of the firm's initial capital;
(c)     the firm meets the requirements imposed
Ö laid down Õ in Articles
18, 20 and 28; and
(d)     such positions are incidental and provisional in nature and
strictly limited to the time required to carry out the transaction in question.
The holding of non-trading-book positions in
financial instruments in order to invest own funds shall not be considered as
dealing for the purposes set out in paragraph 1 or for the purposes of
paragraph 3.
3.2       Member
States may reduce the amount referred to in paragraph 1 to ECU Ö EUR Õ 50000 where a
firm is not authoriszed to hold clients' money or securities, to
deal for its own account, or to underwrite issues on a firm commitment basis.
ê 93/6/EEC Art
3 (3) (adapted)
3. All other
investment firms shall have initial capital of ECU 730 000.
ê 2004/39/EC
Art. 67(2) (adapted)
Article 6
4. The firms referred
to in point (b) of Article 2(2)Ö Local
firms Õ shall have
initial capital of EUR 50 000 in so far as they benefit from the freedom of
establishment or to provide services Ö specified
in Õ under Articles 31 or 32 of Directive 2004/39/EC.
ê 2004/39/EC
Article 67 (3) (adapted)
Article 7
Pending revision of
Directive 93/6/EEC, theCoverage for the firms
referred to in point (b)(iii) of Article 2 Ö 3 Õ (1) shall take
one of the following forms:
(a)          initial capital of EUR 50 000;
(b)          professional indemnity insurance
covering the whole territory of the Community or some other comparable
guarantee against liability arising from professional negligence, representing
at least EUR 1 000 000 applying to each claim and in aggregate EUR 1 500 000
per year for all claims;
(c)          a combination of initial capital
and professional indemnity insurance in a form resulting in a level of coverage
equivalent to that referred to in points (a) or (b).
The amounts referred to in the first
subparagraph shall be periodically reviewed by the Commission in order to take
account of changes in the European Index of Consumer Prices as published by
Eurostat, in line with and at the same time as the adjustments made under
Article 4(7) of Directive 2002/92/EC of the European Parliament and of the
Council[19]
(*).
Ö Article 8 Õ
If an investment firm referred to in point (b)(iii)
of Article 2 Ö 3 Õ (1) is also
registered under Directive 2002/92/EC it shall comply with Article 4(3) of that
Directive and have coverage in one of the following forms:
(a)          initial capital of EUR 25 000;
(b)          professional indemnity insurance
covering the whole territory of the Community or some other comparable
guarantee against liability arising from professional negligence, representing
at least EUR 500 000 applying to each claim and in aggregate EUR 750 000 per
year for all claims;
(c)          a combination of initial capital
and professional indemnity insurance in a form resulting in a level of coverage
equivalent to that referred to in points (a) or (b).
ê 93/6/EEC Art
3(3) (adapted)
Article 9
All other investment firms shall have
initial capital of ECU Ö EUR Õ 730 000.
ê 93/6/EEC
Art 3(5) to (8) (adapted)
Article 10
1.         Ö By
derogation to Articles 5(1), 5(3), 6 and 9, Õ Notwithstanding paragraphs 1 to 4, Member States may
continue the authorisation of investment firms and firms covered by Ö Article 6 Õ paragraph 4 in existence before Ö 31 December
1995 Õ this Directive is applied the own funds of which are
less than the initial capital levels specified for them in Ö Articles 5(1),
5(3), 6 and 9 Õ paragraphs 1 to 4.
The own funds of such firms shall not fall
below the highest reference level calculated after the date of notification of this Directive Ö 1993/6/EEC Õ. That
reference level shall be the average daily level of own funds calculated over a
six-month period preceding the date of calculation. It shall be calculated
every six months in respect of the corresponding preceding period.
2.         If control of a firm covered by
paragraph 5Ö 1 Õ is taken by a
natural or legal person other than the person who controlled it previously, the
own funds of that firm must attain at least the level specified for it in Ö Articles 5(1),
5(3), 6 and 9 Õ paragraphs 1 to 4, except in the
following situations: (i)-       in the case of the first transfer by
inheritance after Ö 31
December 1995 Õ the application of this Directive, subject to the
competent authorities' approval, for not more than 10 years after that
transfer.;
(ii)          in
the case of a change in the composition of a partnership, as long as at least
one of the partners at the date of the application of this Directive remains in
the partnership, for not more than 10 years after the date of the application
of this Directive.
3.         In certain specific
circumstances, and with the consent of
the competent authorities, however, in the event
of a merger of two or more investment firms and/or firms covered by paragraph 4Ö Article 6Õ, the own funds
of the firm produced by the merger need not attain the level specified in paragraphs 1 to 4Ö Articles 5(1),
5(3), 6 and 9 Õ. Nevertheless,
during any period when the levels specified in paragraphs
1 to 4 Ö Articles 5(1),
5(3), 6 and 9 Õ have not been attained,
the own funds of the new firm may not fall below the merged firms' total own
funds at the time of the merger.
4.         The own funds of investment
firms and firms covered by paragraph 4Ö Article 6 Õ may not fall
below the level specified in paragraphs 1 to 5 and 7 Ö Articles 5(1),
5(3), 6, 9, 10(1) and 10(3)Õ.
If they do, however, the competent
authorities may, where the circumstances justify it, allow such firms a limited
period in which to rectify their situations or cease their activities.
ò new
CHAPTER III
TRADING BOOK
Article 11
1.         The
trading book of an institution shall consist of all positions in financial
instruments and commodities held either with trading intent or in order to
hedge other elements of the trading book, which must either be free of any
restrictive covenants on their tradability or able to be hedged.
2.         Positions
held with trading intent are those held intentionally for short-term resale
and/or with the intention of benefiting from actual or expected short-term
price differences between buying and selling prices, or from other price or
interest rate variations. The term “positions” shall include proprietary
positions, positions arising from client servicing and market making.
3.         Trading
intent shall be evidenced based on the strategies, policies and procedures set up
by the institution to manage the position or portfolio in accordance with Annex
VII Part A.
4.         Institutions
shall establish and maintain systems and controls to manage their trading book,
in accordance with Annex VII, Part B.
5.         Internal
hedges may be included in the trading book, in which case Annex VII Part C
shall apply.
ò new
CHAPTER IV
OWN FUNDS
ê 93/6/EEC
Art. 2 (25) (adapted)
Article 12
Original own funds means the sum of items 1, 2 and Ö points
(a) to (c) Õ , less the sum
of items 9, 10 and 11 Ö points
(i) to (k) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ.
ò new
The Commission
shall, by 1 January 2009 at the latest, submit an appropriate proposal to the
European Parliament and to the Council for amendment of this Chapter.
ê 93/6/EEC Annex
V first and second subparagraph (adapted)
ð new
Article 13
1.         ð Subject to paragraphs 2 to 5 of
this Article, and Articles 14 to 17,ï Tthe
own funds of investment firms and credit institutions shall be defined Ö determined Õ in accordance
with Directive 89/299/EEC Ö [2000/12/EC] Õ .
In addition, the first subparagraph applies to
investment firms which do not have one of the legal forms referred to in
Article 1 (1) of the Fourth Council Directive 78/660/EEC.
ê 93/6/EEC Annex
V (1) 2nd subparagraph (2) to (5) (adapted)
è1 98/31/EC Art. 1.7 and Annex 4(a) (b)
ð new
2.         è1 Notwithstanding Ö By
derogation to Õ paragraph 1,
the competent authorities may permit those institutions which are obliged to
meet the capital own-funds requirements calculated
in accordance with Ö Articles
21 and 28 to 32 and Õ laid down in Annexes I, II,
III, IV, VI, VII and VIII Ö and III
to VI Õ to use, for
that purpose only, an alternative definition when meeting
those requirements only Ö determination Õof own funds. ç No part
of the own funds used for that purpose thus provided
may be used simultaneously to meet other capital own-funds
requirements.
This alternative definition
Ö determination Õ shall be the
sum of the items set out in points (a) to (c) below, minus the item set out in
point (d) below, with include the following items (a),
(b) and (c) less item (d), the deduction of that last item being left to
the discretion of the competent authorities:
(a)     own funds as defined in Directive 89/299/EEC Ö [2000/12/EC] Õ excluding only
items (12) Ö points
(l) to (p) Õ and (13) of Article 2 (1) Ö 57 Õ of that
Directive for those investment firms which are required to deduct item (d) of
this paragraph from the total of items (a), (b) and (c) of this paragraph;
(b)     an institution's net trading-book
profits net of any foreseeable charges or dividends, less net losses on its other
business provided that none of those amounts has already been included in item
(a) of this paragraph under the items set out in paragraphs
(2) or (11) Ö points
(b) or (k) Õ of Article 2 (1) of Directive 89/299/EEC Ö 57 of
Directive [2000/12/EC] Õ;
(c)     subordinated loan capital and/or the
items referred to in paragraphs 5,
subject to the conditions set out in paragraphs 3 to 7
Ö and 4 and
Article 14 Õ ;
(d)     illiquid assets as defined Ö specified Õ in paragraph 8 Ö Article
15 Õ .
3.         The subordinated loan capital
referred to in Ö point (c) Õ of paragraph 2
shall have an initial maturity of at least two years. It shall be fully paid up
and the loan agreement shall not include any clause providing that in specified
circumstances other than the winding up of the institution the debt will become
repayable before the agreed repayment date, unless the competent authorities
approve the repayment. Neither the principal nor the interest on such
subordinated loan capital may be repaid if such repayment would mean that the
own funds of the institution in question would then amount to less than
100 % of the Ö that Õ institution's
overall requirements.
In addition, an institution shall notify the
competent authorities of all repayments on such subordinated loan capital as
soon as its own funds fall below 120 % of its overall Ö capital Õ requirements.
4.         The subordinated loan capital
referred to in Ö point (c)
of Õ paragraph 2 may
not exceed a maximum of 150 % of the original own funds left to meet the
requirements Ö calculated
in accordance with Articles 21 and 28 to 32 andÕ laid down in Annexes I, II, III,
IV, VI, VII, and VIII Ö to
VI Õ and may
approach that maximum only in particular circumstances acceptable to the relevant
authorities.
5.         The competent authorities may
permit institutions to replace the subordinated loan capital referred to Ö in point
(c) of paragraph 2 Õ in paragraphs 3 and 4 with items
3 and 5 to 8 Ö points
(d) to (h) Õ of Article 2 (1) of Directive 89/299/EEC Ö 57 of
Directive [2000/12/EC] Õ.
ê 98/31/EC
Annex .4(c) (adapted)
Article 14
1.         The competent authorities may
permit investment firms to exceed the ceiling for subordinated loan capital Ö set out Õ prescribed in paragraph 4 Ö Article
13(4) Õ if they judge
it prudentially adequate and provided that the total of such subordinated loan
capital and the items referred to in paragraph 5 Ö Article
13(5) Õ does not
exceed 200 % of the original own funds left to meet the requirements calculated
in accordance with imposed in Ö Articles
21, 28 to 32 and Õ Annexes I, II, III, IV, VI, VII and
VIII Ö and III
to VI Õ or 250 %
of the same amount where investment firms deduct the item set out in point (d) of
referred to in paragraph 2
Ö Article
13(2) Õ when
calculating own funds.
2.         The competent authorities may
permit the ceiling for subordinated loan capital set out prescribed in paragraph 4 Ö Article
13(4) Õ to be exceeded
by a credit institution if they judge it prudentially adequate and provided
that the total of such subordinated loan capital and items
(4) to (8) Ö points
(d) to (h) Õ of Article 35(2) Ö 57 Õ of Directive [2000/12/EC]
referred to in paragraph 5 does not exceed
250 % of the original own funds left to meet the requirements calculated
in accordance with imposed in Articles Ö 28 to 32
and Õ Annexes I, II, III, IV, V and VI Ö and III
to VI Õ.
ê 93/6/EEC Annex
V (8) (adapted)
Article 15
Illiquid assets Ö as
referred to in point (d) of Article 12(2) shall include the following: Õ
(a)     tangible fixed assets, (except
to the extent that land and buildings may be allowed to count against the loans
which they are securing);
(b)     holdings in, including subordinated claims on, credit or
financial institutions which may be included in the own funds of Ö those Õ such institutions, unless they have been deducted under items (12) Ö points
(l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ or under Article
15(d) of this Annex Ö Directive Õ ;
(c)     holdings and other investments, in undertakings other than
credit institutions and other financial institutions, which are not readily
marketable;
(d)     deficiencies in subsidiaries;
(e)     deposits made, other than those which are available for
repayment within 90 days, and also excluding payments in connection with
margined futures or options contracts;
(f)     loans and other amounts due, other than those due to be repaid
within 90 days;
(g)     physical stocks, unless they are Ö already Õ subject to the capital requirements imposed
in Article 4 (2) and provided that such requirements are not less stringent
than those imposed in Article 4 (1)(iii) Ö at least
as stringent as those set out in Articles 18 to 20 Õ .
ê 93/6/EEC
Annex V(8) second indent, second subparagraph (adapted)
Ö For the
purposes of point (b), w Õ Wwhere
shares in a credit or financial institution are held temporarily for the
purpose of a financial assistance operation designed to reorganise and save
that institution, the competent authorities may waive this provision. They may
also waive it in respect of those shares which are included in the investment
firm's trading book,.
ê 93/6/EEC
Annex V (9) (adapted)
Article 16
9. Those i Investment firms included in
a group subject to Ö which has
been granted Õ the waiver provided
for described in Article 7(4)
Ö 22 Õ shall
calculate their own funds in accordance with paragraphs 1
to 8 Ö Articles
13 to 15 Õ subject to the
following modifications:
(a)(i)  the
illiquid assets referred to in paragraph 2Ö point (d) of
Article 13(2) Õ shall be
deducted;
(b)(ii) the
exclusion referred to in paragraph 2 Ö point (a)
of Article 12(2) Õ shall not
cover those components of items 12 Ö points
(l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ which an
investment firm holds in respect of undertakings included in the scope of
consolidation as defined in Article Ö 2
(1) Õ of this
Directive;
(c)(iii) the limits referred to in points (a) and (b) of Article 6 Ö 66 Õ (1)(a) and (b) of Directive 89/299/EEC
Ö [2000/12/EC] Õ shall be
calculated with reference to the original own funds less those
Ö the Õ components of items (12) Ö points
(l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö[2000/12/EC] Õ described in (ii) Ö referred to in point
(b) Õ which are
elements of the original own funds of the undertakings in question;
(d)(iv)
those Ö the Õ components of items (12) Ö points
(l) to (p) Õ of Article 2 (1) Ö 57 Õ of Directive 89/299/EEC Ö[2000/12/EC] Õ referred to in
point (c) shall be deducted from the original own funds rather than from the
total of all items as laid down prescribed in point
(c) of Article 6 Ö 66 Õ(1) (c) of that same Directive
for the purposes, in particular, of paragraphs 4 to 7
Ö Articles
13(4), 13(5) and 14 Õ of this Annex Ö Directive Õ .
ò new
Article 17
1.         Where
an institution calculates risk-weighted exposure amounts for the purposes of
Annex II in accordance with the provisions of Articles 84 to 89 of Directive
[2000/12/EC], then for the purposes of the calculation provided for in
Directive [2000/12/EC] Annex VII, Part 1, Sub-part 4, the following shall apply:
(a)     value
adjustments made to take account of the credit quality of the counterparty may
be included in the sum of value adjustments and provisions made for the
exposures indicated in Annex II;
(b)     subject to
the approval of the competent authorities, if the credit risk of the
counterparty is adequately taken into account in the valuation of a position
included in the trading book the expected loss amount for the counterparty risk
exposure shall be zero.
For the purposes of
point (a), for such institutions, such value adjustments shall not be included
in own funds other than in accordance with this sub-paragraph.
2.         For the
purposes of this Article, Article 153 and 154 of Directive [2000/12/EC] shall
apply.
ê 93/6/EEC
(adapted)
Ö CHAPTER V Õ
Ö Section 1 Õ
PROVISIONS AGAINST RISKS
ê 93/6/EEC Art
4(1) 1st subparagraph (adapted)
ð new
Article 18
1.         The competent authorities shall require iInstitutions
ð shall have ï to provide own funds which are always
more than or equal to the sum of Ö the
following Õ :
ê 98/31/EC
Art. 1.2 (adapted)
i) (a)  the capital
requirements, calculated in accordance with Ö the
methods and options laid down in Articles 28 to 32 and Õ Annexes I, II
and VI and, as appropriate, Annex VIII, for their
trading-book business;
ii) (b) the
capital requirements, calculated in accordance with Ö the
methods and options laid down in Õ Annexes III
and VII Ö IV Õ and, as
appropriate, Annex VIII, for all of their business
activities.
ê 93/6/EEC
Art. 4.1 (iii) and (iv) (adapted)
(iii)         the
capital requirements imposed in Directive 89/647/EEC for all of their business
activities, excluding both their trading-book business and their illiquid
assets it they are deducted from own funds under paragraph 2 (d) of Annex V;
(iv)         the capital
requirements imposed in paragraph 2.
ê 93/6/EEC Art.
4.1 (iii) to (iv), second subparagraph
Irrespective of the amount of the capital requirement
referred to in (i) to (iv) the own-funds requirement for investment firms shall
never be less than the amount prescribed in Annex IV.
ê 93/6/EEC
Art. 4 (2) to (5)
2. The competent authorities shall require
institutions to cover the risks arising in connection with business that is
outside the scope of both this Directive and Directive 89/647/EEC and
considered to be similar to the risks covered by those Directives by adequate
own funds.
3. If the own funds held by an institution fall below
the amount of the own funds requirement imposed in paragraph 1, the competent
authorities shall ensure that the institution in question takes appropriate
measures to rectify its situation as quickly as possible.
4. The competent authorities shall require
institutions to set up systems to monitor and control the interest-rate risk on
all of their business, and those systems shall be subject to overview by the
competent authorities.
5. Institutions shall be required to satisfy their
competent authorities that they employ systems which can calculate their
financial positions with reasonable accuracy at any time. 
ê 93/6/EEC Art
4(6) (adapted)
2.         Notwithstanding
Ö By
derogation to Õ paragraph 1,
the competent authorities may allow institutions to calculate the capital
requirements for their trading book business in accordance with Directive 89/647/EEC rather than in accordance with Annexes I
and II to this Directive provided that Ö Article 75(a)
of Directive [2000/12/EC] and paragraphs 6, 7, 8 and 10 of Annex II of this
Directive, Õ rather than in
accordance with Annexes I and II of this Directive, where the size of the
trading book business meets the Ö following Õ requirements set out below: 
i) (a)  the trading-book
business of such institutions does not normally exceed 5% of their total
business;
ii) (b) their
total trading-book positions do not normally exceed ECU Ö EUR Õ 15 million; and
iii)(c) the
trading-book business of such institutions never exceeds 6% of their total
business and their total trading-book positions never exceed ECU Ö EUR Õ 20 million.
ê 93/6/EEC Art
4(7) (adapted)
3.         In order to calculate the
proportion that trading-book business bears to total business as in Ö points
(a) and (c) of Õ paragraph 6 Ö 2 Õ i) and iii), the competent authorities may refer either
to the size of the combined on- and off-balance-sheet business, to the profit
and loss account or to the own funds of the institutions in question, or to a
combination of those measurements. When the size of on- and off-balance-sheet
business is assessed, debt instruments shall be valued at their market prices
or their principal values, equities at their market prices and derivatives
according to the nominal or market values of the instruments underlying them.
Long positions and short positions shall be summed regardless of their signs.
ê 93/6/EEC Art
4(8) (adapted)
4.         If an institution should happen
for more than a short period to exceed either or both of the limits imposed in
paragraph 6 Ö 2 (a)
and (b)Õ (i) and (ii) or to exceed either or both of the limits
imposed in paragraph 6 Ö 2 (c)
Õ (iii), it shall be required to meet the requirements
imposed in Article Ö paragraph 1
(a) Õ 4 (i) rather than those of Ö Article 75(a)
of ÕDirective 89/647/EEC Ö [2000/12/EC] Õ in respect of
its trading-book business and to notify the competent authority.
ò new
Article
19
1.         For
the purposes of paragraph 14 of Annex I, subject to national discretion, a 0%
weighting can be assigned to debt securities issued by the same entities and
denominated and funded in domestic currency.
ê 93/6/EEC
Art 11(2) (adapted)
2.         Notwithstanding
Ö By
derogation to Õ paragraphs Ö 13 and Õ 14 of Annex I,
Member States may set a specific risk requirement for any bonds assigned a weighting of 10% under Articles 11(2) of Directive
89/647/EEC Ö falling
within Annex VI, Part 1, paragraphs 65 to 67 of Directive [2000/12/EC], Õ equal to half the specific risk requirement for a qualifying item
with the same residual maturity as such a bond Ö , reduced
in accordance with the percentages given in Annex VI, Part 1, paragraph 68 of
Directive [2000/12/EC] Õ .
ò new
3.         If, as
set out in paragraph 52 of Annex I, a competent authority approves a third
country CIU as eligible, a competent authority in another Member State may make use of this recognition without conducting its own assessment.
Article 20
1.         Subject
to paragraphs 2, 3 and 4 of this Article, and Article 34 of this Directive, the
requirements in Article 75 of Directive [2000/12/EC] shall apply to investment
firms. 
2.         By
derogation to paragraph 1, competent authorities may allow investment firms that are not authorised to provide the
investment services listed in point 3 and point 6 of Annex I, Section A of
Directive 2004/39/EC to provide own funds which are
always more than or equal to the higher of the following:
(a)     the sum of
the capital requirements contained in points (a) to (c) of Article 75 of
Directive [2000/12/EC];
(b)     the amount laid
down in Article 21 of this Directive.
3.         By
derogation to paragraph 1, competent authorities may allow investment firms
which hold initial capital as set out in Article 9, but which fall within the following
categories, to provide own funds which are always more than or equal to the sum
of the capital requirements calculated in accordance with the requirements
contained in points (a) to
(c) of Article 75 of Directive [2000/12/EC] and the
amount prescribed in Article 21 of this Directive:
(a)     investment
firms that deal on own account for the purpose of fulfilling or executing a
client order or for the purpose of gaining entrance to a clearing and
settlement system or a recognised exchange when acting in an agency capacity or
executing a client order;
(b)     investment
firms:
(i)      that do not
hold client money or securities;
(ii)     that undertake
only dealing on own account;
(iii)    that have
no external customers;
(iv)    the
execution and settlement of whose transactions takes place under the
responsibility of a clearing institution and are guaranteed by that clearing
institution.
4.         Investment
firms referred to in paragraphs 2 and 3 shall remain subject to all other
provisions regarding operational risk set out in Annex V of Directive
[2000/12/EC].
ê 93/6/EEC Annex
IV
Article 21
Investment firms shall be required to hold
own funds equivalent to one quarter of their preceding year's fixed overheads.
The competent authorities may adjust that
requirement in the event of a material change in a firm's business since the
preceding year.
Where a firm has not completed a year's
business, including the day it starts up, the requirement shall be a quarter of
the fixed overheads figure projected in its business plan unless an adjustment
to that plan is required by the authorities.
ê 93/6/EEC
(adapted)
Ö section 2
Application of requirements on a consolidated basis Õ
ò new
Article 22
1.         The competent authorities required or
mandated to exercise supervision of groups covered by Article 2 on a
consolidated basis may waive, on a case by case basis, the application of
capital requirements on a consolidated basis provided that:
(a)     each
investment firm in such a group uses the definition of own funds given in
Article 16;
(b)     all
investment firms in such a group fall within the categories in paragraphs 2 and
3 of Article 20;
(c)     each
investment firm in such a group meets the requirements imposed in Articles 18
and 20 on an individual basis and at the same time deducts from its own funds
any contingent liability in favour of investment firms, financial institutions,
asset management companies and ancillary services undertakings which would
otherwise be consolidated;
(d)     any
financial holding company which is the parent undertaking of any investment
firm in such a group holds at least as much capital, defined here as the sum of
points (a) to (h) of Article 57 of Directive [2000/12/EC], as the sum of the
full book value of any holdings, subordinated claims, and instruments referred
to in Article 57 of Directive [2000/12/EC] in investment firms, financial
institutions, asset management companies and ancillary services undertakings
which would otherwise be consolidated, and the total amount of any contingent
liability in favour of investment firms, financial institutions, asset management
companies and ancillary services undertakings which would otherwise be
consolidated;
Where the criteria in
the first sub-paragraph are met, each investment firm shall have in place
systems to monitor and control the sources of capital and funding of all
financial holding companies, investment firms, financial institutions, asset
management companies and ancillary services undertakings within the group.
2.         By
derogation to paragraph 1, competent authorities may permit financial holding
companies which are the parent of an investment firm in such a group to use a
value lower than the value calculated under point (d) of paragraph 1, but no
lower than the sum of the requirements imposed in Article 18 and 20 on an
individual basis to investment firms, financial institutions, asset management
companies and ancillary services undertakings which would otherwise be
consolidated, and the total amount of any contingent liability in favour of
investment firms, financial institutions, asset management companies and ancillary
services undertakings which would otherwise be consolidated. For the purposes
of this paragraph the capital requirement for financial institutions, asset
management companies and ancillary services undertakings is a notional capital
requirement.
ê 93/6/EEC
Art. 7(5) & (6) (adapted)
Article 23
The competent authorities shall require
investment firms in a group which has been granted the waiver provided for in Article
20 Ö 22 Õ to notify them
of the risks which could undermine their financial positions, including those
associated with the composition and sources of their capital and funding. If
the competent authorities then consider that the financial positions of those
investment firms is not adequately protected, they shall require the investment
firms to take measures including, if necessary, limitations on the transfer of
capital from such firms to group entities.
Where the competent authorities waive the
obligation of supervision on a consolidated basis provided for in Ö Article
22 Õ paragraph 4 they shall take other appropriate measures
to monitor the risks, namely large exposures, of the whole group, including any
undertakings not located in a Member State.
ò new
Where the competent authorities waive the obligation
of supervision on a consolidated basis provided for in Article 22, the
requirements of Title V, Chapter 5 of Directive [2000/12/EC] shall continue to
apply on an individual basis and the requirements of Article 124 of Directive
[2000/12/EC] shall continue to apply to the supervision of investment firms on
an individual basis.
ê 93/6/EC
Art. 7 (7) to (9)
7. Member States may waive the application of the
requirements imposed in Articles 4 and 5, on an individual or subconsolidated
basis, to an institution which, as a parent undertaking, is subject to
supervision on a consolidated basis, and to any subsidiary of such an
institution which is subject to their authorization and supervision and is
included in the supervision on a consolidated basis of the institution which is
its parent company.
The same right of waiver shall be granted where the
parent undertaking is a financial holding company which has its head office in
the same Member State as the institution, provided that it is subject to the
same supervision as that exercised over credit institutions or investment
firms, and in particular the requirements imposed in Articles 4 and 5.
In both cases, if the right of waiver is exercised
measures must be taken to ensure the satisfactory allocation of own funds
within the group.
8. Where an institution the parent undertaking of
which is an institution has been authorized and is situated in another Member
State, the competent authorities which granted that authorization shall apply
the rules laid down in Articles 4 and 5 to that institution on a individual or,
where appropriate, a subconsolidated basis.
9. Notwithstanding paragraph 8, the competent
authorities responsible for authorizing the subsidiary of a parent undertaking
which is an institution may, by a bilateral agreement, delegate their
responsibility for supervising the subsidiary's capital adequacy and large
exposures to the competent authorities which authorized and supervise the parent
undertaking. The Commission must be kept informed of the existence and content
of such agreements. It shall forward such information to the competent
authorities of the other Member States and to the Banking Advisory Committee
and to the Council, except in the case of groups covered by paragraph 3.
ò new
Article 24
By derogation to
Article 2(2), competent authorities may exempt investment firms from the
consolidated capital requirement established there, provided that all the
investment firms in the group fall within the investment firms referred to in Article
20(2) and the group does not include credit institutions.
Where the
requirements of the first sub-paragraph are met, the parent investment firm
shall be required to provide own funds which are always more than or equal to
the higher of the following two consolidated requirements, calculated as set
out in Section 3 of this Chapter:
(a)              
the sum of the capital
requirements contained in points (a) to (c) of Article 75 of Directive
[2000/12/EC];
(b)              
the amount prescribed
in Article 21.
Article 25
By derogation to
Article 2(2), competent authorities may exempt investment firms from the consolidated
capital requirement established there, provided that all the investment firms
in the group fall within the investment firms referred to in Articles 20(2) and
(3), and the group does not include credit institutions.
Where the
requirements of the first sub-paragraph are met, the parent investment firm
shall be required to provide own funds which are always more than or equal to
the sum of the consolidated capital requirements, calculated as set out in Section
3 of this Chapter, of the requirements contained in points (a) to (c) of Article
75 of Directive [2000/12/EC] and the amount prescribed in Article 21 of this
Directive.
ê 93/6/EEC
(adapted)
Ö section 3 Õ
calculating Ö calculation
of Õ consolidated
requirements
ê 98/31/EC
Art. 1.4 (adapted)
Article 26
1.         Where
the right of waiver provided for in Article 20
Ö 22 Õ is not exercised, the competent authorities may, for the
purpose of calculating the capital requirements set out in Annexes I and VIII and the exposures to clients set out in Ö Articles
28 to 32 and Õ Annex VI on a
consolidated basis, permit positions in the trading book of one institution to
offset positions in the trading book of another institution according to the
rules set out in Ö Articles 28 to 32 Õ Annexes I, VI and VIII.
In addition, they may allow foreign-exchange
positions in one institution to offset foreign-exchange positions in another
institution in accordance with the rules set out in Annex III and/or Annex VIII. They may also allow commodities positions in one
institution to offset commodities positions in another institution in
accordance with the rules set out in Annex VII Ö IV Õ and/or Annex VIII.
ê 93/6/EEC
Art 7(11) (adapted)
2.         The
competent authorities may also permit offsetting
of the trading book and of the foreign-exchange and commodities positions,
respectively, of undertakings located in third countries, subject to the
simultaneous fulfilment of the following conditions:
i) (a)  those undertakings have
been authorized in a third country and either satisfy the definition of credit
institution given in the first indent of
Article 1 Ö 4(1) Õ of Directive 77/780/EEC Ö [2000/12/EC] Õ or are
recognized third-country investment firms;
ii) (b) such undertakings comply, on a solo basis, with capital adequacy
rules equivalent to those laid down in this Directive;
iii)(c) no
regulations exist in the countries in question which might significantly affect
the transfer of funds within the group.
ê 93/6/EEC
Art 7(12) (adapted)
3.         The competent authorities may
also allow the offsetting provided for in paragraph 10
Ö 1 Õ between
institutions within a group that have been authorized in the Member State in question, provided that:
i) (a)  there is a satisfactory
allocation of capital within the group;
ii) (b) the
regulatory, legal or contractual framework in which the institutions operate is
such as to guarantee mutual financial support within the group.
ê 93/6/EEC
Art 7(13) (adapted)
4.         Furthermore, the competent
authorities may allow the offsetting provided for in paragraph 10 Ö 1 Õ between
institutions within a group that fulfil the conditions imposed in paragraph 12 Ö 3 Õ and any
institution included in the same group which has been authorized in another
Member State provided that that institution is obliged to fulfil the capital
requirements imposed in Articles 4 and 5 Ö 18, 20
and 28 Õ on a solo Ö an
individual Õ basis.
ê 93/6/EEC
Art 7(14) & (15) (adapted)
Article 27
1.         In the calculation of own funds
on a consolidated basis Article 5 Ö 65 Õ of Directive 89/299/EEC Ö [2000/12/EC] Õ shall apply.
2.         The competent authorities
responsible for exercising supervision on a consolidated basis may recognise the
validity of the specific own-funds definitions applicable to the institutions
concerned under Chapter IV in the calculation of their consolidated own funds.
ê 93/6/EEC
(adapted)
Ö section 4 Õ
Ö MONITORING
AND CONTROL OF LARGE EXPOSURES Õ
ê 93/6/EEC Art
5(1) (adapted)
Article 28
1.         Institutions shall monitor and
control their large exposures in accordance with Directive
92/121/EEC Ö Articles
106 to 118 of Directive [2000/12/EC]. Õ
ê 98/31/EC
Art. 1.3 (adapted)
2.         Ö By
derogation to paragraph 1, Õ Notwithstanding institutions which calculate the capital
requirements for their trading-book business in accordance with Annexes I and
II, and, as appropriate, Annex VIII, shall monitor
and control their large exposures in accordance with Directive
92/121/EEC Ö Articles
106 to 118 of Directive [2000/12/EC] Õ subject to the
amendments laid down in Articles 27 to 30 Ö 29 to
32 Õ of this
Directive.
ò new
3.         By 31 December 2007, the Commission shall submit to the European Parliament and to the
Council a report on the functioning of this Section, together with any
appropriate proposals. 
ê 93/6/EEC
Annex VI (2) (adapted)
ð new
Article 29
1.         The exposures to individual
clients which arise on the trading book shall be calculated by summing the
following items (i), (ii) and (iii):
i) (a)  the excess — where
positive — of an institution's long positions over its short positions in all
the financial instruments issued by the client in question, Ö with Õ (the net position in each of the different instruments
being calculated according to the methods laid down in Annex I);
ii) (b) the net exposure, in the
case of the underwriting of a debt or an equity instrument;, the institution's
exposure shall be its net exposure; (which is calculated by deducting those
underwriting positions which are subscribed or sub-underwritten by third
parties on the basis of a formal agreement) reduced by the factors set out in
paragraph 39 of Annex I.
iii)(c) the exposures due to the transactions, agreements and contracts
referred to in Annex II with the client in question, such exposures being
calculated in the manner laid down in that Annex, ð for the calculation of exposure
values ï without application of the weightings for
counterparty risk.
Ö For the
purposes of point (b), the net exposure is calculated by deducting those
underwriting positions which are subscribed or sub-underwritten by third
parties on the basis of a formal agreement reduced by the factors set out in
paragraph 41 of Annex I. Õ
Ö For the
purposes of point (b), Õ Ppending further
coordination, the competent authorities shall require institutions to set up
systems to monitor and control their underwriting exposures between the time of
the initial commitment and working day one in the light of the nature of the
risks incurred in the markets in question.
ðFor the purposes of point (c), Articles 84
to 89 of Directive [2000/12/EC] shall be excluded from the reference in
paragraph 5 of Annex II of this Directive.ï
ê 93/6/EEC
Annex VI (3) (adapted)
2.         Thereafter,
T Ö the Õ exposures to
groups of connected clients on the trading book shall be calculated by summing
the exposures to individual clients in a group, as calculated in paragraph 12.
ê 93/6/EEC Annex
VI (4) (adapted)
Article 30
1.         The overall exposures to
individual clients or groups of connected clients shall be calculated by
summing the exposures which arise on the trading book and the exposures which
arise on the non-trading book, taking into account Article 4 Ö 112 to
117 Õ (6) to (12) of Directive 92/121/EEC
Ö [2000/12/EC] Õ.
In order to calculate the exposure on the
non-trading book, institutions shall take the exposure arising from assets
which are deducted from their own funds by virtue of Ö point (d)
of Article 13(2) Õ paragraph 2(d) of Annex V to be zero.
ê 93/6/EEC
Annex VI (5) (adapted)
ð new
2.         Institutions' overall exposures
to individual clients and groups of connected clients calculated in accordance
with paragraph 4 shall be reported in accordance with Article 3 Ö 110 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ.
ð Other than in relation to repurchase
transactions, securities or commodities lending or borrowing transactions, the
calculation of large exposures to clients and groups of connected clients for
reporting purposes shall not include the recognition of credit risk mitigation.
ï
ê 93/6/EEC Annex
VI (6) (adapted)
3.         That
Ö The Õ sum of the exposures
to an individual client or group of connected clients Ö in paragraph
1 Õ shall be
limited in accordance with Article 4 Ö Articles
111 to 117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ subject to the transitional provisions of Article 6 of the same
Directive.
ê 93/6/EEC
Annex VI (7) (adapted)
4.         Ö By
derogation to Õ Notwithstanding paragraph Ö 3 Õ 6, the competent
authorities may allow assets constituting claims and other exposures investment firms on recognized
recognised third-country investment firms
and recognized recognised clearing houses and exchanges in
financial instruments to be subject to the same treatment accorded to those on
institutions Ö laid out Õ in Article Ö Articles
113(2)(i), 115(2) and 116Õ 4 (7) (i), (9) and (10) of Directive 92/121/EEC Ö [2000/12/EC]. Õ
ê 93/6/EEC Annex
VI (8) (adapted)
Article 31
The competent authorities may authorize the
limits laid down in Article 4
Ö Articles
111 to 117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ to be exceeded
subject to Ö if Õ the following
conditions being met simultaneously Ö are met Õ:
1. (a)      the exposure on the
non-trading book to the client or group of clients in question does not exceed
the limits laid down in Directive 92/121/EEC Ö Articles
111 to 117 of [Directive 2000/12/EC] Õ, calculated
with reference to own funds as defined Ö specified Õ in Directive 89/299/EEC Ö [2000/12/EC] Õ, so that the
excess arises entirely on the trading book;
2.(b)       the
Ö institution Õ firm meets an additional capital requirement on the
excess in respect of the limits laid down in Article 4
Ö 111 Õ (1) and (2) of
Directive 92/121/EEC Ö [2000/12/EC],
calculated in accordance with Annex VI of this DirectiveÕ;
3.(c)       where
10 days or less has elapsed since the excess occurred, the trading-book
exposure to the client or group of connected clients in question must not
exceed 500 % of the institution's own funds;
4.(d)       any
excesses which have persisted for more than 10 days must not, in aggregate,
exceed 600 % of the institution's own funds;
5 .(e)      institutions
must report to the competent authorities every three months all cases where the
limits laid down in Article 4 Ö 111 Õ (1) and (2) of
Directive 92/121/EEC Ö [2000/12/EC] Õ have been
exceeded during the preceding three months.
In relation to point (e), in each case in
which the limits have been exceeded the amount of the excess and the name of
the client concerned must be reported.
ê 93/6/EEC Annex
VI (9) & (12) (adapted)
Article 32
1.         The competent authorities shall
establish procedures of which they shall notify the
Council and the Commissionto prevent institutions from deliberately
avoiding the additional capital requirements that they would otherwise incur,
on exposures exceeding the limits laid down in Article 4
Ö 111 Õ (1) and (2) of
Directive 92/121/EEC Ö [2000/12/EC] Õ 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. Institutions
shall maintain systems which ensure that any transfer which has this effect is
immediately reported to the competent authorities.
The competent authorities shall notify Ö the
Council and Õ the Commission
of those procedures.
Institutions shall maintain systems which
ensure that any transfer which has the effect referred to in the first
subparagraph is immediately reported to the competent authorities.
2.         The competent authorities may
permit those institutions which are allowed to use
the alternative definition Ö determination Õ of own funds
under paragraph 2 of Annex V Ö Article 13(2) Õ to use that definition
Ö determination Õ for the
purposes of paragraphs 5, 6 and 8 of this Annex
Ö Articles 30(2),
30(3) and 31 Õ provided that
the institutions concerned are required, in addition, to meet all of the
obligations set out in Articles 3 and 4 Ö 110 to
117 Õ of Directive 92/121/EEC Ö [2000/12/EC] Õ, in respect of
the exposures which arise outside their trading books by using own funds as
defined in Directive 89/299/EEC Ö [2000/12/EC] Õ.
ê 93/6/EEC (adapted)
Ö section 5 Õ
VALUATION OF POSITIONS FOR REPORTING
PURPOSES
Article 33
ò new
1.         All
trading book positions shall be subject to prudent valuation rules as specified
in Annex VII, Part B. These rules shall require institutions to ensure that the
value applied to each of its trading book positions appropriately reflects the
current market value. This value shall contain an appropriate degree of
certainty having regard to the dynamic nature of trading book positions, the
demands of prudential soundness and the mode of operation and purpose of
capital requirements in respect of trading book positions.
2.         Positions
shall be re-valued at least daily.
ê 93/6/EEC
Art. 6 (adapted)
1. Institutions shall mark to market their trading
books on a daily basis unless they are subject to Article 4 (6).
23.       In
the absence of readily available market prices, for example in the case of dealing in new issues on
the primary markets, the competent authorities may waive the
requirement imposed in paragraphs 1 Ö and 2 Õ and Ö shall Õ require
institutions to use alternative methods of valuation provided that those
methods are sufficiently prudent and have been approved by competent
authorities.
ê 93/6/EEC
SUPERVISION ON A CONSOLIDATED BASIS
ò new
SCOPE OF
APPLICATION 
ê 96/3/EEC
Article
7
General principles
ê 98/31EC
Art. 7(10) (adapted)
10. Where the rights of waiver
provided for in paragraphs 7 and 9 are not exercised, the
competent authorities may, for the purpose of calculating the capital
requirements set out in Annexes I and VIII and the exposures to clients set out
in Annex VI on a consolidated basis, permit positions in the trading book of
one institution to offset positions in the trading book of another institution
according to the rules set out in Annexes I, VI and VIII.
In addition, they may allow
foreign-exchange positions in one institution to offset foreign-exchange
positions in another institution in accordance with the rules set out in Annex
III and/or Annex VIII. They may also allow commodities positions in one
institution to offset commodities positions in another institution in
accordance with the rules set out in Annex VII and/or Annex VIII.
ò new 
section 6
Risk
management and capital assessment
Article 34
Competent
authorities shall require that every investment firm, as well as meeting the
requirements in Article 13 of Directive 2004/39/EC, shall meet the requirements
in Articles 22 and 123 of Directive [2000/12/EC].
ê 93/6/EEC
(adapted)
Ö section 7 Õ
REPORTING REQUIREMENTS
ê 93/6/EEC
Art. 8 (adapted)
Article 35
1.         Member States shall require that
investment firms and credit institutions provide the competent authorities of
their home Member States with all the information necessary for the assessment
of their compliance with the rules adopted in accordance with this Directive.
Member States shall also ensure that institutions'internal
control mechanisms and administrative and accounting procedures Ö of the
institutions Õ permit the
verification of their compliance with such rules at all times.
2.         Investment firms shall be obliged toreport to the competent authorities in the
manner specified by the latter at least once every month in the case of firms
covered by Article 3(3) Ö 9 Õ , at least
once every three months in the case of firms covered by Article 3 Ö 5 Õ (1) and at
least once every six months in the case of firms covered by Article 3 Ö 5 Õ (2).
3.         Notwithstanding paragraph 2,
investment firms covered by Articles 3 Ö 5 Õ (1) and (3) Ö 9 Õ shall be
required to provide the information on a consolidated or sub-consolidated basis
only once every six months.
4.         Credit institutions shall be
obliged to report in the manner specified by the competent authorities as often
as they are obliged to report under Directive 89/647/EEC Ö [2000/12/EC] Õ.
ê 98/31/EC
Art. 1.5
5.         The competent authorities shall
oblige institutions to report to them immediately any case in which their
counter-parties in repurchase and reverse repurchase agreements or securities
and commodities-lending and securities and commodities-borrowing transactions
default on their obligations. Commission shall report to the Council on such cases
and their implications for the treatment of such agreements and transactions in
this Directive not more than three years after the date referred to in Article
12. Such report shall also describe the way that institutions meet those of
conditions (i) to (v) in Article 2(6)(b) that apply to them, in particular
condition (v). Furthermore it shall give details of any changes in the relative
volume of institutions' traditional lending and their lending through reverse
repurchase agreements and securities-borrowing or commodities-borrowing
transactions. If the Commission concludes on the basis of this report and other
information that further safeguards are needed to prevent abuse, it shall make
appropriate proposals.
ê 93/6/EEC
(adapted)
Ö Chapter
VI Õ
Ö SECTION 1 Õ
COMPETENT AUTHORITIES
ê 93/6/EEC
Art. 9 (adapted)
Article 36
1.         Member States shall designate
the authorities which are Ö competent Õ to carry out
the duties provided for in this Directive. They shall inform the Commission
thereof, indicating any division of duties.
2.         The Ö competent Õ authorities referred to in paragraph 1 must Ö shall Õ be public
authorities or bodies officially recognized by national law or by public
authorities as part of the supervisory system in operation in the Member State concerned.
3.         The Ö competent Õ authorities
concerned must Ö shall Õ be granted all
the powers necessary for the performance of their tasks, and in particular that
of overseeing the constitution of trading books.
1.                     
4. The competent
authorities of the various Member States shall collaborate closely in the
performance of the duties provided for in this Directive, particularly when
investment services are provided on a services basis or through the
establishment of branches in one or more Member States. They shall on request
supply one another with all information likely to facilitate the supervision of
the capital adequacy of investment firms and credit institutions, in particular
the verification of their compliance with the rules laid down in this
Directive. Any exchange of information between competent authorities which is
provided for in this Directive in respect of investment firms shall be subject
to the obligation of professional secrecy imposed in Article 25 of Directive
93/22/EEC and, as regards credit institutions, to the obligation imposed in
Article 12 of Directive 77/780/EEC, as amended by Directive 89/646/EEC.
ò new
SECTION 2
Supervision
Article 37
1.         Articles
124 to 132, 136 and 144 of Directive [2000/12/EC] shall apply mutatis mutandis
to the supervision of investment firms in accordance with the following:.
(a)     references
to Article 6 of Directive [2000/12/EC] shall be construed as references to
Article 5 of Directive 2004/39/EC;
(b)     references
to Article 22 and 123 of Directive [2000/12/EC] shall be construed as
references to Article 34 of this Directive;
(c)     references
to Articles 44 to 52 of Directive [2000/12/EC] shall be read as references to
Articles 54 and 58 of Directive 2004/39/EC.
Where an EU parent
financial holding company has as subsidiary both a credit institution and an
investment firm, one competent authority responsible for supervision of the
credit institution shall be identified to be responsible for consolidated
supervision of the entities controlled by that parent.
2.         The
requirements set out in Article 129(2) of Directive [2000/12/EC] shall also
apply to the recognition of internal models of institutions under Annex V of
this Directive.
The period for the
recognition referred to in the first sub-paragraph shall be six months.
ê 93/6/EEC
Art. 9 (4) (adapted)
Article 38
1.         The competent authorities of the
various Member States shall Ö cooperate Õcollaborate closely in the performance of the duties
provided for in this Directive, particularly when Ö where Õinvestment
services are provided on a services basis or through the establishment of
branches in one or more Member States. 
They shall on request supply one another with
all information likely to facilitate the supervision of the capital adequacy of
investment firms and credit institutions, in
particular the verification of their compliance with the rules laid down in
this Directive.
2.         Any exchange of information
between competent authorities which is provided for in this Directive in
respect of investment firms shall be subject to the Ö following Õ obligation Ö s Õ of
professional secrecy Ö : Õ
(a)     Ö for
investment firms, those Õ imposed in
Article 25 Ö 54 and
58 Õ of Directive 93/22/EEC Ö 2004/39/EC Õ;
(b)     and, as regardsÖ for Õ credit
institutions, to the obligation Ö those Õ imposed in
Articles Ö 44 to 52 Õ 12 of Directive 77/780/EEC, as amended by Directive 89/646/EEC
Öof Directive
[2000/12/EC] Õ .
ò new
Chapter VII
Disclosure
Article 39
The requirements
set out in Title V, Chapter 5 of Directive [2000/12/EC] shall apply to
investment firms.
ê 93/6/EEC (adapted)
Ö Chapter
VIII Õ
Ö SECTION 1 Õ
ò new
Article 40
For the purposes
of the calculation of minimum capital requirements for counterparty risk under
this directive, and for credit risk under Directive [2000/12/EC], and without
prejudice to the provisions of the second to sixth paragraphs of Annex III of
Directive [2000/12/EC], exposures to recognized third-country investment firms
and exposures incurred to recognized clearing houses and exchanges shall be
treated as exposures to institutions.
Article 41
By 31 December 2008, the Commission shall examine and, if necessary, revise the treatment of
counterparty risk set out in Annex II.
ê 93/6/EEC
(adapted)
Ö SECTION 2 Õ
ÖPowers of
executionÕ
ê 93/6/EEC Art.
10 (adapted)
ð new
Article 42
1.         Pending
adoption of a further Directive laying down provisions for adapting this
Directive to technical progress in the areas specified below, the Council
shall, acting by qualified majority on a proposal form the Commission, in
accordance with Decision 87/373/EEC, adopt those adaptations which may be
necessary as follows ÖThe Commission
shall decide on any amendments in the following areas in accordance with the
procedure referred to in Article 43(2). Õ
(a)     clarification of the definitions in Article 2 Ö 3 Õ in order to
ensure uniform application of this Directive throughout the Community;
(b)     clarification of the definitions in Article 2 Ö 3 Õ to take
account of developments on financial markets;
(c)     alteration of the amounts of initial capital prescribed in
Articles 3 Ö 5 to 9 Õ and the amount
referred to in Article 4(6) Ö18(2)Õ to take
account of developments in the economic and monetary field;
ð (d) amendment of the categories of
investment firms in Articles 20(2) and (3) to take account of developments on
financial markets; ï
ð (e) clarification of the requirement
laid down in Article 21 to ensure uniform application of this Directive
throughout the Community; ï
(f)     the alignment of terminology on and the framing of definitions
in accordance with subsequent acts on institutions and related matters.;
ð (g) amendment of the technical
provisions in Annexes I to VII in order to take account of developments in
financial markets, risk measurement, accounting standards or requirements set
out in Community legislation. ï
ò new
Article 43
1.         The
Commission shall be assisted by a Committee.
2.         Where
reference is made to this paragraph, the procedure laid down in Article 5 of
Decision 1999/468/EC shall apply, in compliance with Article 7(3) and Article 8
thereof.
The period provided
for in Article 5(6) of Decision 1999/468/EC shall be three months.
ê 93/6/EEC
(adapted)
Ö SECTION 3 Õ
TRANSITIONAL PROVISIONS
ê 93/6/EEC
Art. 11
Article 11
1. Member
States may authorize investment firms subject to Article 30 (1) of Directive
93/22/EEC the own funds of which are on the day of the application of this
Directive lower than the levels specified in Article 3 (1) to (3) of this
Directive. Thereafter, however, the own funds of such investment firms must
fulfil the conditions laid down in Article 3 (5) to (8) of this Directive.
2. Notwithstanding paragraph 14 of Annex I, Member
States may set a specific-risk requirement for any bonds assigned a weighting
of 10 % under Article 11 (2) of Directive 89/647/EEC equal to half the
specific-risk requirement for a qualifying item with the same residual maturity
as such a bond.
ê 98/31/EC
Art. 1.6 (adapted)
Article 1
Until 31 December
2006, Member States may authorise their institutions to use the minimum
spread, carry and outright rates set out in the following table instead of
those indicated in paragraphs 13, 14, 17 and 18 of Annex VII provided that the
institutions, in the opinion of their competent authorities:
(i)           undertake
significant commodities business,
(ii)          have a
diversified commodities portfolio, and
(iii)         are not
yet in a position to use internal models for the purpose of calculating the
capital requirement on commodities risk in accordance with Annex VIII.
 Table 
   || Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products 
 Spread rate (%) || 1.0 || 1.2 || 1.5 || 1.5 
 Carry rate (%) || 0.3 || 0.5 || 0.6 || 0.6 
 Outright rate (%) || 8 || 10 || 12 || 15 
Member States shall
inform the Commission of the use they make of this Article.
ò new
Article 44
Article 152(1) to
(6) of Directive [2000/12/EC] shall apply, in accordance with Article 2 and Chapter
V, Sections 2 and 3 of this Directive, to investment firms calculating
risk-weighted exposure amounts, for the purposes of Annex II of this Directive,
in accordance with Articles 84 to 89 of Directive [2000/12/EC], or using the
Advanced Measurement Approach as specified in Article 105 of that Directive for
the calculation of their capital requirements for operational risk.
Article 45
Until 31 December
2012, for investment firms the relevant indicator for the trading and sales
business line of which represents at least 50% of the total of relevant indicators
for all of its business lines calculated in accordance with Article 20 of this
Directive and Annex X, Part 2, paragraphs 1 to 8 of Directive [2000/12/EC],
Member States may apply a percentage of 15% to the business line “trading and
sales”.
ê 93/6/EEC Art.
12 (adapted)
ð new
Ö SECTION 4 Õ
FINAL PROVISIONS
Article 46
1.         Member
States shall bring into force the laws, regulations and administrative
provisions necessary for them to comply with this Directive by the date fixed
in the second paragraph of Article 31 of Directive 93/22/EEC. They shall
forthwith inform the Commission thereof.
1.         Member States shall adopt and
publish, by 31 December 2006 at the latest, the laws, regulations and administrative
provisions necessary to comply with Articles 2, 3, 11, 13, 17, 18, 19, 20, 22,
23, 24, 25, 29, 30, 33, 34, 35, 37, 39, 40, 42, 44, 45, 47 and the Annexes I,
II, III, V, VII. 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 December 2006.
When Member
States adopt those provisions, they shall contain a
reference to this Directive or add such a reference
Ö be
accompanied by such a referenceÕ on the occasion of their official
publication. Ö They shall also include a statement
that references in existing laws, regulations and administrative provisions to
these directives repealed by this Directive shall be construed as references to
this Directive. Õ The
manner in which such references are to be made shall be laid down by the Member State.
2.         Member States shall communicate
to the Commission the ð text of the ï main
provisions of national law which they adopt in the field covered by this
Directive.
ò new
Article 47
1.         Article
152(7) to (12) of Directive [2000/12/EC] shall apply mutatis mutandis for the
purposes of this Directive subject to the following provisions which shall
apply where the discretion referred to in Article 152(7) of Directive
[2000/12/EC] is exercised:
(a)     References
in Annex II paragraph 6 of Directive [2000/12/EC] shall be read as references
to Directive 2000/12/EC as that Directive stood prior to the date referred to
in Article 46;
(b)     Annex II,
paragraph 4.1, shall apply as it stood prior to the date referred to in Article
46.
2.         Article
157 (2) of Directive [2000/12/EC] shall apply mutatis mutandis for the purposes
of Articles 18 and 20.
ê 93/6/EEC
Art. 13
Article 13
The Commission shall as soon as possible submit to
the Council proposals for capital requirements in respect of commodities
trading, commodity derivatives and units of collective-investment undertakings.
The Council shall decide on the Commission's
proposals no later than six months before the date of application of this
Directive.
ò new
Article 48
Directive 93/6/EEC, as amended by the Directives listed in Annex VIII,
Part A, is repealed without prejudice to the obligations of the Member States
relating to the time-limits for transposition into national law of the
Directives set out in Annex VIII, Part B.
References to the repealed Directives shall be construed as references to
this Directive and shall be read in accordance with the correlation table in
Annex IX.
Article 49
This Directive shall enter into force on the twentieth day following that
of its publication in the Official Journal of the European Union.
ê 93/6/EEC Art
14
REVIEW
CLAUSE
Article 14
Within three
years of the date referred to in Article 12, acting on a proposal from the
Commission, the Council shall examine and, if necessary, revise this Directive
in the light of the experience acquired in applying it, taking into account
market innovation and, in particular, developments in international fora of
regulatory authorities.
ê 93/6/EEC
Art. 15
Article 50
This Directive is addressed to the Member
States.
Done at Brussels, […]
For the European Parliament                        For
the Council
The President                                                 The
President
[…]                                                                […]
ê 93/6/EEC
(adapted)
ð new
ANNEX I
ð CALCULATING CAPITAL REQUIREMENTS
FOR ï POSITION RISK
INTRODUCTION Ö GENERAL
PROVISIONS Õ
Netting
1. The excess of an institution's long
(short) positions over its short (long) positions in the same equity, debt and
convertible issues and identical financial futures, options, warrants and
covered warrants shall be its net position in each of those different
instruments. In calculating the net position the competent authorities shall
allow positions in derivative instruments to be treated, as laid down in
paragraphs 4 to 7, as positions in the underlying (or notional) security or
securities. Institutions' holdings of their own debt instruments shall be
disregarded in calculating specific risk under paragraph 14
Ö 14 Õ .
2. No netting shall be allowed between a
convertible and an offsetting position in the instrument underlying it, unless
the competent authorities adopt an approach under which the likelihood of a
particular convertible's being converted is taken into account or have a
capital requirement to cover any loss which conversion might entail.
3. All net positions, irrespective of their
signs, must be converted on a daily basis into the institution's reporting
currency at the prevailing spot exchange rate before their aggregation.
Particular instruments
ê 93/6/EC
(adapted)
è1 98/31/EC Art. 1.7 and Annex .1(a)
4. Interest-rate futures, forward-rate
agreements (FRAs) and forward commitments to buy or sell debt instruments shall
be treated as combinations of long and short positions. Thus a long interest-rate
futures position shall be treated as a combination of a borrowing maturing on
the delivery date of the futures contract and a holding of an asset with
maturity date equal to that of the instrument or notional position underlying
the futures contract in question. Similarly a sold FRA will be treated as a
long position with a maturity date equal to the settlement date plus the
contract period, and a short position with maturity equal to the settlement
date. Both the borrowing and the asset holding shall be included in the central government column Ö first
category set out in Õ of Table 1 in paragraph 14 Ö 14 Õ in order to
calculate the capital required against specific risk for interest-rate futures
and FRAs. A forward commitment to buy a debt instrument shall be treated as a
combination of a borrowing maturing on the delivery date and a long (spot)
position in the debt instrument itself. The borrowing shall be included in the central government column Ö first
category set out in Õ of Table 1 Ö in paragraph 14 Õfor purposes of
specific risk, and the debt instrument under whichever column is appropriate
for it in the same table.è1 --- ç
ê 98/31/EC
Art. 1.7 and Annex .1(a) (adapted)
The competent authorities may allow the
capital requirement for an exchange-traded future to be equal to the margin
required by the exchange if they are fully satisfied that it provides an
accurate measure of the risk associated with the future and that it is at least
equal to the capital requirement for a future that would result from a
calculation made using the method set out in this Annex or applying the
internal models method described in Annex VIII. 
Until 31 December
2006 tThe
competent authorities may also allow the capital requirement for an OTC
derivatives contract of the type referred to in this paragraph cleared by a
clearing house recognised by them to be equal to the margin required by the
clearing house if they are fully satisfied that it provides an accurate measure
of the risk associated with the derivatives contract and that it is at least
equal to the capital requirement for the contract in question that would result
from a calculation made using the method set out in the this Annex or applying
the internal models method described in Annex VIII.
ê 93/6/EEC
Art. 2(22)
For the purposes of this paragraph, long
position means a position in which an institution has fixed the interest
rate it will receive at some time in the future, and short position
means a position in which it has fixed the interest rate it will pay at some
time in the future.
ê 93/6/EEC
5. Options on interest rates, debt
instruments, equities, equity indices, financial futures, swaps and foreign
currencies shall be treated as if they were positions equal in value to the
amount of the underlying instrument to which the option refers, multiplied by
its delta for the purposes of this Annex. The latter positions may be netted
off against any offsetting positions in the identical underlying securities or
derivatives. The delta used shall be that of the exchange concerned, that
calculated by the competent authorities or, where that is not available or for
OTC-options, that, calculated by the institution itself, subject to the
competent authorities' being satisfied that the model used by the institution
is reasonable.
However, the competent authorities may also
prescribe that institutions calculate their deltas using a methodology
specified by the competent authorities.
ê 98/31/EC
Art. 1.7 and Annex .1(b) (adapted)
The competent
authorities shall require that the oOther
risks, apart from the delta risk, associated with options are Ö shall be Õ safeguarded
against. The competent authorities may allow the requirement against a written
exchange-traded option to be equal to the margin required by the exchange if
they are fully satisfied that it provides an accurate measure of the risk
associated with the option and that it is at least equal to the capital
requirement against an option that would result from a calculation made using
the method set out in the remainder of this Annex or applying the internal
models method described in Annex VIII. Until 31 December 2006 tThe competent authorities
may also allow the capital requirement for an OTC option cleared by a clearing
house recognised by them to be equal to the margin required by the clearing
house if they are fully satisfied that it provides an accurate measure of the
risk associated with the option and that it is at least equal to the capital
requirement for an OTC option that would result from a calculation made using
the method set out in the remainder of this Annex or applying the internal
models method described in Annex VIII. In addition
they may allow the requirement on a bought exchange-traded or OTC option to be
the same as that for the instrument underlying it, subject to the constraint
that the resulting requirement does not exceed the market value of the option.
The requirement against a written OTC option shall be set in relation to the
instrument underlying it.
ê 98/31/EC
Art. 1.7 and Annex .1(c)
6. Warrants relating to debt instruments
and equities shall be treated in the same way as options under paragraph 5.
ê 93/6/EEC
7. Swaps shall be treated for interest-rate
risk purposes on the same basis as on-balance-sheet instruments. Thus an
interest-rate swap under which an institution receives floating-rate interest
and pays fixed-rate interest shall be treated as equivalent to a long position
in a floating-rate instrument of maturity equivalent to the period until the
next interest fixing and a short position in a fixed-rate instrument with the
same maturity as the swap itself.
ò new
8. For credit
derivatives, unless specified differently, the notional amount of the credit
derivative contract must be used. When calculating the capital requirement for
the market risk of the party who assumes the credit risk (the “protection
seller”), positions are determined as follows:
A total return
swap creates a long position in the general market risk of the reference
obligation and a short position in the general market risk of a government bond
which is assigned a 0% risk weight under Annex VI of Directive [2000/12/EC]. It
also creates a long position in the specific risk of the reference obligation.
A credit default
swap does not create a position for general market risk. For the purposes of
specific risk, the institution must record a synthetic long position in an
obligation of the reference entity. If premium or interest payments are due
under the product, these cash flows must be represented as notional positions
in a government bond with the appropriate fixed or floating rate.
A credit linked
note creates a long position in the general market risk of the note itself, as
an interest product. For the purpose of specific risk, a synthetic long position
is created in an obligation of the reference entity. In addition, a long
position is created in the specific risk of the issuer of the note.
A
first-asset-to-default basket creates a position for the notional amount in an
obligation of each reference entity. If the size of the maximum credit event
payment is lower than the capital requirement under the method in the first
sentence of this sub-paragraph, the maximum payment amount may be taken as the
capital requirement for specific risk.
A second-asset-to-default
basked product creates a position for the notional amount in an obligation of
each reference entity less one (that with the lowest specific risk capital
requirement). If the size of the maximum credit event payment is lower than the
capital requirement under the method in the first sentence of this
sub-paragraph, this amount may be taken as the capital requirement for specific
risk.
Where a credit
linked note basket product has an external rating and meets the conditions for
a qualifying debt item, a single long position with the specific risk of the
note issuer may be recorded instead of the specific risk positions for all
reference entities.
A basket product
providing proportional protection creates a position in each reference entity
for the purposes of specific risk, with the total notional amount of the
contract assigned across the positions according to the proportion of the total
notional amount that each exposure to a reference entity represents. Where more
than one obligation of a reference entity can be selected, the obligation with
the highest risk weighting determines the specific risk. The maturity of the
credit derivative contract is applicable instead of the maturity of the
obligation.
For the party who
transfers credit risk (the “protection buyer”), the positions are determined as
the mirror image of the protection seller, with the exception of a credit
linked note (which entails no short position in the issuer). If at a given
moment there is a call option in combination with a step-up, such moment is
treated as the maturity of the protection. In the case of the nth
to default credit derivatives, protection buyers are allowed to off-set
specific risk for n-1 of the underlyings (i.e., the n-1 assets with the lowest
specific risk charge).
ê 93/6/EEC
(adapted)
89. However, iInstitutions which mark to market and manage
the interest-rate risk on the derivative instruments covered in paragraphs 4 to
7 on a discounted-cash-flow basis may use sensitivity models to calculate the
positions referred to above and may use them for any bond which is amortizsed
over its residual life rather than via one final repayment of principal. Both
the model and its use by the institution must be approved by the competent
authorities. These models should generate positions which have the same
sensitivity to interest-rate changes as the underlying cash flows. This
sensitivity must be assessed with reference to independent movements in sample
rates across the yield curve, with at least one sensitivity point in each of
the maturity bands set out in Table 2 of paragraph 18
Ö 20 Õ . The
positions shall be included in the calculation of capital requirements
according to the provisions laid down in paragraphs 15 to
30 Ö 17 to 32 Õ .
910.
Institutions which do not use models under paragraph 8 Ö 9 Õmay instead, with the approval of the competent authorities,
treat as fully offsetting any positions in derivative instruments covered in
paragraphs 4 to 7 which meet the following conditions at least:
(ia)    the positions are of the same value and
denominated in the same currency;
(iib)   the reference rate (for floating-rate
positions) or coupon (for fixed-rate positions) is closely matched;
(iiic)  the next interest-fixing date or, for fixed
coupon positions, residual maturity corresponds with the following limits:
(i)      less than one month hence: same day,;
(ii)     between one month and one year hence:
within seven days,;
(iii)    over one year hence: within 30 days.
1011.
The transferor of securities or guaranteed rights relating to title to
securities in a repurchase agreement and the lender of securities in a
securities lending shall include these securities in the calculation of its
capital requirement under this Annex provided that such securities meet the
criteria laid down in Article 2(6)(a) Ö 11 Õ .
ê 93/6/EEC
(adapted)
11. Positions
in units of collective-investment undertakings shall be subject to the capital
requirements of Directive 89/647/EEC rather than to position-risk requirements
under this Annex.
Specific and general risks
12. The position risk on a traded debt
instrument or equity (or debt or equity derivative) shall be divided into two components
in order to calculate the capital required against it. The first shall be its
specific-risk component — this is the risk of a price change in the instrument
concerned due to factors related to its issuer or, in the case of a derivative,
the issuer of the underlying instrument. The second component shall cover its
general risk — this is the risk of a price change in the instrument due (in the
case of a traded debt instrument or debt derivative) to a change in the level
of interest rates or (in the case of an equity or equity derivative) to a broad
equity-market movement unrelated to any specific attributes of individual
securities.
TRADED DEBT INSTRUMENTS
13.       The
institution shall classify its nNet positions Ö shall be
classified Õ according to
the currency in which they are denominated and shall calculate the capital
requirement for general and specific risk in each individual currency
separately.
Specific risk
ê 93/6/EC
ð new
14. The institution shall assign its net
positions, as
calculated in accordance with paragraph 1, to the appropriate categories in
Table 1 on the basis of their residual maturities and then multiply them by the
weightings shown. It shall sum its weighted positions (regardless of whether
they are long or short) in order to calculate its capital requirement against
specific risk. ð in the trading book, as calculated
in accordance with paragraph 1 to the appropriate categories in Table 1 on the
basis of their issuer/obligor, external or internal credit assessment, and
residual maturity, and then multiply them by the weightings shown. It shall sum
its weighted positions (regardless of whether they are long or short) in order
to calculate its capital requirement against specific risk. ï
ê 93/6/EEC
Table 1
 Central government items || Qualifying items || Other items 
   || Up to 6 months || Over 6 and up to 24 months || Over 24 months ||   
 0,00 % || 0,25 % || 1,00 % || 1,60 % || 8,00 % 
ò new
Table 1
 Items || Specific risk capital charge 
 Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States’ regional government or local authorities which would receive a 0% risk weighting under the RSA or IRB approaches. || 0% 
 Debt securities issued or guaranteed by central governments, issued by central banks, international organisations, multilateral development banks or Member States’ regional governments or local authorities which would receive a 20% or 50% risk weighting under the RSA Other qualifying items as defined in paragraph 15 below || 0.25% (residual term to final maturity six months or less) 1.00% (residual term to final maturity greater than six months and up to and including 24 months) 1.60% (residual term to maturity exceeding 24 months) 
 All others || 8.00% 
15.       For the
purposes of paragraph 14 qualifying items shall include:
(a)     long and
short positions in assets qualifying for a credit quality step corresponding at
least to investment grade in the mapping process described in Title V, Chapter
2, Section 3, Sub-section 1 of Directive [2000/12/EC];
(b)     long and
short positions in assets which, because of the solvency of the issuer, have a
PD which is not higher than that of the assets referred to under a) above, under
the approach described in Title V, Chapter 2, Section 3, Sub-section 2 of Directive
[2000/12/EC];
(c)     long and
short positions in assets for which a credit assessment by a nominated external
credit assessment institution is not available and which meet the following
conditions:
(i)      they are
considered by the institutions concerned to be sufficiently liquid;
(ii)     their
investment quality is, according to the institution’s own discretion, at least
equivalent to that of the assets referred to under point a);
(iii)    they are
listed on at least one regulated market in a Member State or on a stock
exchange in a third country provided that the exchange is recognised by the
competent authorities of the relevant Member State;
(d)     they are,
subject to competent authorities discretion, long and short positions in assets
issued by institutions subject to the capital adequacy requirements set forth
in Directive [2000/12/EC] 
The manner in
which the debt instruments are assessed shall be subject to scrutiny by the
competent authorities, which shall overturn the judgment of the institution if
they consider that the instruments concerned are subject to too high a degree
of specific risk to be qualifying items;
16. The competent
authorities shall require the institution to apply the maximum weighting shown
in Table 1 to instruments that show a particular risk because of the
insufficient solvency of the issuer of liquidity.
ê 93/6/EEC
General risk
(a) Maturity-based
ê 93/6/EEC
(adapted)
1517.
The procedure for calculating capital requirements against general risk
involves two basic steps. First, all positions shall be weighted according to
maturity (as explained in paragraph 16 Ö 18 Õ ), in order to
compute the amount of capital required against them. Second, allowance shall be
made for this requirement to be reduced when a weighted position is held
alongside an opposite weighted position within the same maturity band. A
reduction in the requirement shall also be allowed when the opposite weighted
positions fall into different maturity bands, with the size of this reduction
depending both on whether the two positions fall into the same zone, or not,
and on the particular zones they fall into. There are three zones (groups of
maturity bands) altogether.
1618.
The institution shall assign its net positions to the appropriate maturity
bands in column 2 or 3, as appropriate, in Table 2 appearing
in paragraph 18 Ö 20 Õ . It shall do
so on the basis of residual maturity in the case of fixed-rate instruments and
on the basis of the period until the interest rate is next set in the case of
instruments on which the interest rate is variable before final maturity. It
shall also distinguish between debt instruments with a coupon of 3 % or
more and those with a coupon of less than 3 % and thus allocate them to
column 2 or column 3 in Table 2. It shall then multiply each of them by the
weighing for the maturity band in question in column 4 in Table 2.
ê 93/6/EEC
1719. It
shall then work out the sum of the weighted long positions and the sum of the
weighted short positions in each maturity band. The amount of the former which
are matched by the latter in a given maturity band shall be the matched
weighted position in that band, while the residual long or short position shall
be the unmatched weighted position for the same band. The total of the matched
weighted positions in all bands then be calculated.
1820.
The institution shall compute the totals of the unmatched weighted long
positions for the bands included in each of the zones in Table 2 in order to
derive the unmatched weighted long position for each zone. Similarly the sum of
the unmatched weighted short positions for each band in a particular zone shall
be summed to compute the unmatched weighted short position for that zone. That
part of the unmatched weighted long position for a given zone that is matched
by the unmatched weighted short position for the same zone shall be the matched
weighted position for that zone. That part of the unmatched weighted long or
unmatched weighted short position for a zone that cannot be thus matched shall
be the unmatched weighted position for that zone.
Table 2
 Zone || Maturity band || Weighting (in %) || Assumed interest rate change (in %) 
 Coupon of 3 % or more || Coupon of less than 3 % 
 One || 0 ≤ 1 month || 0 ≤ 1 month || 0.00 || — 
 > 1 ≤ 3 months || > 1 ≤ 3 months || 0.20 || 1.00 
 > 3 ≤ 6 months || > 3 ≤ 6 months || 0.40 || 1.00 
 > 6 ≤ 12 months || > 6 ≤ 12 months || 0.70 || 1.00 
 Two || > 1 ≤ 2 years || > 1,0 ≤ 1,9 years || 1.25 || 0.90 
 > 2 ≤ 3 years || > 1,9 ≤ 2,8 years || 1.75 || 0.80 
 > 3 ≤ 4 years || > 2,8 ≤ 3,6 years || 2.25 || 0.75 
 Three || > 4 ≤ 5 years || > 3,6 ≤ 4,3 years || 2.75 || 0.75 
 > 5 ≤ 7 years || > 4,3 ≤ 5,7 years || 3.25 || 0.70 
 > 7 ≤ 10 years || > 5,7 ≤ 7,3 years || 3.75 || 0.65 
 > 10 ≤ 15 years || > 7,3 ≤ 9,3 years || 4.50 || 0.60 
 > 15 ≤ 20 years || > 9,3 ≤ 10,6 years || 5.25 || 0.60 
 > 20 years || > 10,6 ≤ 12,0 years || 6.00 || 0.60 
   || > 12,0 ≤ 20,0 years || 8.00 || 0.60 
   || > 20 years || 12.50 || 0.60 
ê 93/6/EC
(adapted)
1921.
The amount of the unmatched weighted long (short) position in zone one which is
matched by the unmatched weighted short (long) position in zone two shall then
be computed. This shall be referred to in paragraph 23
Ö 25Õ as the matched
weighted position between zones one and two. The same calculation shall then be
undertaken with regard to that part of the unmatched weighted position in zone
two which is left over and the unmatched weighted position in zone three in
order to calculate the matched weighted position between zones two and three.
2022.
The institution may, if it wishes, reverse the order in paragraph 19 Ö 21 Õ so as to
calculate the matched weighted position between zones two and three before
working out that between zones one and two.
ê 93/6/EEC
(adapted)
2123.
The remainder of the unmatched weighted position in zone one shall then be
matched with what remains of that for zone three after the latter's matching
with zone two in order to derive the matched weighted position between zones
one and three.
2224.
Residual positions, following the three separate matching calculations in
paragraphs 19, 20 and 21 Ö 21, 22
and 23, Õ shall be
summed.
2325.
The institution's capital requirement shall be calculated as the sum of:
(a)          10 % of the sum of the
matched weighted positions in all maturity bands;
(b)          40 % of the matched weighted
position in zone one;
(c)          30 % of the matched weighted
position in zone two;
(d)          30 % of the matched weighted
position in zone three;
(e)          40 % of the matched weighted
position between zones one and two and between zones two and three (see
paragraph 19 Ö 21 Õ );
(f)          150 % of the matched
weighted position between zones one and three;
(g)          100 % of the residual
unmatched weighted positions.
(b) Duration-based
2426.
The competent authorities in a Member State may allow institutions in general
or on an individual basis to use a system for calculating the capital
requirement for the general risk on traded debt instruments which reflects
duration instead of the system set out in paragraphs 15
to 23 Ö 17 to
25 Õ , provided
that the institution does so on a consistent basis.
ê 93/6/EC
(adapted)
2527.
Under such a system Ö referred
to in paragraph 26 Õ the
institution shall take the market value of each fixed-rate debt instrument and
thence calculate its yield to maturity, which is implied discount rate for that
instrument. In the case of floating-rate instruments, the institution shall
take the market value of each instrument and thence calculate its yield on the
assumption that the principal is due when the interest rate can next be
changed.
ê 93/6/EEC
2628.
The institution shall then calculate the modified duration of each debt
instrument on the basis of the following formula: modified duration =
((duration (D))/(1 + r)), where:
 D || = || ((∑t = 1m((t Ct)/((1 + r)t)))/(∑t = 1m((Ct)/((1 + r)t)))) 
 where: 
 R || = || yield to maturity (see paragraph 25), 
 Ct || = || cash payment in time t, 
 M || = || total maturity (see paragraph 25). 
2729.
The institution shall then allocate each debt instrument to the appropriate
zone in Table 3. It shall do so on the basis of the modified duration of each
instrument.
Table 3
 Zone || Modified duration (in years) || Assumed interest (change in %) 
 One || > 0 ≤ 1,0 || 1.0 
 Two || > 1,0 ≤ 3,6 || 0.85 
 Three || > 3,6 || 0.7 
2830.
The institution shall then calculate the duration-weighted position for each
instrument by multiplying its market price by its modified duration and by the
assumed interest-rate change for an instrument with that particular modified
duration (see column 3 in Table 3).
2931.
The institution shall work out its duration-weighted long and its
duration-weighted short positions within each zone. The amount of the former
which are matched by the latter within each zone shall be the matched
duration-weighted position for that zone.
ê 93/6/EEC
(adapted)
The institution shall then calculate the
unmatched duration-weighted positions for each zone. It shall then follow the
procedures laid down for unmatched weighted positions in paragraphs 19 to 22 Ö 21 to
24 Õ .
ê 93/6/EC
3032.
The institution's capital requirement shall then be calculated as the sum of:
(a)          2 % of the matched
duration-weighted position for each zone;
(b)          40 % of the matched
duration-weighted positions between zones one and two and between zones two and
three;
(c)          150 % of the matched
duration-weighted position between zones one and three;
(d)          100 % of the residual
unmatched duration-weighted positions.
EQUITIES
3133.
The institution shall sum all its net long positions and all its net short
positions in accordance with paragraph 1. The sum of the two figures shall be
its overall gross position. The difference between them shall be its overall
net position.
Specific risk
ê 93/6/EEC
ð new
32.34ð The institution shall sum all its
net long positions and all its net short positions in accordance with paragraph
1. ï It shall multiply its overall gross position by 4 % in order
to calculate its capital requirement against specific risk.
ê 93/6/EC
(adapted)
3335. Notwithstanding paragraph 35 Ö By
derogation to paragraph 34 Õ, the competent
authorities may allow the capital requirement against specific risk to be 2%
rather than 4% for those portfolios of equities that an institution holds which
meet the following conditions:
ê 98/31/EC
Art. 1.7 and Annex .1(d) (adapted)
(ia)         the equities shall not be those of
issuers which have issued only traded debt instruments that currently attract
an 8 % requirement in Table 1 appearing in paragraph
14 or that attract a lower requirement only because they are guaranteed
or secured;
ê 93/6/EEC
(iib)        the equities must be adjudged highly
liquid by the competent authorities according to objective criteria;
ê 93/6/EEC
(adapted)
(iiic)       no individual position shall comprise
more than 5 % of the value of the institution's whole equity portfolio. However 
Ö For the
purpose of point (c) Õ, the competent
authorities may authorizse individual positions of up to 10 %
provided that the total of such positions does not exceed 50 % of the
portfolio.
ê 93/6/EEC
General risk
3436.
Its capital requirement against general risk shall be its overall net position
multiplied by 8 %.
Stock-index futures
ê 93/6/EEC
(adapted)
3537.
Stock-index futures, the delta-weighted equivalents of options in stock-index
futures and stock indices collectively referred to hereafter as «stock-index
futures», may be broken down into positions in each of their constituent
equities. These positions may be treated as underlying positions in the
equities in question,; therefore Ö and may Õ, subject to
the approval of the competent authorities, they may
be netted against opposite positions in the underlying equities themselves.
ê 93/6/EEC
3638.
The competent authorities shall ensure that any institution which has netted
off its positions in one or more of the equities constituting a stock-index
future against one or more positions in the stock-index future itself has
adequate capital to cover the risk of loss caused by the future's values not
moving fully in line with that of its constituent equities; they shall also do
this when an institution holds opposite positions in stock-index futures which
are not identical in respect of either their maturity or their composition or
both.
ê 93/6/EEC
(adapted)
3739. Notwithstanding Ö By derogation
to Õ paragraphs 35 and 36 Ö 37 and
38 Õ, stock-index
futures which are exchange traded and — in the opinion of the competent
authorities — represent broadly diversified indices shall attract a capital requirement
against general risk of 8 %, but no capital requirement against specific
risk. Such stock-index futures shall be included in the calculation of the
overall net position in paragraph 31 Ö 33 Õ, but
disregarded in the calculation of the overall gross position in the same
paragraph.
ê 93/6/EEC
3840. If
a stock-index future is not broken down into its underlying positions, it shall
be treated as if it were an individual equity. However, the specific risk on this
individual equity can be ignored if the stock-index future in question is
exchange traded and, in the opinion of the competent authorities, represents a
broadly diversified index.
UNDERWRITING
ê 93/6/EEC
(adapted)
3941. In
the case of the underwriting of debt and equity instruments, the competent
authorities may allow an institution to use the following procedure in
calculating its capital requirements. Firstly, it shall calculate the net
positions by deducting the underwriting positions which are subscribed or
sub-underwritten by third parties on the basis of formal agreements; secondly. Secondly,
it shall reduce the net positions by the following
reduction factors: Ö in Table
4 Õ
Table 4
 — working day 0: || 100 % 
 — working day 1: || 90 % 
 — working days 2 to 3: || 75 % 
 — working day 4: || 50 % 
 — working day 5: || 25 % 
 — after working day 5: || 0 %. 
ê 93/6/EEC
Working day zero shall be the working day
on which the institution becomes unconditionally committed to accepting a known
quantity of securities at an agreed price.
Thirdly, it shall calculate its capital
requirements using the reduced underwriting positions.
The competent authorities shall ensure that
the institution holds sufficient capital against the risk of loss which exists
between the time of the initial commitment and working day 1.
ò new
SPECIFIC RISK
CAPITAL CHARGES FOR TRADING BOOK POSITIONS HEDGED BY CREDIT DERIVATIVES
42. An allowance
shall be given for protection provided by credit derivatives, in accordance
with the principles set out in paragraphs 43 to 46.
43. Full
allowance shall be given when the value of two legs always move in the opposite
direction and broadly to the same extent. This will be the case in either of
the following situations:
(a)     the two legs
consist of completely identical instruments;
(b)     a long cash
position is hedged by a total rate of return swap (or vice versa) and there is
an exact match between the reference obligation and the underlying exposures
(i.e., the cash position). The maturity of the swap itself may be different
from that of the underlying exposure. 
In these cases, a
specific risk capital charge should not be applied to either side of the
position.
44. An 80% offset
will be applied when the value of two legs always move in the opposite
direction and where there is an exact match in terms of the reference
obligation, the maturity of both the reference obligation and the credit
derivative, and the currency of the underlying exposure. In addition, key
features of the credit derivative contract should not cause the price movement
of the credit derivative to materially deviate from the price movements of the
cash position. To the extent that the transaction transfers risk, an 80%
specific risk offset will be applied to the side of the transaction with the
higher capital charge, while the specific risk requirements on the other side
shall be zero.
45. Partial
allowance shall be given when the value of two legs usually move in the
opposite direction. This would be the case in the following situations:
(a)     the position
is captured in paragraph 43(b) but there is an asset mismatch between the
reference obligation and the underlying exposure. However, the positions meet
the following requirements:
(i)      the
reference obligation ranks pari passu with or is junior to the underlying
obligation; 
(ii)     the
underlying obligation and reference obligation share the same obligor and have
legally enforceable cross-default or cross-acceleration clauses;
(b)     the position
is captured in paragraph 43(a) or paragraph 44 but there is a currency or
maturity mismatch between the credit protection and the underlying asset
(currency mismatches should be included in the normal reporting foreign
exchange risk under Annex III;
(c)     the position
is captured in paragraph 44 but there is an asset mismatch between the cash
position and the credit derivative. However, the underlying asset is included
in the (deliverable) obligations in the credit derivative documentation.
In each of those
cases, rather than adding the specific risk capital requirements for each side
of the transaction, only the higher of the two capital requirements shall
apply.
46. In all cases
not falling under paragraph 45, a specific risk capital charge will be assessed
against both sides of the position.
Capital charges for CIUs in the trading book
47. The capital
requirements for positions in collective investment undertakings (CIUs) which
meet the conditions specified in Article 11 for a trading book capital treatment,
shall be calculated in accordance with the methods set out in paragraphs 48 to
56.
48. Without
prejudice to other provisions in this section, positions in CIUs shall be
subject to a capital requirement for position risk (specific and general) of 32%.
Without prejudice to provisions in Annex III (3)(i) or Annex V (13)(v), where
the modified gold treatment set out in those paragraphs is used, positions in
CIUs shall be subject to a capital requirement for position risk (specific and
general) and foreign-exchange risk of no more than 40%.
49. Institutions
may determine the capital requirement for positions in CIUs which meet the criteria
set out in paragraph 51, by the methods set out in paragraphs 53 to 56.
50. Unless noted
otherwise, no netting is permitted between the underlying investments of a CIU
and other positions held by the institution.
GENERAL
CRITERIA
51. The general
eligibility criteria for using the methods in paragraphs 53 to 56, for CIUs
issued by companies supervised or incorporated within the Community are
that:
(a)     the CIU’s
prospectus or equivalent document shall include:
(i)      the
categories of assets the CIU is authorised to invest in;
(ii)     if
investment limits apply, the relative limits and the methodologies to calculate
them;
(iii)    if leverage
is allowed, the maximum level of leverage;
(iv)    if
investment in OTC financial derivatives or repo-style transactions are allowed,
a policy to limit counterparty risk arising from these transactions;
(b)     the business
of the CIU shall be reported in half-yearly and annual reports to enable an
assessment to be made of the assets and liabilities, income and operations over
the reporting period;
(c)     the
units/shares of the CIU are redeemable in cash, out of the undertaking’s
assets, on a daily basis at the request of the unit holder;
(d)     investments
in the CIU shall be segregated from the assets of the CIU manager;
(e)     there shall
be adequate risk assessment, by the investing institution, of the CIU.
52. Third country
CIUs may be eligible if the requirements in points (a) to (e) of paragraph 51
are met, subject to the approval of the institution’s competent authority.
SPECIFIC
METHODS
53. Where the institution
is aware of the underlying investments of the CIU on a daily basis the
institution may look through to those underlying investments in order to calculate
the capital requirements for position risk (general and specific) for those positions
in accordance with the methods set out in this Annex or, if permission has been
granted, in accordance with the methods set out in Annex V. Under this
approach, positions in CIUs shall be treated as positions in the underlying
investments of the CIU. Netting is permitted between positions in the
underlying investments of the CIU and other positions held by the institution,
as long as the institution holds a sufficient quantity of units to allow for
redemption/creation in exchange for the underlying investments.
54. Institutions
may calculate the capital requirements for position risk (general and specific)
for positions in CIUs in accordance with the methods set out in this Annex or,
if permission has been granted, in accordance with the methods set out in Annex
V, to assumed positions representing those necessary to replicate the
composition and performance of the externally generated index or fixed basket
of equities or debt securities referred to in (a), subject to the following
conditions:
(a)     the purpose
of the CIU’s mandate is to replicate the composition and performance of an
externally generated index or fixed basket of equities or debt securities; 
(b)     a minimum
correlation of 0.9 between daily price movements of the CIU and the index or
basket of equities or debt securities it tracks can be clearly established over
a minimum period of six months. Correlation in this context means the
correlation coefficient between daily returns on the exchange traded fund and
the index or basket of equities or debt securities it tracks.
55. Where the institution
is not aware of the underlying investments of the CIU on a daily basis, the
institution may calculate the capital requirements for position risk (general
and specific) in accordance with the methods set out in this Annex, subject to
the following conditions:
(a)     it will be
assumed that the CIU first invests to the maximum extent allowed under its
mandate in the asset classes attracting the highest capital requirement for
position risk (general and specific), and then continues making investments in
descending order until the maximum total investment limit is reached. The position
in the CIU will be treated as a direct holding in the assumed position;
(b)     institutions
shall take account of the maximum indirect exposure that they could achieve by
taking leveraged positions through the CIU when calculating their capital
requirement for position risk, by proportionally increasing the position in the
CIU up to the maximum exposure to the underlying investment items resulting
from the investment mandate;
(c)     should the
capital requirement for position risk (general and specific) under this
approach exceed that set out in paragraph 48, the capital requirement shall be
capped at that level.
56. Institutions
may rely on a third party to calculate and report capital requirements for
position risk (general and specific) for positions in CIUs falling within
paragraphs 53 and 55, in accordance with the methods set out in this Annex,
provided that the correctness of the calculation and the report is adequately
ensured.
ê 93/6/EEC
(adapted)
ANNEX II
Ö CALCULATING
CAPITAL REQUIREMENTS FOR Õ SETTLEMENT
AND COUNTER-PARTY RISK
SETTLEMENT/DELIVERY RISK
ê 98/31/EC
Art. 1.7 and Annex .2(a)
1. In the case of transactions in which
debt instruments, equities and commodities (excluding repurchase and reverse
repurchase agreements and securities or commodities lending and securities or
commodities borrowing) are unsettled after their due delivery dates, an
institution must calculate the price difference to which it is exposed. This is
the difference between the agreed settlement price for the debt instrument,
equity or commodity in question and its current market value, where the
difference could involve a loss for the institution. It must multiply this
difference by the appropriate factor in column A of the table appearing in
paragraph 2 in order to calculate its capital requirement.
ê 93/6/EEC
(adapted)
2. Notwithstanding
Ö By
derogation to Õ paragraph 1,
an institution may, at the discretion of its competent authorities, calculate
its capital requirements by multiplying the agreed settlement price of every
transaction which is unsettled between 5 and 45 working days after its due date
by the appropriate factor in column B of the tTable 1below. As from 46
working days after the due date it shall take the requirement to be 100 %
of the price difference to which it is exposed as in column A Ö of Table 1Õ .
Ö Table 1 Õ
 Number of working days after due settlement date || Column A (%) || Column B (%) 
 5 — 15 || 8 || 0.5 
 16 — 30 || 50 || 4.0 
 31 — 45 || 75 || 9.0 
 46 or more || 100 || see paragraph 2 
COUNTER-PARTY RISK
ò new
3. An institution
shall be required to hold capital against the counterparty risk arising from
exposures due to the following:
(a)     free
deliveries;
(b)     OTC
derivative instruments and credit derivatives; 
(c)     Repurchase
agreements, reverse repurchase agreements, securities or commodities lending or
borrowing transactions based on securities or commodities included in the
trading book;
(d)     exposures in
the form of fees, commission, interest dividends and margin in exchange-traded
derivative contracts which are neither covered in this Annex or Annex I, nor
deducted from own funds under paragraph 2(d) of Article 13, and which are
directly related to the items included in the trading book.
4. For these
purposes a free-delivery will be deemed to have occurred if the institution has
paid for securities or commodities before receiving them or it has delivered securities
or commodities before receiving payment for them, and, in the case of
cross-border transactions, one day or more has elapsed since it made that
payment or delivery.
5. Subject to
paragraphs 6 to 9, exposure values and risk-weighted exposure amounts for such exposures
shall be calculated in accordance with the provisions of Title V, Chapter 2,
Section 3 of Directive [2000/12/EC] with references to ‘credit institutions’ in
that Section interpreted as references to ‘institutions’, references to ‘parent
credit institutions’ interpreted as references to ‘parent institutions’, and
with concomitant terms interpreted accordingly.
6. For the
purposes of paragraph 5:
Annex IV to
Directive [2000/12/EC] shall be considered to be amended to include after point
3(d) the words ‘and credit derivatives’;
Annex III to
Directive [2000/12/EC] shall be considered to be amended to include after Table
1(a):
To obtain a figure
for potential future credit exposure in the case of total return swap credit
derivatives and credit default swap credit derivatives, the nominal amount of
the instrument is multiplied by the following percentages:
Where the reference
obligation is one that if it gave rise to a direct exposure of the institution
would be a qualifying item for the purposes of Annex I - 5%;
Where the reference
obligation is one that if it gave rise to a direct exposure of the institution
would not be a qualifying item for the purposes of Annex I - 10%.
However, in the case
of a credit default swap, an institution the exposure of which arising from the
swap represents a long position in the underlying shall be permitted to use a
figure of 0% for potential future credit exposure, unless the credit default
swap is subject to closeout upon the insolvency of the entity the exposure of
which arising from the swap represents a short position in the underlying, even
though the underlying has not defaulted.”
Where the credit
derivative provides protection in relation to ‘nth to
default’ amongst a number of underlying obligations, which of the percentage
figures prescribed above is to be applied is determined by the obligation with
the nth lowest credit quality determined by whether it is one
that if incurred by the institution would be a qualifying item for the purposes
of Annex I.’
7. For the
purposes of paragraph 5, in calculating risk-weighted exposure amounts
institutions shall not be permitted to use the Financial Collateral Simple
Method, set out in Annex VIII, Part 3, paragraphs 25 to 30 of Directive
[2000/12/EC], for the recognition of the effects of financial collateral.
8. For the
purposes of paragraph 5, in the case of repurchase transactions and securities
or commodities lending or borrowing transactions, all financial instruments and
commodities that are eligible to be included in the trading book may be
recognised as eligible collateral. For exposures due to OTC derivative
instruments booked in the trading book, commodities that are eligible to be
included in the trading book may also be recognised as eligible collateral. For the purposes of calculating volatility
adjustments where such financial instruments or commodities are lent, sold or
provided, or borrowed, purchased or received by way of collateral or otherwise
under such a transaction such instruments and commodities shall be treated in
the same way as non-main index equities listed on a recognised exchange.
9. For the
purposes of paragraph 5, in relation to the recognition of master netting
agreements covering repurchase transactions and/or securities or commodities lending
or borrowing transactions and/or other capital market-driven transactions
netting across positions in the trading book and the non-trading book will only
be recognised when the netted transactions fulfil the following conditions:
(a)     all
transactions are marked to market daily;
(b)     any items
lent, sold or provided, or borrowed, purchased or received under the
transactions may be recognised as eligible financial collateral under Title V,
Chapter 2, Section 3, Sub-section 3 of Directive [2000/12/EC] without the application
of paragraph 8 of this Annex.
10. Where a
credit derivative included in the trading book forms part of an internal hedge
and the credit protection is recognised under Directive [2000/12/EC], there
shall be deemed not to be counterparty risk arising from the position in the
credit derivative.
11. The capital
requirement shall be 8% of the total risk-weighted exposure amounts.
ê 93/6/EEC
Free deliveries
ê 98/31/EC
Art. 1.7 and Annex .2(b)
3.1. An institution shall be required to hold capital
against counterparty risk if:
(i)           it has paid for securities or commodities before
receiving them or it has delivered securities or commodities before receiving
payment for them;
              and
(ii)          in the case of cross-border transactions, one day or more
has elapsed since it made that payment or delivery.
3.2. The capital requirement shall be 8 % of the
value of the securities or commodities or cash owed to the institution
multiplied by the risk weighting applicable to the relevant counterparty.
ê 98/31/EC
Art. 1.7 and Annex .2(c)
Repurchase and reverse repurchase agreements,
securities or commodities lending and borrowing
4.1. In the case of repurchase agreements and
securities or commodities lending based on securities or commodities included
in the trading book the institution shall calculate the difference between the
market value of the securities or commodities and the amount borrowed by the
institution or the market value of the collateral, where that difference is
positive. In the case of reverse repurchase agreements and securities or
commodities borrowing, the institution shall calculate the difference between
the amount the institution has lent or the market value of the collateral and
the market value of the securities or commodities it has received, where that
difference is positive.
ê 93/6/EEC
The competent authorities shall take measures to
ensure that the excess collateral given is acceptable.
Furthermore, the competent authorities may allow
institutions not to include the amount of excess collateral in the calculations
described in the first two sentences of this paragraph if the amount of excess
collateral is guaranteed in such a way that the transferor is always assured
that the excess collateral will be returned to it in the event of defaults of
its counter-party.
Accrued interest shall be included in calculating the
market value of amounts lent or borrowed and collateral.
4.2. The capital requirement shall be 8 % of the
figure produced in accordance with paragraph 4.1, multiplied by the risk
weighting applicable to the relevant counter-party.
OTC derivative instruments
ê 98/33/EC
Art. 3.2
5. In order to calculate the capital requirement on
their OTC derivative instruments, institutions shall apply Article II to
Directive 89/647/EEC. The risk weightings to be applied to the relevant
counterparties shall be determined in accordance with Article 2(9) of this
Directive.
Until 31 December 2006, the competent authorities of
Member States may exempt from the application of the methods set out in Annex
II OTC contracts cleared by a clearing house where the latter acts as the legal
counterparty and all participants fully collateralise on a daily basis the
exposure they present to the clearing house, thereby providing a protection
covering both the current exposure and the potential future exposure. The
competent authorities must be satisfied that the posted collateral gives the
same level of protection as collateral which complies with Article 6(1)(a)(7)
of Directive 89/647/EEC and that the risk of a build-up of the clearing house's
exposures beyond the market value of posted collateral is eliminated. Member
States shall inform the Commission of the use they make of this option.
ê 93/6/EEC
OTHER
6. The capital requirements of Directive 89/647/EEC
shall apply to those exposures in the form of fees, commission, interest,
dividends and margin in exchange-traded futures or options contracts which are
neither covered in this Annex or Annex I nor deducted from own funds under
paragraph 2 (d) of Annex V and which are directly related to the items included
in the trading book
The risk weightings to be applied to the relevant
counter-parties shall be determined in accordance with Article 2 (9) of this
Directive.
ê 93/6/EEC
(adapted)
ANNEX III
Ö CALCULATING
CAPITAL REQUIREMENTS FOR Õ FOREIGN-EXCHANGE
RISK
ê 98/31/EC
Art. 1.7 and Annex .3(a) (adapted)
1. If the sum of an institution's overall
net foreign-exchange position and its net gold position, calculated in
accordance with the procedure set out below Ö in
paragraph 2 Õ , exceeds
2 % of its total own funds, it shall multiply the sum of its net foreign-exchange
position and its net gold position by 8 % in order to calculate its
own-funds requirement against foreign-exchange risk.
Until 31 December 2004, the competent authorities may allow institutions to calculate their
own-funds requirement by multiplying by 8 % the amount by which the sum of
the overall net foreign-exchange position and the net gold position exceeds
2 % of the total own funds.
ê 93/6/EEC
(adapted)
2. A two-stage calculation shall be used Ö for
capital requirements for foreign-exchange risk Õ.
ê 98/31/EC
Art. 1.7 and Annex .3(b) (adapted)
32.1.
Firstly, the institution's net open position in each currency (including the
reporting currency) and in gold shall be calculated.
This Ö net open Õ position shall
consist of the sum of the following elements (positive or negative):
-(a)    the net spot position
(i.e. all asset items less all liability items, including accrued interest, in
the currency in question or, for gold, the net spot position in gold),
-(b)    the net forward
position (i.e. all amounts to be received less all amounts to be paid under
forward exchange and gold transactions, including currency and gold futures and
the principal on currency swaps not included in the spot position),
-(c)    irrevocable guarantees
(and similar instruments) that are certain to be called and likely to be
irrecoverable,
-(d)   net future
income/expenses not yet accrued but already fully hedged (at the discretion of
the reporting institution and with the prior consent of the competent
authorities, net future income/expenses not yet entered in accounting records
but already fully hedged by forward foreign-exchange transactions may be
included here). Such discretion must be exercised on a consistent basis,
-(e)    the net delta (or
delta-based) equivalent of the total book of foreign-currency and gold options,
-(f)    the market value of
other (i.e. non-foreign-currency and non-gold) options,.
- aAny positions which an institution has
deliberately taken in order to hedge against the adverse effect of the exchange
rate on its capital ratio may be excluded from the calculation of net open
currency positions. Such positions should be of a non-trading or structural
nature and their exclusion, and any variation of the terms of their exclusion,
shall require the consent of the competent authorities. The same treatment
subject to the same conditions as above may be applied to positions which an
institution has which relate to items that are already deducted in the
calculation of own funds.
ò new
For the purposes
of the calculation referred to in the first sub-paragraph, in respect
of CIUs the actual foreign exchange positions of the CIU shall be taken
into account. Institutions may rely on
third party reporting of the foreign exchange positions in the CIU, where the
correctness of this report is adequately ensured. If an institution is not
aware of the foreign exchange positions in a CIU, it shall be assumed that the
CIU is invested up to the maximum extent allowed under the CIU’s mandate in
foreign exchange and institutions shall, for trading book positions, take
account of the maximum indirect exposure that they could achieve by taking
leveraged positions through the CIU when calculating their capital requirement
for foreign exchange risk. This shall be done by proportionally increasing the
position in the CIU up to the maximum exposure to the underlying investment
items resulting from the investment mandate. The assumed position of the CIU in
foreign exchange shall be treated as a separate currency according to the
treatment of investments in gold, subject to the modification that, if the
direction of the CIU's investment is available, the total long position may be
added to the total long open foreign exchange position and the total short
position may be added to the total short open foreign exchange position. There
would be no netting allowed between such positions prior to the calculation.
ê 98/31/EC
Art. 1.7 and Annex .3(b)
3.2 The competent authorities shall have the discretion to allow
institutions to use the net present value when calculating the net open
position in each currency and in gold.
ê 93/6/EEC
è1 98/31/EC Art. 1.7 and Annex .3(c)
è1 42.2. Secondly, net short and long positions in
each currency other than the reporting currency and the net long or short
position in gold shall be converted at spot rates into the reporting
currency. ç They shall then
be summed separately to form the total of the net short positions and the total
of the net long positions respectively. The higher of these two totals shall be
the institution's overall net foreign-exchange position.
ê 93/6/EEC
(adapted)
53. Notwithstanding Ö By
derogation to Õ paragraphs 1 to 4 Ö and 2 Õ and pending
further coordination, the competent authorities may prescribe or allow
institutions to use alternative Ö the
following Õ procedures for
the purposes of this Annex.
ê 93/6/EEC
(adapted)
63.1. Firstly, tThe competent authorities may allow
institutions to provide lower capital requirements against positions in closely
correlated currencies than those which would result from applying paragraphs 1 to 4 Ö and 2 Õ to them. The
competent authorities may deem a pair of currencies to be closely correlated
only if the likelihood of a loss — calculated on the basis of daily
exchange-rate data for the preceding three or five years — occurring on equal
and opposite positions in such currencies over the following 10 working days,
which is 4 % or less of the value of the matched position in question
(valued in terms of the reporting currency) has a probability of at least
99 %, when an observation period of three years is used, or 95 %,
when an observation period of five years is used. The own-funds requirement on
the matched position in two closely correlated currencies shall be 4 %
multiplied by the value of the matched position. The capital requirement on
unmatched positions in closely correlated currencies, and all positions in
other currencies, shall be 8 %, multiplied by the higher of the sum of the
net short or the net long positions in those currencies after the removal of
matched positions in closely correlated currencies.
ê 98/31/EC
Art. 1.7 and Annex .3(d) (adapted)
7. Secondly, until 31 December 2004, the competent authorities may allow institutions to apply an alternative
method to those outlined in paragraphs 1 to 6 for the purposes of this Annex.
The capital requirement produced by this method must be sufficient to exceed
2 % of the net open position as measured in paragraph 4 and, on the basis
of an analysis of exchange-rate movements during all the rolling 10-working-day
periods over the preceding three years, to exceed the likely loss 99 % or more of the time.
The alternative
method described in the first subparagraph may only be used under the following
conditions:
(i)           the
calculation formula and the correlation coefficients are set by the competent
authorities, based on their analysis of exchange-rate movements;
(ii)          the
competent authorities review the correlation coefficients regularly in the
light of developments in foreign-exchange markets.
ê 93/6/EEC
(adapted)
83.2. Thirdly, tThe competent authorities may allow
institutions to remove positions in any currency which is subject to a legally
binding intergovernmental agreement to limit its variation relative to other
currencies covered by the same agreement from whichever of the methods
described in paragraphs 1 to 7 Ö, 2 and 3.1 Õ that they
apply. Institutions shall calculate their matched positions in such currencies
and subject them to a capital requirement no lower than half of the maximum
permissible variation laid down in the intergovernmental agreement in question
in respect of the currencies concerned. Unmatched positions in those currencies
shall be treated in the same way as other currencies.
Notwithstanding Ö By
derogation to Õ the first Ö sub- Õ paragraph, the
competent authorities may allow the capital requirement on the matched positions
in currencies of Member States participating in the second stage of the
European monetary union to be 1.6 %, multiplied by the value of such
matched positions.
ê 93/6/EEC
(adapted)
9. The competent
authorities shall notify the Council and Commission of the methods, if any,
that they are prescribing or allowing in respect of paragraphs 6 to 8.
10. The Commission
shall report to the Council on the methods referred to in paragraph 9 and,
where necessary and with due regard to international developments, shall
propose a more harmonized treatment of foreign-exchange risk.
ê 93/6/EEC
114. Net positions in composite currencies may be broken down into the
component currencies according to the quotas in force.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
ANNEX VIII
Ö IV Õ
Ö CALCULATING
CAPITAL REQUIREMENTS FOR Õ COMMODITIES
RISK
ê 98/31/EC
Art. 1.7 and Annex .5
1. Each position in commodities or commodity
derivatives shall be expressed in terms of the standard unit of measurement.
The spot price in each commodity shall be expressed in the reporting currency.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
2. Positions in gold or gold derivatives
shall be considered as being subject to foreign-exchange risk and treated
according to Annex III or Annex VIII, as
appropriate, for the purpose of calculating market risk.
3. For the purposes of this Annex,
positions which are purely stock financing may be excluded from the commodities
risk calculation only.
4. The interest-rate and foreign-exchange
risks not covered by other provisions of this Annex shall be included in the
calculation of general risk for traded debt instruments and in the calculation
of foreign-exchange risk.
5. When the short position falls due before
the long position, institutions shall also guard against the risk of a shortage
of liquidity which may exist in some markets.
6. For the purpose of paragraph 19, the
excess of an institution's long (short) positions over its short (long)
positions in the same commodity and identical commodity futures, options and
warrants shall be its net position in each commodity.
The competent authorities shall allow
positions in derivative instruments to be treated, as laid down in paragraphs
8, 9 and 10, as positions in the underlying commodity.
ê 98/31/EC
Art. 1.7 and Annex .5 
7. The competent authorities may regard the
following positions as positions in the same commodity:
-(a)         positions
in different sub-categories of commodities in cases where the sub-categories
are deliverable against each other;
              and
-(b)         positions
in similar commodities if they are close substitutes and if a minimum
correlation of 0,9 0.9 between price movements can be clearly
established over a minimum period of one year.
ê 98/31/EC
Art. 1.7 and Annex .5
Particular instruments
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
8. Commodity futures and forward
commitments to buy or sell individual commodities shall be incorporated in the
measurement system as notional amounts in terms of the standard unit of
measurement and assigned a maturity with reference to expiry date.
The competent authorities may allow the
capital requirement for an exchange-traded future to be equal to the margin
required by the exchange if they are fully satisfied that it provides an
accurate measure of the risk associated with the future and that it is at least
equal to the capital requirement for a future that would result from a
calculation made using the method set out in the remainder of this Annex or
applying the internal models method described in Annex VIII.

Until 31 December
2006 tThe
competent authorities may also allow the capital requirement for an OTC commodity
derivatives contract of the type referred to in this paragraph cleared by a
clearing house recognised by them to be equal to the margin required by the
clearing house if they are fully satisfied that it provides an accurate measure
of the risk associated with the derivatives contract and that it is at least
equal to the capital requirement for the contract in question that would result
from a calculation made using the method set out in the remainder of this Annex
or applying the internal models method described in Annex VIII.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
9. Commodity swaps where one side of the
transaction is a fixed price and the other the current market price shall be
incorporated into the maturity ladder approach Ö, as set out in
paragraphs 13 to 18, Õ as a series of
positions equal to the notional amount of the contract, with one position
corresponding with each payment on the swap and slotted into the maturity
ladder set out in the tTable appearing in
paragraph 13 Ö 1 Õ. The positions
would be long positions if the institution is paying a fixed price and
receiving a floating price and short positions if the institution is receiving
a fixed price and paying a floating price.
Commodity swaps where the sides of the
transaction are in different commodities are to be reported in the relevant
reporting ladder for the maturity ladder approach.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
10. Options on commodities or on commodity
derivatives shall be treated as if they were positions equal in value to the
amount of the underlying to which the option refers, multiplied by its delta
for the purposes of this Annex. The latter positions may be netted off against any
offsetting positions in the identical underlying commodity or commodity
derivative. The delta used shall be that of the exchange concerned, that
calculated by the competent authorities or, where none of those is available, or for OTC options, that calculated by the
institution itself, subject to the competent authorities being satisfied that
the model used by the institution is reasonable.
However, the competent authorities may also
prescribe that institutions calculate their deltas using a methodology specified
by the competent authorities.
The competent
authorities shall require that the oOther
risks, apart from the delta risk, associated with commodity options are Ö shall be Õ safeguarded
against.
The competent authorities may allow the
requirement for a written exchange-traded commodity option to be equal to the
margin required by the exchange if they are fully satisfied that it provides an
accurate measure of the risk associated with the option and that it is at least
equal to the capital requirement against an option that would result from a
calculation made using the method set out in the remainder of this Annex or
applying the internal models method described in Annex VIII.

Until 31 December
2006 tThe
competent authorities may also allow the capital requirement for an OTC
commodity option cleared by a clearing house recognised by them to be equal to
the margin required by the clearing house if they are fully satisfied that it
provides an accurate measure of the risk associated with the option and that it
is at least equal to the capital requirement for an OTC option that would
result from a calculation made using the method set out in the remainder of
this Annex or applying the internal models method described in Annex VIII.
In addition they may allow the requirement
on a bought exchange-traded or OTC commodity option to be the same as that for
the commodity underlying it, subject to the constraint that the resulting
requirement does not exceed the market value of the option. The requirement for
a written OTC option shall be set in relation to the commodity underlying it.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
11. Warrants relating to commodities shall
be treated in the same way as commodity options under
Ö referred
to in Õ paragraph 10.
ê 98/31/EC
Art. 1.7 and Annex .5
12. The transferor of commodities or
guaranteed rights relating to title to commodities in a repurchase agreement
and the lender of commodities in a commodities lending agreement shall include
such commodities in the calculation of its capital requirement under this
Annex.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
(a) Maturity ladder approach
13. The institution shall use a separate maturity
ladder in line with the following
tTable 1 for each commodity. All positions in that
commodity and all positions which are regarded as positions in the same
commodity pursuant to paragraph 7 shall be assigned to the appropriate maturity
bands. Physical stocks shall be assigned to the first maturity band.
Ö Table
1 Õ
 Maturity band (1) || Spread rate (in %) (2) 
 0 ≤ 1 month || 1.50 
 > 1 ≤ 3 months || 1.50 
 > 3 ≤ 6 months || 1.50 
 > 6 ≤ 12 months || 1.50 
 > 1 ≤ 2 years || 1.50 
 > 2 ≤ 3 years || 1.50 
 > 3 years || 1.50 
14. Competent authorities may allow
positions which are, or are regarded pursuant to paragraph 7 as, positions in
the same commodity to be offset and assigned to the appropriate maturity bands
on a net basis for Ö the following Õ :
- (a)      positions in
contracts maturing on the same date;
and
- (b)        positions in
contracts maturing within 10 days of each other if the contracts are traded on
markets which have daily delivery dates.
ê 98/31/EC
Art. 1.7 and Annex .5
15. The institution shall then work out the
sum of the long positions and the sum of the short positions in each maturity
band. The amount of the former (latter) which are matched by the latter
(former) in a given maturity band shall be the matched positions in that band,
while the residual long or short position shall be the unmatched position for
the same band.
16. That part of the unmatched long (short)
position for a given maturity band that is matched by the unmatched short
(long) position for a maturity band further out shall be the matched position
between two maturity bands. That part of the unmatched long or unmatched short
position that cannot be thus matched shall be the unmatched position.
17. The institution's capital requirement
for each commodity shall be calculated on the basis of the relevant maturity
ladder as the sum of the following:
(ia)         the sum of the matched long and
short positions, multiplied by the appropriate spread rate as indicated in the
second column of the table appearing in paragraph 13 for each maturity band and
by the spot price for the commodity;
(iib)        the matched position between two
maturity bands for each maturity band into which an unmatched position is
carried forward, multiplied by 0,6 % (carry rate) and by the spot price
for the commodity;
(iiic)       the residual unmatched positions,
multiplied by 15 % (outright rate) and by the spot price for the
commodity.
18. The institution's overall capital
requirement for commodities risk shall be calculated as the sum of the capital
requirements calculated for each commodity according to paragraph 17.
(b) Simplified approach
19. The institution's capital requirement
for each commodity shall be calculated as the sum of:
(ia)         15% of the net position, long or
short, multiplied by the spot price for the commodity;
(iib)        3% of the gross position, long plus
short, multiplied by the spot price for the commodity.
20. The institution's overall capital
requirement for commodities risk shall be calculated as the sum of the capital
requirements calculated for each commodity according to paragraph 19.
ê 93/6/EEC
Art 11a (adapted)
Ö (c) Extended Maturity ladder approach Õ
Until 31 December
2006, Member States Ö Competent authorities Õ may authorise their institutions
to use the minimum spread, carry and outright rates set out in the following
table instead of those indicated in paragraphs 13, 14, 17 and 18 of Annex VII provided that the institutions, in the
opinion of their competent authorities:
(a)     undertake significant commodities
business,
(b)     have a diversified commodities
portfolio, and
(c)     are not yet in a position to use
internal models for the purpose of calculating the capital requirement on
commodities risk in accordance with Annex Ö V Õ VIII.
Table 2
   || Precious metals (except gold) || Base metals || Agricultural products (softs) || Other, including energy products 
 Spread rate (%) || 1.0 || 1.2 || 1.5 || 1.5 
 Carry rate (%) || 0.3 || 0.5 || 0.6 || 0.6 
 Outright rate (%) || 8 || 10 || 12 || 15 
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
è1 98/31/EC Art. 1.7 and Annex .5 amended by
Corrigendum, OJ L 248, 8.9.1998, p. 20
ANNEX VIII
Ö USE OF Õ INTERNAL
MODELS Ö TO
CALCULATE CAPITAL REQUIREMENTS Õ
1. The competent authorities may, subject
to the conditions laid down in this Annex, allow institutions to calculate
their capital requirements for position risk, foreign-exchange risk and/or
commodities risk using their own internal risk-management models instead of or
in combination with the methods described in Annexes I, III and VII Ö IV Õ. Explicit
recognition by the competent authorities of the use of models for supervisory
capital purposes shall be required in each case.
2. Recognition shall only be given if the
competent authority is satisfied that the institution's risk-management system
is conceptually sound and implemented with integrity and that, in particular, the
following qualitative standards are met:
(ia)    the internal risk-measurement model is
closely integrated into the daily risk-management process of the institution
and serves as the basis for reporting risk exposures to senior management of
the institution;
(iib)   the institution has a risk control unit
that is independent from business trading units and reports directly to senior
management. The unit must be responsible for designing and implementing the
institution's risk-management system. It shall produce and analyse daily
reports on the output of the risk-measurement model and on the appropriate
measures to be taken in terms of trading limits;
(iiic)  the institution's board of directors and
senior management are actively involved in the risk-control process and the
daily reports produced by the risk-control unit are reviewed by a level of
management with sufficient authority to enforce both reductions of positions
taken by individual traders as well as in the institution's overall risk
exposure;
(ivd)  the institution has sufficient numbers of
staff skilled in the use of sophisticated models in the trading, risk-control,
audit and back-office areas;
(ve)   the institution has established procedures
for monitoring and ensuring compliance with a documented set of internal
policies and controls concerning the overall operation of the risk-measurement
system;
(vif)  the institution's models have a proven
track record of reasonable accuracy in measuring risks;
(viig) the institution frequently conduct a
rigorous programme of stress testing and the results of these tests are
reviewed by senior management and reflected in the policies and limits it sets;
(viiih) the institution must conduct, as part of its
regular internal auditing process, an independent review of its
risk-measurement system.
This Ö The Õ review Ö referred
to in point (h) of the first subparagraph Õ must Ö shall Õ include both
the activities of the business trading units and of the independent
risk-control unit. At least once a year, the institution must conduct a review
of its overall risk-management process.
The review must Ö shall Õ consider Ö the
following Õ :
- (a)   the adequacy of the
documentation of the risk-management system and process and the organisation of
the risk-control unit;
- (b)   the integration of
market risk measures into daily risk management and the integrity of the
management information system;
- (c)   the process the
institution employs for approving risk-pricing models and valuation systems
that are used by front and back-office personnel;
- (d)  the scope of market
risks captured by the risk-measurement model and the validation of any
significant changes in the risk-measurement process;
- (e)   the accuracy and
completeness of position data, the accuracy and appropriateness of volatility
and correlation assumptions, and the accuracy of valuation and risk sensitivity
calculations;
- (f)   the verification
process the institution employs to evaluate the consistency, timeliness and
reliability of data sources used to run internal models, including the
independence of such data sources;
         and
- (g)   the verification
process the institution uses to evaluate back-testing that is conducted to
assess the model's accuracy.
3. The institution shall monitor the
accuracy and performance of its model by conducting a back-testing programme.
The back-testing has to provide for each business day a comparison of the one-day
value-at-risk measure generated è1 by the institution's model for the portfolio's
end-of-day positions to the one-day change of the portfolio's value ç by the end of
the subsequent business day.
Competent authorities shall examine the
institution's capability to perform back-testing on both actual and
hypothetical changes in the portfolio's value. Back-testing on hypothetical
changes in the portfolio's value is based on a comparison between the
portfolio's end-of-day value and, assuming unchanged positions, its value at
the end of the subsequent day. Competent authorities shall require institutions
to take appropriate measures to improve their back-testing programme if deemed
deficient.
4. For the purpose of calculating capital
requirements for specific risk associated with traded debt and equity
positions, the competent authorities may recognise the use of an institution's
internal model if, in addition to
compliance with the conditions in the remainder of this Annex, the model Ö meets the
following conditions Õ :
- (a)   it explains the
historical price variation in the portfolio;
- (b)   it captures
concentration in terms of magnitude and changes of composition of the
portfolio;
- (c)   it is robust to an
adverse environment;
- (d)  it is validated through
back-testing aimed at assessing whether specific risk is being accurately
captured. If competent authorities allow this back-testing to be performed on
the basis of relevant sub-portfolios, these must be chosen in a consistent
manner.
ê 98/31/EC
Art. 1.7 and Annex .5
5. Institutions using internal models which
are not recognised in accordance with paragraph 4 shall be subject to a
separate capital charge for specific risk as calculated according to Annex I.
6. For the purpose of paragraph 10(ii) the
results of the institution's own calculation shall be scaled up by a
multiplication factor of at least 3.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
7. The multiplication factor shall be
increased by a plus-factor of between 0 and 1 in accordance with the following tTable
Ö 1 Õ, depending on
the number of overshootings for the most recent 250 business days as evidenced
by the institution's back-testing. Competent authorities shall require the
institutions to calculate overshootings consistently on the basis of
back-testing either on actual or on hypothetical changes in the portfolio's
value. An overshooting is a one-day change in the portfolio's value that
exceeds the related one-day value-at-risk measure generated by the
institution's model. For the purpose of determining the plus-factor the number
of overshootings shall be assessed at least quarterly.
Ö Table
1 Õ
 Number of overshootings || Plus-factor 
 Fewer than 5 || 0.00 
 5 || 0.40 
 6 || 0.50 
 7 || 0.65 
 8 || 0.75 
 9 || 0,85 
 10 or more || 1.00 
The competent authorities can Ö may Õ, in individual
cases and owing to an exceptional situation, waive the requirement to increase
the multiplication factor by the plus-factor according to the above tTable Ö 1 Õ, if the
institution has demonstrated to the satisfaction of the competent authorities
that such an increase is unjustified and that the model is basically sound.
If numerous overshootings indicate that the
model is not sufficiently accurate, the competent authorities shall revoke the
model's recognition or impose appropriate measures to ensure that the model is
improved promptly.
In order to allow competent authorities to
monitor the appropriateness of the plus-factor on an ongoing basis,
institutions shall notify promptly, and in any case no later than within five
working days, the competent authorities of overshootings that result form their
back-testing programme and that would according to the above table imply an
increase of a plus-factor.
8. If the institution's model is recognised
by the competent authorities in accordance with paragraph 4 for the purpose of
calculating capital requirements for specific risk, the institution shall
increase its capital requirement calculated pursuant to paragraphs 6, 7 and 10
by a surcharge in the amount of either Ö of the
following Õ:
(ia)         the specific risk portion of the
value-at-risk measure which should be isolated according to supervisory
guidelines; or, at the institution's option,
(iib)        the value-at-risk measures of
sub-portfolios of debt and equity positions that contain specific risk.
Institutions using option (ii Ö b Õ) are required
to identify their sub-portfolio structure beforehand and should not change it
without the consent of the competent authorities.
ê 98/31/EC
Art. 1.7 and Annex .5
9. The competent authorities may waive the
requirement pursuant to paragraph 8 for a surcharge if the institution
demonstrates that in line with agreed international standards its model
accurately captures also the event risk and default risk for its traded debt
and equity positions.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
10. Each institution must meet a capital
requirement expressed as the higher of:
(ia)         its previous day's value-at-risk
number measured according to the parameters specified in this Annex;
(iib)        an average of the daily value-at-risk
measures on each of the preceding 60 business days, multiplied by the factor
mentioned in paragraph 6, adjusted by the factor mentioned
Ö referred
to Õ in paragraph 7.
ê 98/31/EC
Art. 1.7 and Annex .5
11. The calculation of value-at-risk shall
be subject to the following minimum standards:
(ia)         at least daily calculation of
value-at-risk;
(iib)        a 99th percentile, one-tailed
confidence interval;
(iiic)       a 10-day equivalent holding period;
(ivd)       an effective historical observation
period of at least one year except where a shorter observation period is
justified by a significant upsurge in price volatility;
(ve)        three-monthly data set updates.
12. The competent authorities shall require
that the model captures accurately all the material price risks of options or
option-like positions and that any other risks not captured by the model are
covered adequately by own funds.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
13. The competent authorities
shall require that the risk-measurement model Ö shall Õ captures a sufficient number of risk factors, depending on the
level of activity of the institution in the respective markets Ö and in
particular the following Õ .
As a minimum, the
following provisions shall be respected:
Ö Interest
rate risk Õ
(i)         for
interest rate risk, tThe risk-measurement system shall
incorporate a set of risk factors corresponding to the interest rates in each
currency in which the institution has interest rate sensitive on- or
off-balance sheet positions. The institution shall model the yield curves using
one of the generally accepted approaches. For material exposures to
interest-rate risk in the major currencies and markets, the yield curve shall
be divided into a minimum of six maturity segments, to capture the variations
of volatility of rates along the yield curve. The risk-measurement system must
also capture the risk of less than perfectly correlated movements between
different yield curves;.
Ö Foreign-exchange
risk Õ
(ii)        for
foreign-exchange risk, tThe risk-measurement system shall
incorporate risk factors corresponding to gold and to the individual foreign
currencies in which the institution's positions are denominated;.
ò new
For CIUs the
actual foreign exchange positions of the CIU shall be taken into account.
Institutions may rely on third party reporting of the foreign exchange position
in the CIU, where the correctness of this report is adequately ensured. If an
institution is not aware of the foreign exchange positions in a CIU, it shall
be assumed that the CIU is invested up to the maximum extent allowed under the
CIU’s mandate in foreign exchange and institutions shall, for trading book
positions, take account of the maximum indirect exposure that they could
achieve by taking leveraged positions through the CIU when calculating their
capital requirement for foreign exchange risk. This shall be done by
proportionally increasing the position in the CIU up to the maximum exposure to
the underlying investment items resulting from the investment mandate. The
assumed position of the CIU in foreign exchange shall be treated as a separate currency
according to the treatment of investments in gold. If, however, the direction
of the CIU's investment is available, the total long position may be added to
that the total long open foreign exchange position and the total short position
may be added to the total short open foreign exchange position. There would be
no netting allowed between such positions prior to the calculation.
ê 98/31/EC
Art. 1.7 and Annex .5 (adapted)
Ö Equity
risk Õ
(iii)       for
equity risk, tThe risk-measurement system shall use a separate risk factor at least
for each of the equity markets in which the institution holds significant
positions;.
Ö Commodity
risk Õ
(iv)       for
commodity risk, tThe risk-measurement system shall use a separate risk factor at least
for each commodity in which the institution holds significant positions. The
risk-measurement system must also capture the risk of less than perfectly
correlated movements between similar, but not identical, commodities and the
exposure to changes in forward prices arising from maturity mismatches. It
shall also take account of market characteristics, notably delivery dates and
the scope provided to traders to close out positions;.
ê 98/31/EC
Art. 1.7 and Annex .5
14. The competent authorities may allow
institutions to use empirical correlations within risk categories and across
risk categories if they are satisfied that the institution's system for
measuring correlations is sound and implemented with integrity.
ê 93/6/EEC
Annex VI (8) (2) second sentence (adapted)
ANNEX VI
Ö CALCULATING
CAPITAL REQUIREMENTS FOR Õ LARGE
EXPOSURES
1. The excess referred to in Article 29 Ö 31 Õ (b) shall be
calculated by selecting those components of the total trading exposure to the
client or group of clients in question which attract the highest specific-risk
requirements in Annex I and/or requirements in Annex II, the sum of which
equals the amount of the excess referred to in Article 29
Ö 31 Õ (a).
2. Where the excess has not persisted for
more than 10 days, the additional capital requirement shall be 200 % of
the requirements referred to in paragraph 1, on these components. 
3. As from 10 days after the excess has
occurred, the components of the excess, selected in accordance with paragraph
1, shall be allocated to the appropriate line in column 1 of Table I in
ascending order of specific-risk requirements in Annex I and/or requirements in
Annex II. The additional capital requirement shall be equal to the sum of the
specific-risk requirements in Annex I and/or the Annex II requirements on these
components multiplied by the corresponding factor in column 2 of Table I.
Ö Table
1 Õ
 Excess over the limits (on the basis of a percentage of own funds) || Factors 
 Up to 40 % || 200 % 
 From 40 % to 60 % || 300 % 
 From 60 % to 80 % || 400 % 
 From 80 % to 100 % || 500 % 
 From 100 % to 250 % || 600 % 
 Over 250 % || 900 % 
é
ò new
ANNEX VII
TRADING
Part A -
Trading Intent
1.
Positions/portfolios held with trading intent shall comply with the following
requirements:
(a)     there must
be a clearly documented trading strategy for the position/instrument or
portfolios, approved by senior management, which shall include expected holding
horizon;
(b)     there must
be clearly defined policies and procedures for the active management of the
position, which shall include the following:
(i)      positions
entered into on a trading desk;
(ii)     position
limits are set and monitored for appropriateness;
(iii)    dealers
have the autonomy to enter into/manage the position within agreed limits and
according to the agreed strategy;
(iv)    positions
are reported to senior management as an integral part of the institution’s risk
management process;
(v)     positions
are actively monitored with reference to market information sources and an assessment
made of the marketability or hedge-ability of the position or its component
risks, including the assessment of, in particular, the quality and availability
of market inputs to the valuation process, level of market turnover, sizes of
positions traded in the market;
(c)     there must
be clearly defined policy and procedures to monitor the position against the
institution’s trading strategy including the monitoring of turnover and sale
positions in the institution’s trading book.
Part B -
Systems and Controls
1. Institutions shall establish and maintain systems
and controls sufficient to provide prudent and reliable valuation estimates.
2. Systems and controls shall include at least the
following elements:
(a)     documented
policies and procedures for the process of valuation. This includes clearly
defined responsibilities of the various areas involved in the determination of
the valuation, sources of market information and review of their
appropriateness, frequency of independent valuation, timing of closing prices,
procedures for adjusting valuations, month end and ad-hoc verification procedures;
(b)     clear and
independent (i.e. independent of front office) reporting lines for the
department accountable for the valuation process.
The reporting
line shall ultimately be to a main board executive director.
Prudent
Valuation Methods
3. Marking to
market is the at least daily valuation of positions at readily available close
out prices that are sourced independently. Examples include exchange prices,
screen prices, or quotes from several independent reputable brokers.
4. When marking
to market, the more prudent side of bid/offer shall be used unless the
institution is a significant market maker in the particular type of financial
instrument or commodity in question and it can close out at mid market.
5. Where marking
to market is not possible, institutions must mark to model their
positions/portfolios before applying trading book capital treatment. Marking to
model is defined as any valuation which has to be benchmarked, extrapolated or
otherwise calculated from a market input.
6. The following
requirements must be complied with when marking to model:
(a)          senior
management shall be aware of the elements of the trading book which are subject
to mark to model and shall understand the materiality of the uncertainty this
creates in the reporting of the risk/performance of the business;
(b)          market
inputs shall be sourced, where possible, in line with market prices, and the
appropriateness of the market inputs of the particular position being valued
and the parameters of the model shall be assessed on a daily basis;
(c)          where
available, valuation methodologies which are accepted market practice for
particular financial instruments or commodities shall be used;
(d)          where
the model is developed by the institution itself, it shall be based on
appropriate assumptions, which have been assessed and challenged by suitably
qualified parties independent of the development process;
(e)          there
shall be formal change control procedures in place and a secure copy of the
model shall be held and periodically used to check valuations;
(f)          risk
management shall be aware of the weaknesses of the models used and how best to
reflect those in the valuation output;
(g)          the
model shall be subject to periodic review to determine the accuracy of its
performance (e.g. assessing the continued appropriateness of assumptions,
analysis of P&L versus risk factors, comparison of actual close out values
to model outputs).
For the purposes of
point (d), the model shall be developed or approved independently of the front
office. If shall be independently tested. This includes validating the
mathematics, the assumptions and the software implementation
7. Independent
price verification should be performed in addition to daily marking to market
or marking to model. This is the process by which market prices or model inputs
are regularly verified for accuracy and independence. While daily marking to
market may be performed by dealers, verification of market prices and model
inputs should be performed by a unit independent of the dealing room, at least
monthly (or, depending on the nature of the market/trading activity, more
frequently). Where independent pricing sources are not available or pricing
sources are more subjective, prudent measures such as valuation adjustments may
be appropriate.
Valuation
adjustments or reserves
8. Institutions
shall establish and maintain procedures for considering valuation
adjustments/reserves.
General
standards
9. The competent
authorities shall require the following valuation adjustments/reserves to be
formally considered: unearned credit spreads, close-out costs, operational
risks, early termination, investing and funding costs, future administrative
costs and, where relevant, model risk.
Standards
for less liquid items
10. Less liquid
positions could arise from both market events and institution-related
situations e.g. concentrated positions and/or stale positions.
11. Institutions
shall consider several factors when determining whether a valuation reserve is
necessary for less liquid items. These factors include the amount of time it
would take to hedge out the position/risks within the position, the volatility
and average of bid/offer spreads, the availability of market quotes (number and
identity of market makers) and the volatility and average of trading volumes.
12. When using
third party valuations or marking to model, institutions shall consider whether
to apply a valuation adjustment. In addition, institutions shall consider the
need for establishing reserves for less liquid position and on an ongoing basis
review their continued suitability.
13. When
valuation adjustments/reserves give rise to material losses of the current
financial year, these shall be deducted from an institution’s original own
funds according to point (k) of Article 57 of Directive [2000/12/EC].
14. Other
profits/losses originating from valuation adjustments/reserves shall be
included in the calculation of “net trading book profits” mentioned in point
(2)(b) of Article 13 and be added to/deducted from the additional own funds
eligible to cover market risk requirements according to such provisions.
Part C –
Internal Hedges
1. An internal
hedge is a position that materially or completely offsets the component risk
element of a non-trading book position or a set of positions. Positions arising
from internal hedges are eligible for trading book capital treatment, provided
that they are held with trading intent and that the general criteria on trading
intent and prudent valuation specified in Parts A and B are met. In particular:
(a)     internal
hedges shall not be primarily intended to avoid or reduce capital requirements;
(b)     internal
hedges shall be properly documented and subject to particular internal approval
and audit procedures;
(c)     the internal
transaction shall be dealt with at market conditions;
(d)     the bulk of
the market risk that is generated by the internal hedge shall be dynamically
managed in the trading book within the authorised limits; 
(e)     internal
transactions shall be carefully monitored. 
Monitoring must
be ensured by adequate procedures.
2. The treatment
referred to in paragraph 1 applies without prejudice to the capital
requirements applicable to the “non-trading book leg” of the internal hedge.
ANNEX VIII
REPEALED DIRECTIVES
PART A
REPEALED
DIRECTIVES TOGETHER WITH THEIR SUCCESSIVE AMENDMENTS
(referred to
in Article 48)
Council Directive
93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and
credit institutions
Directive
98/31/EC of the European Parliament and of the Council of 22 June 1998 amending
Council Directive 93/6/EEC on the capital adequacy of investment firms and
credit institutions
Directive
98/33/EC of the European Parliament and of the Council of 22 June 1998 amending
Article 12 of Council Directive 77/780/EEC on the taking up and pursuit of the
business of credit institutions, Articles 2, 5, 6, 7, 8 of and Annexes II and
III to Council Directive 89/647/EEC on a solvency ratio for credit institutions
and Article 2 of and Annex II to Council Directive 93/6/EEC on the capital
adequacy of investment firms and credit institutions
Directive
2002/87/EC of the European Parliament and of the Council of 16 December 2002 on
the supplementary supervision of credit institutions, insurance undertakings
and investment firms in a financial conglomerate and amending Council Directives
73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and
Directives 98/78/EC and 2000/12/EC of the European Parliament and of the
Council,
Only Art. 26
Directive
2004/39/EC of the European Parliament and of the Council of 21 April 2004 on
markets in financial instruments amending Council Directives 85/611/EEC
and 93/6/EEC and Directive 2000/12/EC of the European Parliament and
of the Council and repealing Council Directive 93/22/EEC
Only Art. 67
PART B
DEADLINES
FOR IMPLEMENTATION
(referred to
in Article 48)
 Directive ||   || Deadline for implementation 
 Council Directive 93/6/EEC ||   || 1.7.1995 
 Directive 98/31/EC ||   || 21.7.2000 
 Directive 98/33/EC ||   || 21.7.2000 
 Directive 2002/87/EC ||   || 11.8.2004 
 Directive 2004/39/EC ||   || Not yet available 
 Directive 2004/xx/EC ||   || Not yet available 
ò new
ANNEX IX
CORRESPONDANCE TABLE
 This Directive || Directive 93/6/EEC || Directive 98/31/EC || Directive 98/33/EC || Directive 2002/87/EC || Directive 2004/39/EC 
 Article 1(1) first sentence ||   ||   ||   ||   ||   
 Article 1(1) second sentence and (2) || Article 1 ||   ||   ||   ||   
 Article 2(1) ||   ||   ||   ||   ||   
 Article 2(2) || Article 7(3) ||   ||   ||   ||   
 Article 3(1)(a) || Article 2(1) ||   ||   ||   ||   
 Article 3(1)(b) || Article 2(2) ||   ||   ||   || Article 67(1) 
 Article 3(1)(c) to (e) || Article 2(3) to (5) ||   ||   ||   ||   
 Article 3(1)(f) and (g) ||   ||   ||   ||   ||   
 Article 3(1)(h) || Article 2(10) ||   ||   ||   ||   
 Article 3(1)(i) || Article 2(11) ||   || Article 3(1) ||   ||   
 Article 3(1)(j) || Article 2(14) ||   ||   ||   ||   
 Article 3(1)(k) and (l) || Article 2(15) and (16) || Article 1(1)(b) ||   ||   ||   
 Article 3(1)(m) || Article 2(17) || Article 1(1)(c) ||   ||   ||   
 Article 3(1)(n) || Article 2(18) || Article 1(1)(d) ||   ||   ||   
 Article 3(1)(o) to (q) || Article 2(19) to (21) ||   ||   ||   ||   
   ||   ||   ||   ||   ||   
 Article 3(1)(r) || Article 2(23) ||   ||   ||   ||   
 Article 3(1)(s) || Article 2(26) ||   ||   ||   ||   
 Article 3(2) || Article 2(7) and (8) ||   ||   ||   ||   
 Article 3(3)(a) and (b) || Article 7(3) ||   ||   || Article 26 ||   
 Article 3(3)(c) || Article 7(3) ||   ||   ||   ||   
 Article 4 || Article 2(24) ||   ||   ||   ||   
 Article 5 || Article 3(1) and (2) ||   ||   ||   ||   
 Article 6 || Article 3(4) ||   ||   ||   || Article 67(2) 
 Article 7 || Article 3(4a) ||   ||   ||   || Article 67(3) 
 Article 8 || Article 3(4b) ||   ||   ||   || Article 67(3) 
 Article 9 || Article 3(3) ||   ||   ||   ||   
 Article 10 || Article 3(5) to (8) ||   ||   ||   ||   
 Article 11 || Article 2(6) ||   ||   ||   ||   
 Article 12 first sub-paragraph || Article 2(25) ||   ||   ||   ||   
 Article 12 second sub-paragraph ||   ||   ||   ||   ||   
 Article 13(1) first sub-paragraph || Annex V(1) first sub-paragraph ||   ||   ||   ||   
 Article 13(1) second sub-paragraph and (2) to (5) || Annex V(1) second sub-paragraph and (2) to (5) || Article 1(7) and Annex 4(a)(b) ||   ||   ||   
 Article 14 || Annex V(6) and (7) || Annex 4(c) ||   ||   ||   
 Article 15 || Annex V(8) ||   ||   ||   ||   
 Article 16 || Annex V(9) ||   ||   ||   ||   
 Article 17 ||   ||   ||   ||   ||   
 Article 18(1) first sub-paragraph || Article 4(1) first sub-paragraph ||   ||   ||   ||   
 Article 18(1)(a) and (b) || Article 4(1)(i) and (ii) || Article 1(2) ||   ||   ||   
 Article 18(2) to (4) || Article 4(6) to (8) ||   ||   ||   ||   
 Article 19(1) ||   ||   ||   ||   ||   
 Article 19(2) || Article 11(2) ||   ||   ||   ||   
 Article 19(3) ||   ||   ||   ||   ||   
 Article 20 ||   ||   ||   ||   ||   
 Article 21 || Annex IV ||   ||   ||   ||   
 Article 22 ||   ||   ||   ||   ||   
 Article 23 first and second sub-paragraph || Article 7(5) and (6) ||   ||   ||   ||   
 Article 23 third sub-paragraph ||   ||   ||   ||   ||   
 Article 24 ||   ||   ||   ||   ||   
 Article 25 ||   ||   ||   ||   ||   
 Article 26(1) || Article 7(10) || Article 1(4) ||   ||   ||   
 Article 26(2) to (4) || Article 7(11) to (13) ||   ||   ||   ||   
 Article 27 || Article 7(14) and (15) ||   ||   ||   ||   
 Article 28(1) || Article 5(1) ||   ||   ||   ||   
 Article 28(2) || Article 5(2) || Article 1(3) ||   ||   ||   
 Article 28(3) ||   ||   ||   ||   ||   
 Article 29(1)(a) to (c) and next two sub-paragraphs || Annex VI(2) ||   ||   ||   ||   
 Article 29(1) last sub-paragraph ||   ||   ||   ||   ||   
 Article 29(2) || Annex VI(3) ||   ||   ||   ||   
 Article 30(1) and (2) first sub-paragraph || Annex VI(4) and (5) ||   ||   ||   ||   
 Article 30(2) second sub-paragraph ||   ||   ||   ||   ||   
 Article 30(3) and (4) || Annex VI(6) and (7) ||   ||   ||   ||   
 Article 31 || Annex VI(8)(1), (2) first sentence, (3) to (5) ||   ||   ||   ||   
 Article 32 || Annex VI(9) and (10) ||   ||   ||   ||   
 Article 33(1) and (2) ||   ||   ||   ||   ||   
 Article 33(3) || Article 6(2) ||   ||   ||   ||   
 Article 34 ||   ||   ||   ||   ||   
 Article 35(1) to (4) || Article 8(1) to (4) ||   ||   ||   ||   
 Article 35(5) || Article 8(5) first sentence || Article 1(5) ||   ||   ||   
 Article 36 || Article 9(1) to (3) ||   ||   ||   ||   
 Article 37 ||   ||   ||   ||   ||   
 Article 38 || Article 9(4) ||   ||   ||   ||   
 Article 39 ||   ||   ||   ||   ||   
 Article 40 || Article 2(9) ||   ||   ||   ||   
 Article 41 ||   ||   ||   ||   ||   
 Article 42(1)(a) to (c) || Article 10 first, second and third indents ||   ||   ||   ||   
 Article 42(1)(d) and (e) ||   ||   ||   ||   ||   
 Article 42(1)(f) || Article 10 fourth indent ||   ||   ||   ||   
 Article 42(1)(g) ||   ||   ||   ||   ||   
 Article 43 ||   ||   ||   ||   ||   
 Article 44 ||   ||   ||   ||   ||   
 Article 45 ||   ||   ||   ||   ||   
 Article 46 || Article 12 ||   ||   ||   ||   
 Article 47 ||   ||   ||   ||   ||   
 Article 48 ||   ||   ||   ||   ||   
 Article 49 ||   ||   ||   ||   ||   
 Article 50 || Article 15 ||   ||   ||   ||   
   ||   ||   ||   ||   ||   
 Annex I(1) to (4) || Annex I(1) to (4) ||   ||   ||   ||   
 Annex I(4) last sub-paragraph || Article 2(22) ||   ||   ||   ||   
 Annex I(5) to (7) || Annex I(5) to (7) ||   ||   ||   ||   
 Annex I(8) ||   ||   ||   ||   ||   
 Annex I(9) to (11) || Annex I(8) to (10) ||   ||   ||   ||   
 Annex I(12) to (14) || Annex I(12) to (14) ||   ||   ||   ||   
 Annex I(15) and (16) || Article 2(12) ||   ||   ||   ||   
 Annex I(17) to (41) || Annex I(15) to (39) ||   ||   ||   ||   
 Annex I(42) to (56) ||   ||   ||   ||   ||   
 Annex II(1) and (2) || Annex II(1) and (2) ||   ||   ||   ||   
 Annex II(3) to (11) ||   ||   ||   ||   ||   
 Annex III(1) || Annex III(1) first sub-paragraph || Article 1(7) and Annex 3(a) ||   ||   ||   
 Annex III(2) || Annex III(2) ||   ||   ||   ||   
 Annex III(2.1) first to third sub-paragraphs || Annex III(3.1) || Article 1(7) and Annex 3(b) ||   ||   ||   
 Annex III(2.1) fourth sub-paragraph ||   ||   ||   ||   ||   
 Annex III(2.1) fifth sub-paragraph || Annex III(3.2) || Article 1(7) and Annex 3(b) ||   ||   ||   
 Annex III(2.2), (3), (3.1) || Annex III(4) to (6) || Article 1(7) and Annex 3(c) ||   ||   ||   
 Annex III(3.2) || Annex III(8) ||   ||   ||   ||   
 Annex III(4) || Annex III(11) ||   ||   ||   ||   
 Annex IV(1) to (20) || Annex VII(1) to (20) || Article 1(7) and Annex 5 ||   ||   ||   
 Annex IV(21) || Article 11a || Article 1(6) ||   ||   ||   
 Annex V(1) to (13) third sub-paragraph || Annex VIII(1) to (13)(ii) || Article 1(7) and Annex 5 ||   ||   ||   
 Annex V(13) fourth sub-paragraph ||   ||   ||   ||   ||   
 Annex V(13) fifth sub-paragraph to (14) || Annex VIII(13)(iii) to (14) || Article 1(7) and Annex 5 ||   ||   ||   
 Annex VI || Annex VI(8)(2) after the first sentence ||   ||   ||   ||   
 Annex VII ||   ||   ||   ||   ||   
 Annex VIII ||   ||   ||   ||   ||   
 Annex IX ||   ||   ||   ||   ||   
[1]               OJ C […], […], p. […].
[2]               OJ C
[3]               OJ C […], […], p. […].
[4]               OJ C […], […], p. […].
[5]               OJ C […], […], p. […].
[6]               OJ L No 141, 11.6.1993 p.1,
as last amended by Directive 2004/xx/EC, OJ […]
[7]               OJ L No 141, 11.06.1993 p.
0027, as last amended by Directive [2004/…/EC (OJ ………..)]
[8]               OJ
No 126, 26.5.2000, p.1
[9]               OJ L No 145, 30.04.2004, p. 1
[10]             OJ No L 386, 30. 12. 1989, p. 14. Directive as amended by
Directive 92/30/EEC (OJ No L 110, 28. 4. 1992, p. 52).
[11]             OJ No L
29, 5. 2. 1993, p. 1.
[12]             OJ No L
124, 5. 5. 1989, p. 16. Directive as last amended by Directive 92/30/EEC (OJ No
L 110, 24. 9. 1992, p. 52).
[13]             OJ No L 110, 28. 4. 1992, p. 52.
[14]             OJ L 184, 17.7.1999, p. 23.
[15]             OJ
No L 197, 18. 7. 1987, p. 33.
[16]             OJ L 35,
11.2.2003, p.1
[17]             OJ No L 322, 17. 12. 1977, p. 30.
Directive as amended by Directive 89/646/EEC (OJ No L 386, 30. 12. 1989, p. 1).
[18]             OJ L 35, 11.2.2003, p.1
[19]             OJ L 9, 15.1.2003, p. 3.
EN
 || COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 14.7.2004
COM(2004) 486 final
2004/0155 (COD)
2004/0159 (COD)
Annexes techniques
 
Proposal for
DIRECTIVES OF THE EUROPEAN PARLIAMENT
AND OF THE COUNCIL
Re-casting Directive 2000/12/EC of the
European Parliament and of the Council of 20 March 2000 relating to the taking
up and pursuit of the business of credit institutions and Council Directive
93/6/EEC of 15 March 1993 on the capital adequacy of investment firms and credit
institutions.
(presented by the Commission)
{SEC(2004) 921}
EXPLANATORY MEMORANDUM
-
Proposal for a
COUNCIL DIRECTIVE
on […]
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty establishing
the European Community, and in particular Article […] thereof,
Having regard to the proposal from the
Commission[1],
Having regard to the opinion of the
European Parliament[2],
Having regard to the opinion of the
European Economic and Social Committee[3],
Having regard to the opinion of the
Committee of the Regions[4],
Whereas:
(1)              
[Initial
capital…].
(2)              
[Initial
capital…],
HAS ADOPTED THIS DIRECTIVE:
Article 1
[…]
Article […]
Member States shall bring into force the
laws, regulations and administrative provisions necessary to comply with this
Directive by […] at
the latest. They shall forthwith inform the Commission thereof.
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.
Article […]
This Directive shall enter into force on
the […] day following
that of its publication in the Official Journal of the European Union.
Article […]
This Directive is addressed to the Member
States.
Done at Brussels, […]
                                                                       For
the Council
                                                                       The
President
                                                                       […]
ANNEX 
ò new
Annex
V - Technical criteria on organisation and treatment of risks

1.                      
Governance

1.                      
Arrangements shall be
defined by the management body referred to in Article 11 concerning the
segregation of duties in the organisation and the prevention of conflicts of
interest.

2.                      
Treatment of risks

2.                      
The management body
referred to in Article 11 shall approve and periodically review the strategies
and policies for taking up, managing, monitoring and mitigating the risks the
credit institution is or might be exposed to, including those posed by the
macroeconomic environment in which it operates in relation to the status of the
business cycle.

3.                      
Credit and
counterparty risk

3.                      
Credit-granting shall
be based on sound and well-defined criteria. The process for approving,
amending, renewing, and re-financing credits shall be clearly established.
4.                      
The ongoing
administration and monitoring of their various credit risk-bearing portfolios
and exposures, including for identifying and managing problem credits and for
making adequate value adjustments and provisions, shall be operated through
effective systems.
5.                      
Diversification of
credit portfolios shall be adequate given the credit institution’s target markets
and overall credit strategy.

4.                      
Residual risk

6.                      
The risk that
recognised credit risk mitigation techniques used by the credit institution
prove less effective than expected shall be addressed and controlled by means
of written policies and procedures.

5.                      
Concentration risk

7.                      
The concentration risk
arising from exposures to counterparties, groups of connected counterparties,
and counterparties in the same economic sector, geographic region or from the
same activity or commodity, the application of credit risk mitigation techniques,
and including in particular risks associated with large indirect credit
exposures (e.g. to a single collateral issuer), shall be addressed and controlled by means of
written policies and procedures.

6.                      
Securitisation risks

8.                      
The risks arising from
securitisation transactions in relation to which the credit institutions are
originator or sponsor shall be evaluated and addressed through appropriate
policies and procedures, to ensure in particular that the economic substance of
the transaction is fully reflected in the risk assessment and management
decisions. 
9.                      
Liquidity plans to
address the implications of both scheduled and early amortization shall exist
at credit institutions which are originators of revolving securitisation
transactions involving early amortisation provisions.

7.                      
Interest rate risk
arising from non-trading activities

10.                  
Systems shall be
implemented to evaluate and manage the risk arising from potential changes in
interest rates as they affect a credit institution’s non-trading activities.

8.                      
Operational risk

11.                  
Policies and processes
to evaluate and manage the exposure to operational risk, including to
low-frequency high-severity events, shall be implemented. Without prejudice to
the definition laid down in Article 4(22), credit institutions shall articulate
what constitutes operational risk for the purposes of those policies and
procedures.
12.                  
Contingency and
business continuity plans shall be in place to ensure a credit institutions'
ability to operate on an ongoing basis and limit losses in the event of severe
business disruption.

9.                      
Liquidity risk

13.                  
Policies and processes
for the measurement and management of their net funding position and
requirements on an ongoing and forward-looking basis shall exist.
Alternative scenarios shall be considered and
the assumptions underpinning decisions concerning the net funding position
shall be reviewed regularly.
14.                  
Contingency plans to
deal with liquidity crises shall be in place.
ANNEX VI
Standardised Approach
Part 1 - Risk weights

1.                      
EXPOSURES TO CENTRAL GOVERNMENTS
OR CENTRAL BANKS
1.1.                
Treatment

1.                      
Without prejudice to
paragraphs 2 to 8, exposures to central governments and central banks shall receive a 100% risk weight.
2.                      
Exposures to central
governments and central banks for which a credit assessment by a nominated ECAI
is available shall be assigned a risk weight according to Table 1 in accordance
with the assignment by the competent authorities of the credit assessments of
eligible ECAIs to six steps in a credit quality assessment scale.
Table 1
 Credit quality step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 0% || 20% || 50% || 100% || 100% || 150% 
3.                      
Exposures to the
European Central Bank shall be assigned a 0% risk weight.

1.2.                
Exposures in the
national currency of the borrower

4.                      
Subject to the
discretion of competent authorities, exposures to their central government and
central bank denominated and funded in the domestic currency may be assigned a
risk weight which is lower than that indicated in paragraph 2.
5.                      
When the discretion in
paragraph 4 is exercised by the competent authorities of one Member State, the
competent authorities of another Member State may also allow their credit
institutions to apply the same risk weight to exposures to that central
government or central bank denominated and funded in that currency.
6.                      
When the competent
authorities of a third country which apply supervisory and regulatory
arrangements at least equivalent to those applied in the Community assigns a
risk weight which is lower than that indicated in paragraph 1 to 2 to exposures
to its central government and central bank denominated and funded in the
domestic currency, Member States may allow their credit institutions to risk
weight such exposures in the same manner.

1.3.                
Use of credit
assessments by Export Credit Agencies

7.                      
A credit assessment by
an Export Credit Agency may be recognised only if either of the following
conditions are met:
(a)     the credit
assessment is a consensus risk score from an Export Credit Agency participating
in the OECD “Arrangement on Guidelines for Officially Supported Export Credits”
(b)     the Export
Credit Agency publishes its credit assessments, and the Export Credit Agency
subscribes to the OECD agreed methodology, and the credit assessment is
associated with one of the seven minimum export insurance premiums (MEIP) that
the OECD agreed methodology establishes.
8.                      
Exposures for which a
credit assessment by an Export Credit Agency is recognised for risk weighting
purposes shall be assigned a risk weight according to Table 2.
Table 2
 MEIP || 1 || 2 || 3 || 4 || 5 || 6 || 7 
 Risk weight || 0% || 20% || 50% || 100% || 100% || 100% || 150% 

2.                      
EXPOSURES TO REGIONAL
GOVERNMENTS OR LOCAL AUTHORITIES

9.                      
Without prejudice to
paragraphs 10 to 12, exposures to regional governments and local authorities
shall be risk weighted as exposures to institutions. Exercise of this
discretion by competent authorities is independent of the exercise of
discretion by competent authorities as specified in Article 80. The
preferential treatment for short-term exposures specified in paragraphs 30,
31and 36 shall not be applied.
10.                  
Subject to the
discretion of competent authorities, exposures to regional governments and
local authorities may be treated as exposures to the central government in
whose jurisdiction they are established where there is no difference in risk
between such exposures because of the specific revenue-raising powers of the former,
and the existence of specific institutional arrangements the effect of which is
to reduce their risks of default. 
11.                  
When the discretion of
paragraph 10 is exercised by the competent authorities of one Member State, the competent authorities of another Member States may also allow their credit
institutions to apply the same risk weight to exposures to those regional
governments and local authorities.
12.                  
When competent
authorities of a third country jurisdiction which apply supervisory and
regulatory arrangements at least equivalent to those applied in the Community
treat exposures to regional governments and local authorities as exposures to
their central government, Member States may allow their credit institutions to
risk weight exposures to such regional governments and local authorities in the
same manner.

3.                      
EXPOSURES ON
ADMINISTRATIVE BODIES AND NON-COMMERCIAL UNDERTAKINGS 
3.1.                
Treatment

13.                  
Without prejudice to
paragraphs 14 to 18, exposures to administrative bodies and non-commercial
undertakings shall receive a 100% risk weight.

3.2.                
Public Sector Entities

14.                  
Without prejudice to
paragraphs 15 to 17, exposures to public sector entities shall receive a 100%
risk weight.
15.                  
Subject to the discretion
of competent authorities, exposures to public sector entities may be treated as
exposures to institutions. Exercise of this discretion by competent authorities
is independent of the exercise of discretion by competent authorities as
specified in Article 80. The preferential treatment for short-term exposures
specified in paragraphs 30, 31 and 36 shall not be applied.
16.                  
When the discretion to
treat exposures to public sector entities as exposures to institutions is
exercised by the competent authorities of one Member State, the competent
authorities of another Member State may allow their credit institutions to risk
weight exposures to such public sector entities in the same manner.
17.                  
When competent
authorities of a third country jurisdiction, which apply supervisory and
regulatory arrangements at least equivalent to those applied in the Community,
treat exposures to public sector entities as exposures to institutions, Member
States may allow their credit institutions to risk weight exposures to such
public sector entities in the same manner.

3.3.                
Churches and religious
communities

18.                  
Exposures to churches
and religious communities constituted in the form of a legal person under
public law shall, in so far as they raise taxes in accordance with legislation
conferring on them the right to do so, be treated as exposures to public sector
entities.

4.                      
EXPOSURES TO
MULTILATERAL DEVELOPMENT BANKS
4.1.                
Scope

19.                  
For the purposes of
Articles 78 to 83, the Inter-American Investment Corporation is considered to
be a Multilateral Development Bank (MDB).

4.2.                
Treatment

20.                  
Without prejudice to
paragraphs 21 and 22, exposures to multilateral development banks shall be
treated in the same manner as exposures to credit institutions in accordance
with paragraphs 28 to 31. The preferential treatment for short-term exposures
as specified in paragraph 30, 31 and 36 shall not apply.
21.                  
Exposures to the
following multilateral development banks shall attract a 0% risk weight:
(a) the International
Bank for Reconstruction and Development;
(b) the International
Finance Corporation;
(c) the
Inter-American Development Bank;
(d) the Asian
Development Bank;
(e) the African
Development Bank;
(f) the Council of
Europe Development Bank
(g) the Nordic
Investment Bank;
(h) the Caribbean
Development Bank;
(i) the European Bank
for Reconstruction and Development;
(j) the European
Investment Bank;
(k) the European
Investment Fund;
(l) the Multilateral
Investment Guarantee Agency
22.                  
A risk weight of 20%
shall be applied to the portion of unpaid capital subscribed to the European
Investment Fund.

5.                      
EXPOSURES TO
INTERNATIONAL ORGANISATIONS

23.                  
Exposures to the
following international organisations shall be assigned a 0% risk weight:
(a) the European
Community;
(b) the International
Monetary Fund;
(c) the Bank for
International Settlements.

6.                      
EXPOSURES TO
INSTITUTIONS
6.1.                
Treatment

24.                  
One of the two methods
described in paragraphs 26 to 27 and 28 to 31 shall apply in determining the
risk weights for exposures to institutions.

6.2.                
Risk-weight floor on
exposures to unrated institutions

25.                  
Exposures to an
unrated institution shall not receive a risk weight lower than that applied to
exposures to its central government.

6.3.                
Central government
risk weight based method

26.                  
Exposures to
institutions shall be assigned a risk weight according to the credit quality
step to which exposures to the central government of the jurisdiction in which
the institution is incorporated are assigned in accordance with Table 3.
Table 3
 Credit quality step to which central government is assigned || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight of exposure || 20% || 50% || 100% || 100% || 100% || 150% 
27.                  
For exposures to
institutions incorporated in countries where the central government is unrated,
the risk weight shall be not more than 100%.

6.4.                
Credit assessment
based method

28.                  
Exposures to
institutions with an original effective maturity of more than three months for
which a credit assessment by a nominated ECAI is available shall be assigned a
risk weight according to Table 4 in accordance with the assignment by the
competent authorities of the credit assessments of eligible ECAIs to six steps
in a credit quality assessment scale.
Table 4
 Credit quality step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 20% || 50% || 50% || 100% || 100% || 150% 
29.                  
Exposures to unrated
institutions shall be assigned a risk weight of 50%.
30.                  
Exposures to an
institution with an original effective maturity of three months or less for
which a credit assessment by a nominated ECAI is available shall receive a risk
weight according to Table 5 in accordance with the assignment by the competent
authorities of the credit assessments of eligible ECAIs to six steps in a
credit quality assessment scale:
Table 5
 Credit quality step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 20% || 20% || 20% || 50% || 50% || 150% 
31.                  
Exposures to unrated
institutions having an original effective maturity of three months or less
shall be assigned a 20% risk weight.

6.5.                
Interaction with
short-term credit assessments

32.                  
If the method
specified in paragraphs 28 to 31 is applied to exposures to institutions, then
the interaction with specific short-term assessments shall be the following.
33.                  
If there is no
short-term exposure assessment, the general preferential treatment for
short-term exposures as specified in paragraph 30 shall apply to all exposures
to institutions of up to three months initial maturity.
34.                  
If there is a
short-term assessment and such an assessment determines the application of a
more favourable or identical risk weight than the use of the general
preferential treatment for short-term exposures, as specified in paragraph 30,
then the short-term assessment shall be used for that specific exposure only.
Other short-term exposures shall follow the general preferential treatment for
short-term exposures, as specified in paragraph 30.
35.                  
If there is a
short-term assessment and such an assessment determines a less favourable risk
weight than the use of the general preferential treatment for short-term exposures,
as specified in paragraph 30, then the general preferential treatment for
short-term exposures shall not be used and all unrated short-term claims shall
receive the same risk weight as that applied by the specific short-term
assessment.

6.6.                
Short-term exposures
in the national currency of the borrower

36.                  
When competent
authorities have adopted for exposures to central governments and central banks
the method described in paragraphs 4 to 6, subject to their discretion,
exposures to institutions of an original effective maturity of 3 months or less
denominated and funded in the national currency may be assigned, under both
methods described in paragraphs 26 to 27 and 28 to 31, a risk weight that is
one category less favourable than the preferential risk weight, as described in
paragraphs 4 to 6, assigned to exposures to its central government.
37.                  
No exposures of an
original effective maturity of 3 months or less denominated and funded in the
national currency of the borrower shall be assigned a risk weight less than
20%.
6.7     Investments
in regulatory capital instruments
38.                  
Investments in equity
or regulatory capital instruments issued by institutions shall be risk weighted
at 100%, unless deducted from the own funds.

7.                      
EXPOSURES TO
CORPORATES
7.1.                
Treatment

39.                  
Exposures for which a
credit assessment by a nominated ECAI is available shall be assigned a risk
weight according to Table 5 in accordance with the assignment by the competent
authorities of the credit assessments of eligible ECAIs to six steps in a
credit quality assessment scale.
Table 5
 Credit quality step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 20% || 50% || 100% || 100% || 150% || 150% 
40.                  
Exposures for which
such a credit assessment is not available shall receive a 100% risk weight or
the risk weight of its central government, whichever is the higher.

8.                      
RETAIL EXPOSURES

41.                  
Exposures that comply
with the criteria listed in Article 79(2) may, subject to the discretion of
competent authorities, be assigned a risk weight of 75%.

9.                      
EXPOSURES SECURED BY
REAL ESTATE PROPERTY

42.                  
Without prejudice to paragraphs
43 to 57, exposures fully secured by real estate property shall be assigned a
risk weight of 100%.

9.1.                
Exposures secured by
mortgages on residential property

43.                  
Exposures fully and
completely secured, to the satisfaction of the competent authorities, by
mortgages on residential property which is or shall be occupied or let by the
owner shall be assigned a risk weight of 35%.
44.                  
Exposures fully and
completely secured, to the satisfaction of the competent authorities, by shares
in Finnish residential housing companies, operating in accordance with the
Finnish Housing Company Act of 1991 or subsequent equivalent legislation, in
respect of residential property which is or shall be occupied or let by the
owner shall be assigned a risk weight of 35%.
45.                  
In the exercise of
their judgement, competent authorities shall be satisfied only if the following
conditions are met:
(a)     the value of
the property does not materially depend upon the credit quality of the obligor.
This requirement does not preclude situations where purely macro-economic
factors affect both the value of the property and the performance of the
borrower;
(b)     the risk of
the borrower does not materially depend upon the performance of the underlying
property or project, but rather on the underlying capacity of the borrower to
repay the debt from other sources. As such, repayment of the facility does not
materially depend on any cash flow generated by the underlying property serving
as collateral;
(c)     the minimum
requirements set out in Annex VIII, Part 2, paragraph 8 and the valuation rules
set out in Annex VIII, Part 3, paragraphs 63 to 66 are met;
(d)     the value of
the property exceeds by a substantial margin the exposures.
46.                  
Competent authorities
may dispense with the condition contained in paragraph 45(b) for exposures
fully and completely secured by mortgages on residential property which is
situated within their territory, if they have evidence that a well-developed
and long-established residential real estate market is present in their
territory with loss rates which are sufficiently low to justify such treatment.

47.                  
When the discretion
contained in paragraph 46 is exercised by the competent authorities of a Member State, the competent authorities of another Member State may allow their credit
institutions to apply a risk weight of 35% to such exposures fully and
completely secured by mortgages on residential property.

9.2.                
Exposures secured by
mortgages on commercial real estate

48.                  
Subject to the
discretion of competent authorities, exposures fully and completely secured, to
the satisfaction of the competent authorities, by mortgages on offices or other
commercial premises situated within their territory may be assigned a risk
weight of 50%.
49.                  
Subject to the
discretion of competent authorities, exposures fully and completely secured, to
the satisfaction of the competent authorities, 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 may be assigned a risk weight of 50%. 
50.                  
Subject to the discretion
of competent authorities, exposures related to property leasing transactions
concerning offices or other commercial premises situated in their territory and
governed by statutory provisions whereby the lessor retains full ownership of
the rented assets until the tenant exercises his option to purchase, may be
assigned a risk weight of 50%. 
51.                  
The application of paragraphs
48 to 50 is subject to the following conditions:
(a)     the value of
the property must not materially depend upon the credit quality of the obligor.
This requirement does not preclude situations where purely macro-economic
factors affect both the value of the property and the performance of the
borrower;
(b)     the risk of
the borrower must not materially depend upon the performance of the underlying
property or project, but rather on the underlying capacity of the borrower to
repay the debt from other sources. As such, repayment of the facility must not
materially depend on any cash flow generated by the underlying property serving
as collateral;
(c)     the minimum
requirements set out in Annex VIII, Part 2, paragraph 8, and the valuation
rules set out in Annex VIII, Part 3, paragraphs 63 to 66 are met.
52.                  
The 50 % risk weight
shall apply to the part of the loan that does not exceed a limit calculated
according to either of the following conditions:
(a)     50% of the
market value of the property in question;
(b)     50% of the
market value of the property or 60 % of the mortgage lending value, whichever
is lower, in those Member States that have laid down rigorous criteria for the
assessment of the mortgage lending value in statutory or regulatory provisions.
53.                  
A 100% risk weigh
shall apply to the part of the loan that exceeds the limits set out in paragraph
52.
54.                  
When the discretion
contained in paragraph 48 to 50 is exercised by the competent authorities of
one Member State, the competent authorities of another Member State may allow
their credit institutions to risk weight at 50% such exposures fully and
completely secured by mortgages on commercial property.
55.                  
Competent authorities
may dispense with the condition contained in paragraph 51(b) for exposures
fully and completely secured by mortgages on commercial property which is
situated within their territory, if they have evidence that a well-developed
and long-established commercial real estate market is present in their
territory with loss-rates which do not exceed the following limits:
(a)     up to 50% of
the market value (or where applicable and if lower 60 % of the mortgage lending
value (MLV)) must not exceed 0.3 % of the outstanding loans in any given year;
(b)     overall
losses stemming from commercial real estate lending must not exceed 0.5% of the
outstanding loans in any given year.
56.                  
If either of the
limits referred to in paragraph 55 is not satisfied in a given year, the
eligibility to use this treatment shall cease and the second condition
contained in paragraph 51(b) shall need to be satisfied again before it can be
applied any more. 
57.                  
When the discretion
contained in paragraph 55 is exercised by the competent authorities of a Member State, the competent authorities of another Member State may allow their credit
institutions to apply a risk weight of 50% to such exposures fully and
completely secured by mortgages on commercial property.

10.                  
PAST DUE ITEMS

58.                  
Without prejudice to
the provisions contained in paragraphs 59 to 62, the unsecured portion of any
item that is past due for more than 90 days shall be assigned a risk weight of:
(a)     150% if
value adjustments are less than 20% of the unsecured part of the exposure gross
of value adjustments value;
(b)     100% if
value adjustments are no less than 20% of the unsecured part of the exposure
gross of value adjustments;
(c)     50%, subject
to the discretion of competent authorities, if value adjustments are no less
than 50% of the unsecured part of the exposure gross of value adjustments.
59.                  
For the purpose of
defining the secured portion of the past due item, eligible collateral and
guarantees shall be those eligible for credit risk mitigation purposes.
60.                  
Nonetheless, where a
past due item is fully secured by forms of collateral other then those eligible
for credit risk mitigation purposes, a 100% risk weight may apply subject to
the discretion of competent authorities based upon strict operational criteria
to ensure the good quality of the collateral when value adjustments reach 15%
of the exposure gross of value adjustments.
61.                  
Exposures indicated in
paragraphs 43 to 47 shall be assigned a risk weight of 100% net of value
adjustments if they are past due for more than 90 days. If value adjustments
are no less than 20% of the exposures gross of value adjustments, the risk
weight applicable to the remainder of the exposure may be reduced to 50% at the
discretion of competent authorities.
62.                  
Exposures indicated in
paragraphs 48 to 57 shall be assigned a risk weight of 100% if they are past
due for more than 90 days.

11.                  
ITEMS BELONGING TO
REGULATORY HIGH-RISK CATEGORIES

63.                  
Subject to the
discretion of competent authorities, exposures associated with particularly
high risks such as investments in venture capital firms and private equity
investments shall be assigned a risk weight of 150%.
64.                  
Competent authorities
may permit non past due items receiving a 150% risk weight according to the
provisions of the previous sections and for which value adjustments have been
established to be assigned a risk weight of:
(a)     100% if
value adjustments are no less than 20% of the exposure value gross of value
adjustments;
(b)     50%, if
value adjustments are no less than 50% of the exposure value gross of value
adjustments.

12.                  
EXPOSURES IN THE FORM OF COVERED BONDS

65.                  
‘Covered bonds’, shall mean bonds as defined in Article 22(4) of
Directive
 85/611/EEC and collateralised by any of the following eligible assets:
(a)     exposures to
or guaranteed by central governments, central banks, multilateral development
banks, international organisations that qualify for the credit quality
assessment step 1 as set out in this Annex;
(b)     exposures to
or guaranteed by public sector entities, regional governments and local
authorities that are risk weighted as exposures to institutions or central
governments and central banks according to paragraphs 15, 9 or 10 respectively
and that qualify for the credit quality assessment step 1 as set out in
this Annex;
(c)     exposures to
institutions that qualify for the credit quality assessment step 1 as set
out in this Annex. The total exposure of this kind shall not exceed 10% of the
nominal amount of outstanding covered bonds of the issuing credit institution.
Exposures caused by transmission of payments from the obligors of loans secured
by real estate to the holders of covered bonds shall not be comprised by the
10% limit;
(d)     loans
secured by residential real estate or shares in Finnish residential housing
companies as referred to in paragraph 44 where only liens that are combined
with any prior liens within 80% of the value of the pledged property;
(e)     loans
secured by commercial real estate or shares in Finnish housing companies as
referred to in paragraph 49 where only liens that are combined with any prior
liens within 60% of the value of the pledged property. The competent
authorities may recognise loans secured by commercial real estate as eligible
where the Loan to Value ratio of 60% is exceeded up to a maximum level of 70%
if the value of the total assets pledged as collateral for the covered bonds
exceed the nominal amount outstanding on the covered bond by at least 10%, and
the bondholders' claim meets the legal certainty requirements set out in Annex
IX. The bondholders' claim must take priority over all other claims on the
collateral.
66.                  
Credit institutions
shall for real estate collateralising covered bonds meet the minimum
requirements set out in Annex VIII part 2, paragraph 8 and the valuation rules
set out in Annex VIII, Part 3, paragraphs 63 to 66.
67.                  
Notwithstanding
paragraphs 65 and 66, covered bonds meeting the definition of Article 22(4) of
Directive 85/611/EEC and issued before 31 December 2007 are also eligible for the preferential treatment until their maturity.
68.                  
Covered bonds shall be
assigned a risk weight on the basis of the risk weight attributed to senior
unsecured exposures to the credit institution which issues them. The following
correspondence between risk weights shall apply:
(a)     if the
exposures to the institution receive a risk weight of 20%, the covered bond
shall receive a risk weight of 10%;
(b)     if the
exposures to the institution receive a risk weight of 50%, the covered bond
shall receive a risk weight of 20%;
(c)     if the
exposures to the institution receive a risk weight of 100%, the covered bond
shall receive a risk weight of 50%;
(d)     if the
exposures to the institution receive a risk weight of 150%, the covered bond
shall receive a risk weight of 100%;

13.                  
ITEMS REPRESENTING
SECURITISATION POSITIONS

69.                  
Risk weights exposure
amounts for securitisation positions shall be determined in accordance with the
provisions of Articles 94 to 101.

14.                  
SHORT-TERM EXPOSURES oN CREDIT
INSTITUTIONS AND CORPORATES 

70.                  
Short-term exposures
on an institution or corporate for which a credit assessment by a nominated
ECAI is available shall be assigned a risk weight according to Table 6 in
accordance with the mapping by the competent authorities of the credit
assessments of eligible ECAIs to six steps in a credit quality assessment
scale:
Table 6
 Credit Quality Step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 20% || 50% || 100% || 150% || 150% || 150% 

15.                  
EXPOSURES IN THE FORM
OF COLLECTIVE INVESTMENT UNDERTAKINGS (CIUS)

71.                  
Without prejudice to paragraphs
72 to 78, exposures in collective investment undertakings (CIUs) shall be
assigned a risk weight of 100%.
72.                  
Exposures in the form
of CIUs for which a credit assessment by a nominated ECAI is available shall be
assigned a risk weight according to Table 7 in accordance with the assignment
by the competent authorities of the credit assessments of eligible ECAIs to six
steps in a credit quality assessment scale.
Table 7
 Credit quality step || 1 || 2 || 3 || 4 || 5 || 6 
 Risk weight || 20% || 50 || 100% || 100% || 150% || 150% 
73.                  
Where competent
authorities consider that a position in a CIU is associated with particularly
high risks they shall require that that position is assigned a risk weight of
150%.
74.                  
Credit institutions
may determine the risk weight for a CIU as set out in paragraphs 76 to 78, if
the following eligibility criteria are met:
(a)     the CIU is
managed by a company which is subject to supervision in a Member State or,
subject to approval of the credit institution's competent authority, if: 
(i)      they are
managed by a company which is subject to supervision that is considered
equivalent to that laid down in Community law; and 
(ii)     co-operation
between competent authorities is sufficiently ensured;
(b)     the CIU’s
prospectus or equivalent document includes:
–              
the categories of
assets the CIU is authorised to invest in,
–              
if investment limits
apply, the relative limits and the methodologies to calculate them;
(c)     the business
of the CIU is reported on at least an annual basis to enable an assessment to
be made of the assets and liabilities, income and operations over the reporting
period.
75.                  
If a competent
authority approves a third country CIU as eligible, as set out in paragraph 74,
point (a), then a competent authority in another Member State may make use of
this recognition without conducting their own assessment.
76.                  
Where the credit
institution is aware of the underlying exposures of a CIU, it may look though
to those underlying exposures in order to calculate an average risk weight for
the CIU in accordance with the methods set out in Article 78 to 83.
77.                  
Where the credit
institution is not aware of the underlying exposures of a CIU, it may calculate
an average risk weight for the CIU in accordance with the methods set out in Articles
78 to 83 subject to the following rules: it will be assumed that the CIU first
invests, to the maximum extent allowed under its mandate, in the exposure
classes attracting the highest capital requirement, and then continues making
investments in descending order until the maximum total investment limit is
reached.
78.                  
Credit institutions
may rely on a third party to calculate and report, in accordance with the
methods set out in paragraphs 76 and 77, a risk weight for the CIU provided
that the correctness of the calculation and report shall be adequately ensured.

16.                  
OTHER ITEMS
16.1.            
Treatment

79.                  
Tangible assets within
the meaning of Article 4(10) of Directive 86/635/EEC shall be assigned a risk
weight of 100%.
80.                  
Prepayments and
accrued income for which an institution is unable to determine the counterparty
in accordance with Directive 86/635/EEC, shall be assigned a risk weight of
100%.
81.                  
Cash items in the
process of collection shall receive a 20% risk weight. Cash in hand and
equivalent cash items shall receive a 0% risk weight;
82.                  
Member States may
allow a risk weight of 10% for exposures to institutions specialising in the
inter-bank and public-debt markets in their home Member States and subject to
close supervision by the competent authorities where those asset items are
fully and completely secured, to the satisfaction of the competent authorities
of the home Member States, by a items assigned a 0% or a 20% risk weight and
recognised by the latter as constituting adequate collateral. 
83.                  
Holdings of equity and
other participations except where deducted from own funds shall be assigned a
risk weight of at least 100%.
84.                  
Gold bullion held in
own vaults or on an allocated basis to the extent backed by bullion liabilities
shall receive a 0% risk weight.
85.                  
In the case of asset
sale and repurchase agreements and outright forward purchases, the risk weight
shall be those attached to the assets in question and not to the counterparties
to the transactions.
86.                  
Where a credit
institution provides credit protection for a number of exposures under terms
that the nth default among the exposures shall trigger payment and that
this credit event shall terminate the contract, if the product has an external
credit assessment from an eligible ECAI the risk weights prescribed Articles 78
to 83 shall be applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included
in the basket will be aggregated, excluding n-1 exposures, up to a
maximum of 1250% and multiplied by the nominal amount of the protection
provided by the credit derivative to obtain the risk weighted asset amount. The
n-1 exposures to be excluded from the aggregation shall be determined on
the basis that they shall include those exposures each of which produces a
lower risk-weighted exposure amount than the risk-weighted exposure amount of
any of the exposures included in the aggregation.
Part 2 -
Recognition of ECAIs and mapping of their credit assessments

1.                      
METHODOLOGY
1.1.                
Objectivity

1.                      
Competent authorities
shall verify that the methodology for assigning credit assessments is rigorous,
systematic, continuous and subject to validation based on historical
experience.

1.2.                
Independence

2.                      
Competent authorities
shall verify that the methodology is free from external political influences or
constraints, and from economic pressures that may influence the credit
assessment.
3.                      
Independence of the ECAI’s methodology shall be
assessed by competent authorities according to factors such as the following:
(a)     ownership
and organisation structure of the ECAI;
(b)     financial
resources of the ECAI;
(c)     staffing and
expertise of the ECAI;
(d)     corporate
governance of the ECAI.

1.3.                
Ongoing review

4.                      
Competent authorities
shall verify that ECAI’s credit assessments are subject to ongoing review and
shall be responsive to changes in the financial conditions. Such review shall
take place after all significant events and at least annually.
5.                      
Before any
recognition, competent authorities shall verify that the assessment methodology
for each market segment is established according to standards such as the
following:
(a)     the
backtesting must be established for at least one year;
(b)     the
regularity of the review process by the ECAI must be monitored by the competent
authorities;
(c)     the competent
authorities must be able to receive from the ECAI the extent of its contacts
with the senior management of the entities which it rates.
6.                      
Competent authorities
shall take the necessary measures to be promptly informed by ECAIs of any
material changes in the methodology they use for assigning credit assessments. 

1.4.                
Transparency and
disclosure

7.                      
Competent authorities
shall take the necessary measures to assure that the principles of the
methodology employed by the ECAI for the formulation of its credit assessments
are publicly available as to allow all potential users to decide whether they
are derived in a reasonable way.

2.                      
INDIVIDUAL CREDIT
ASSESSMENTS
2.1.                
Credibility and market
acceptance:

8.                      
Competent authorities
shall verify that ECAIs’ individual credit assessments are recognised in the
market as credible and reliable by the users of such credit assessments.
9.                      
Credibility shall be
assessed by competent authorities according to factors such as the following:
(a)     market share
of the ECAI;
(b)     revenues
generated by the ECAI, and more in general financial resources of the ECAI;
(c)     whether
there is any pricing on the basis of the rating.

2.2.                
Transparency and
Disclosure

10.                  
Competent authorities
shall verify that individual credit assessments are accessible at equivalent
terms at least to all parties having a legitimate interest in these individual
credit assessments.
11.                  
In particular,
competent authorities shall verify that individual credit assessments are
available to non-domestic parties on equivalent terms as to domestic parties
having a legitimate interest in these individual credit assessments.

3.                      
‘MAPPING’

12.                  
In order to
differentiate between the relative degrees of risk expressed by each credit
assessment, competent authorities shall consider quantitative factors such as
the long-term default rate associated with all items assigned the same credit
assessment. For recently established ECAIs and for those that have compiled
only a short record of default data, competent authorities shall ask the ECAI
what it believes to be the long-term default rate associated with all items
assigned the same credit assessment.
13.                  
In order to
differentiate between the relative degrees of risk expressed by each credit
assessment, competent authorities shall consider qualitative factors such as
the pool of issuers that the ECAI covers, the range of credit assessments that
the ECAI assigns, each credit assessment meaning and the ECAI’s definition of
default.
14.                  
Competent authorities
shall compare default rates experienced for each credit assessment of a particular
ECAI and compare them with a benchmark built on the basis of default rates
experienced by other ECAIs on a population of issuers that the competent
authorities believes to present an equivalent level of credit risk.
15.                  
When competent
authorities believe that the default rates experienced for the credit
assessment of a particular ECAI are materially and systematically higher then
the benchmark, competent authorities shall assign a higher risk step in the
credit quality assessment scale to the ECAI credit assessment.
16.                  
When competent
authorities have increased the associated risk weight for a specific credit
assessment of a particular ECAI, if the ECAI demonstrates that the default
rates experienced for its credit assessment are no longer materially and systematically
higher than the benchmark, competent authorities may decide to restore the
original step in the credit quality assessment scale for the ECAI credit
assessment. 
Part 3 -
Use of ECAIs’ credit assessments for the determination of risk weights 

1.                      
treatment

1.                      
An institution may
nominate one or more eligible ECAIs to be used for the determination of risk
weights applicable to asset and off-balance sheet items.
2.                      
A credit institution
which decides to use the credit assessments produced by an eligible ECAI for a
certain class of items must use those credit assessments consistently for all
exposures belonging to that class.
3.                      
An institution which
decides to use the credit assessments produced by an eligible ECAI must use
them in a continuous and consistent way over time.
4.                      
A credit institution
can only use ECAIs credit assessments that take into account all amounts both
in principal and in interest owed to it.
5.                      
If only one credit
assessment is available from a nominated ECAI for a rated item, that credit
assessment shall be used to determine the risk weight for that item.
6.                      
If two credit
assessments are available from nominated ECAIs and the two correspond to
different risk weights for a rated item, the higher risk weight shall be
applied.
7.                      
If more than two
credit assessments are available from nominated ECAIs for a rated item, the two
assessments generating the two lowest risk weights shall be referred to. If the
two lowest risk weights are different, the higher risk weight shall be applied.
If the two lowest risk weights are the same, that risk weight shall be applied.
8.                      
Credit institutions
shall use solicited credit assessments. The competent authorities may allow
credit institutions to use unsolicited credit assessments.

2.                      
Issuer and issue
credit assessment

9.                      
Where a credit
assessment exists for a specific issuing program or facility to which the item
constituting the exposure belongs, this credit assessment shall be used to
determine the risk weight applicable to that item.
10.                  
Where no directly
applicable credit assessment exists for a certain item, but a credit assessment
exists for a specific issuing program or facility to which the item
constituting the exposure does not belong or a general credit assessment exists
for the issuer, then that credit assessment shall be used if it produces a
higher risk weight than would other wise be the case or if it produces a lower
risk weight and the exposure in question ranks pari passu or senior in
all respects to the specific issuing program or facility or to senior unsecured
exposures of that issuer as relevant.
11.                  
Paragraphs 9 and 10
are not to prevent the application of paragraphs 65 to 68 of Part 1 of this
Annex.
12.                  
Credit assessments for
issuers within a corporate group cannot be used as credit assessment of another
issuer within the same corporate group.

3.                      
Long-term and
short-term credit assessments

13.                  
Short-term credit
assessments may only be used for short-term asset and off-balance sheet items
constituting exposures to institutions and corporates.
14.                  
Any short-term credit
assessment shall only apply to the item the short-term credit assessment refers
to, and it shall not be used to derive risk weights for any other item.
15.                  
Notwithstanding
paragraph 14, if a short-term rated facility receives a 150% risk weight, then
all unrated unsecured exposures on that obligor whether short-term or long-term
shall also receive a 150% risk weight.
16.                  
Notwithstanding
paragraph 14, if a short-term rated facility attracts a 50% risk-weight, no
unrated short-term exposure shall attract a risk weight lower than 100%.

4.                      
Domestic and foreign
currency items

17.                  
A credit assessment
that refers to an item denominated in the obligor’s domestic currency cannot be
used to derive a risk weight for another exposure on that same obligor that is
denominated in a foreign currency.
18.                  
Notwithstanding
paragraph 17, when an exposure arises through a bank's participation in a loan
that has been extended by a Multilateral Development Bank whose preferred
creditor status is recognised in the market, competent authorities may allow
the credit assessment on the obligor’s domestic currency item to be used for
risk weighting purposes.
ANNEX VII
Internal Ratings based Approach
Part 1 - Risk weighted exposure amounts and expected loss amounts

1.                      
Calculation of risk
weighted exposure amounts for credit risk

1.                      
Unless noted
otherwise, the input parameters probability of default (PD), loss given default
(LGD), and maturity value (M) shall be determined as set out in Part 2,
the exposure value shall be determined as set out in Part 3. 
2.                      
The risk weighted
exposure amount for each exposure shall be calculated in accordance with the
following formulas: 

1.1.                
Risk weighted exposure
amounts for exposures to corporates, institutions and central governments and
central banks.

3.                      
Subject to paragraphs 4
to 8 the risk weighted exposure amounts for exposures to corporates,
institutions and central governments and central banks shall be calculated
according to the following formulas: 
Correlation (R) =      
Maturity factor (b) =

Risk weight (RW) = 
N() denotes the
cumulative distribution function for a standard normal random variable (i.e.
the probability that a normal random variable with mean zero and variance of
one is less than or equal to x).  denotes the
inverse cumulative distribution function for a standard normal random variable
(i.e. the value x such that =
z). 
Risk-weighted
exposure amount =   RW * exposure value
4.                      
For exposures to
companies where the total annual sales for the consolidated group of which the
firm is a part is less than EUR 50 million credit institutions may use the
following correlation formula for the calculation of risk weights for corporate
exposures. In this formula S is expressed as total annual sales in millions of
Euros with EUR 5 million <= S <= EUR
50 million. Reported sales of less than EUR 5 million shall be
treated as if they were equivalent to EUR 5 million. For purchased
receivables the total annual sales shall be the weighted average by individual
exposures of the pool.
Correlation (R) =
Credit institutions
shall substitute total assets of the consolidated group for total annual sales
when total annual sales are not a meaningful indicator of firm size and total
assets are a more meaningful indicator than total annual sales. 
5.                      
For specialised
lending exposures that a credit institution cannot demonstrate that its PD
estimates meet the minimum requirements set out in Part 4 it shall assign risk
weights to these exposures according to table 1. 
Table 1: 
 Remaining Maturity || category1 || category 2 || category 3 || category 4 || category 5 
 Less than 2.5 years || 50% || 70% || 115% || 250% || 0% 
 Equal or more than 2.5 years || 70% || 90% || 115% || 250% || 0% 
The competent
authorities may authorise a credit institution to generally assign preferential
risk weights of 50% to exposures in category 1, and a 70% risk weight to
exposures in category 2, provided the credit institutions’ underwriting
characteristics and other risk characteristics are substantially strong for the
relevant category. 
In assigning risk
weights to specialised lending exposures institutions shall take into account
the following factors: Financial strength, political and legal environment,
transaction and/or asset characteristics, strength of the sponsor and developer
including any public private partnership income stream, security package. 
6.                      
To be eligible for the
corporate treatment purchased corporate receivables shall comply with the
minimum requirements set out in Part 4, paragraphs 104 to 108. For
purchased corporate receivables that comply in addition with the conditions set
out in paragraph 12, and where it would be unduly burdensome for a credit
institution to use the risk quantification standards for corporate exposures as
set out in Part 4 for these receivables, the risk quantification standards for
retail exposures as set out in Part 4 may be used.
7.                      
For purchased corporate
receivables, refundable purchase discounts, collateral or partial guarantees
that provide first-loss protection for default losses, or both, may be treated
as first-loss positions under the IRB securitisation framework.
8.                      
Where an institution
provides credit protection for a number of exposures under terms that the nth
default among the exposures shall trigger payment and that this credit event
shall terminate the contract, if the product has an external credit assessment
from an eligible ECAI the risk weights set out in Articles 94-101 will be
applied. If the product is not rated by an eligible ECAI, the risk weights of the exposures included
in the basket will be aggregated, excluding n-1 exposures where the sum of the expected loss amount
multiplied by 12.5 and the risk weighted exposure amount shall not exceed the nominal amount of the protection
provided by the credit derivative multiplied by 12.5.
The n-1 exposures to be excluded from the aggregation shall be
determined on the basis that they shall include those exposures each of which
produces a lower risk-weighted exposure amount than the risk-weighted exposure
amount of any of the exposures included in the aggregation.

1.2.                
Risk weighted exposure
amounts for retail exposures:

9.                      
Subject to paragraphs 10
and 11 the risk weighted exposure amounts for retail exposures shall be
calculated according to the following formulas: 
Correlation (R) = 
Risk weight: 
N() denotes the
cumulative distribution function for a standard normal random variable (i.e.
the probability that a normal random variable with mean zero and variance of
one is less than or equal to x).  denotes the
inverse cumulative distribution function for a standard normal random variable
(i.e. the value x such that =
z). 
Risk-weighted
exposure amount =   RW * exposure value
10.                  
For retail exposures
secured by real estate collateral a correlation (R) of 0.15 shall replace the
figure produced by the correlation formula in paragraph 9. 
11.                  
For qualifying
revolving retail exposures as defined in (a) to (e), a correlation (R) of 0.04
shall replace the figure produced by the correlation formula in paragraph 9.
Exposures shall
qualify as qualifying revolving retail exposures if they meet the following
conditions:
(a)     The
exposures are to individuals
(b)     The exposures
are revolving, unsecured, and to the extent they are not drawn immediately and
unconditionally cancellable by the credit institution (In this context
revolving exposures are defined as those where customers outstanding balances
are permitted to fluctuate based on their decisions to borrow and repay, up to
a limit established by the credit institution). Undrawn commitments may be
considered as unconditionally cancellable if the terms permit the credit
institution to cancel them to the full extent allowable under consumer protection
and related legislation.
(c)     The maximum
exposure to a single individual in the sub-portfolio is EUR 100,000 or less.
(d)     The credit
institution can demonstrate that the use of the correlation formula of this paragraph
is constrained to portfolios that have exhibited low volatility of loss rates,
relative to their average level of loss rates, especially within the low PD
bands. Supervisors shall review the relative volatility of loss rates across
the qualifying revolving retail subportfolios, as well the aggregate qualifying
revolving retail portfolio, and intend to share information on the typical
characteristics of qualifying revolving retail loss rates across jurisdictions.
(e)     The
competent authority concurs that treatment as a qualifying revolving retail
exposure is consistent with the underlying risk characteristics of the
sub-portfolio.
12.                  
To be eligible for the
retail treatment purchased receivables shall comply with the minimum
requirements set out in Part 4, paragraphs 104 to 108 and the following
conditions:
(a)     The credit
institution has purchased the receivables from unrelated, third party sellers,
and its exposure to the obligor of the receivable does not include any
exposures that are directly or indirectly originated by the credit institution
itself.
(b)     The
purchased receivables shall be generated on an arm’s-length basis between the
seller and the obligor. As such, intercompany accounts receivables and
receivables subject to contra-accounts between firms that buy and sell to each
other are ineligible.
(c)     The
purchasing credit institution has a claim on all proceeds from the purchased
receivables or a pro-rata interest in the proceeds.
(d)     The
portfolio of purchased receivables is sufficiently diversified. 
13.                  
For purchased
receivables, refundable purchase discounts, collateral or partial guarantees
that provide first-loss protection for default losses, dilution losses, or
both, may be treated as first-loss positions under the IRB securitisation
framework.
14.                  
For hybrid pools of
purchased retail receivables where purchasing credit institutions cannot
separate exposures secured by real estate collateral and qualifying revolving
retail exposures from other retail exposures, the retail risk weight function
producing the highest capital requirements for those exposures shall apply. 

1.3.                
Risk weighted exposure
amounts for equity exposures:

15.                  
Subject to approval of
the competent authorities, a credit institution may employ different approaches
to different portfolios where the credit institution itself uses different
approaches internally. Where a credit institution is permitted to use different
approaches, the credit institution shall demonstrate to the competent
authorities that the choice is made consistently and is not determined by regulatory
arbitrage considerations. 
16.                  
Notwithstanding paragraph
15 competent authorities may allow the attribution of risk weighted exposure
amounts for equity exposures to ancillary services undertakings according to
the treatment of other non credit-obligation assets. 

1.3.1.          
Simple
Risk Weight Approach 

17.                  
The risk weighted
exposure amounts shall be calculated according to the following formula:
Risk weight (RW) =
190% for private equity exposures in sufficiently diversified portfolios.
Risk weight (RW) =
290% for exchange traded equity exposures.
Risk weight (RW) =
370% for all other equity exposures.
Risk-weighted
exposure amount =   RW * exposure value
18.                  
Short cash positions
and derivative instruments held in the non-trading book are permitted to offset
long positions in the same individual stocks provided that these instruments
have been explicitly designated as hedges of specific equity exposures and that
they provide a hedge for at least another year. Other short positions are to be
treated as if they are long positions with the relevant risk weight applied to
the absolute value of each position. In the context of maturity mismatched
positions, the method is that for corporate exposures. 
19.                  
Credit institutions
may recognise unfunded credit protection obtained on an equity exposure in
accordance with the methods set out in Articles 90 to 93. 

1.3.2.          
PD/LGD
Approach

20.                  
The risk weighted
exposure amounts shall be calculated according to the formulas in paragraph 3.
If institutions do not have sufficient information to use the definition of
default set out in Part 4, paragraphs 44 to 48, a scaling factor of 1.5
shall be applied to the risk weights. 
21.                  
At the individual
exposure level the sum of the expected loss amount multiplied by 12.5 and the
risk weighted exposure amount shall not exceed the exposure value multiplied by
12.5.
22.                  
Credit institutions
may recognise unfunded credit protection obtained on an equity exposure in
accordance with the methods set out in of Articles 90 to 93. This shall be subject to an LGD of 90% on the
exposure to the provider of the hedge. For private equity exposures in
sufficiently diversified portfolios an LGD of 65% may be used. For these
purposes M shall be 5 years. 

1.3.3.          
Internal
Models Approach

23.                  
The risk weighted
exposure amounts shall be the potential loss on the institution’s equity
exposures as derived using internal value-at-risk models subject to the 99th
percentile, one-tailed confidence interval of the difference between quarterly
returns and an appropriate risk-free rate computed over a long-term sample
period, multiplied by 12.5. The risk weighted exposure amounts at the
individual exposure level shall not be less than the sum of minimum risk
weighted exposure amounts required under the PD/LGD Approach and the
corresponding expected loss amounts multiplied by 12.5.
24.                  
Credit institutions
may recognise unfunded credit protection obtained on an equity position. 

1.4.                
Risk weighted exposure
amounts for other non credit-obligation assets

25.                  
The risk weighted
exposure amounts shall be calculated according to the formula:
Risk-weighted
exposure amount = 100% * exposure value

2.                      
Calculation of risk
weighted exposure amounts for dilution risk of purchased receivables

26.                  
Risk weights for
dilution risk of purchased corporate and retail receivables:
The risk weights
shall be calculated according to the formula in paragraph 3. The input
parameters PD and LGD shall be determined as set out in Part 2, the
exposure value shall be determined as set out in Part 3 and M shall be 1 year.
If credit institutions can demonstrate to the competent authorities that
dilution risk is immaterial, it need not be recognised. 

3.                      
Calculation of
expected loss amounts

27.                  
Unless noted
otherwise, the input parameters PD and LGD shall be determined as set out in
Part 2, the exposure value shall be determined as set out in Part 3. 
28.                  
The expected loss
amounts for exposures to corporates, institutions, central governments and
central banks and retail exposures shall be calculated according to the
following formulas: 
Expected loss (EL) =            PD
× LGD
Expected loss amount
=       EL × exposure value
Premiums on purchased
exposures shall be treated as EL.
29.                  
The EL values for
specialised lending exposures where credit institutions use the methods set out
in paragraph 5 for assigning risk weights shall be assigned according to table
2. 
Table 2
 Remaining Maturity || category 1 || category 2 || category 3 || category 4 || category 5 
 Less than 2.5 years || 0% || 5% || 35% || 100% || 625% 
 Equal or more than 2.5 years EL || 5% || 10% || 35% || 100% || 625% 
Where competent
authorities have authorised a credit institution to generally assign
preferential risk weights of 50% to exposures in category 1, and 70% to
exposures in category 2, the EL value for exposures in category 1
shall be 0%, and for exposures in category 2 shall be 5%. 
30.                  
The expected loss
amounts for equity exposures where the risk weighted exposure amounts are
calculated according to the methods set out in paragraphs 17 to 19, shall be
calculated according to the following formula: 
Expected loss amount
=       EL × exposure value
The EL values shall
be the following:
Expected loss (EL) =            10%
for private equity exposures in sufficiently diversified portfolios
Expected loss (EL) =            10%
for exchange traded equity exposures.
Expected loss (EL) =            30%
for all other equity exposures.
31.                  
The expected loss
amounts for equity exposures where the risk weighted exposure amounts are
calculated according to the methods set out paragraphs 20 to 22 shall be
calculated according to the following formulas: 
Expected loss (EL) =            PD
× LGD
Expected loss amount
=       EL × exposure value
32.                  
The expected loss amounts
for equity exposures where the risk weighted exposure amounts are calculated
according to the methods set out in paragraphs 23 to 24 shall be 0%. 
33.                  
The expected loss
amounts for dilution risk of purchased receivables shall be calculated
according to the following formula: 
Expected loss (EL) =            PD
× LGD
Expected loss amount
=       EL × exposure value

4.                      
Treatment of expected
loss amounts

34.                  
The expected loss
amounts calculated in accordance with paragraphs 28, 29 and 33 shall be
subtracted from the sum of value adjustments and provisions related to these exposures.
Discounts on purchased exposures according to Part 3, paragraph 1 shall be
treated in the same manner as value adjustments, premiums on purchased
exposures according to Part 3, paragraph 1 shall be added to the expected loss amounts. Expected loss amounts for securitised exposures and value adjustments and provisions related to these exposures
shall not be included in this calculation. 
Part 2 -
PD, LGD and Maturity
1.                      
The input parameters
probability of default (PD), loss given default (LGD) and maturity value (M)
into the calculation of risk weighted exposure amounts and expected loss
amounts specified in Part 1 shall be those estimated by the credit institution
in accordance with Part 4 subject to the following provisions. 

1.                      
Exposures to
Corporates, Institutions and Central Governments and Central Banks
1.1.                
PD

2.                      
The PD of an exposure
to a corporate or an institution shall be at least 0.03%. 
3.                      
For purchased
corporate receivables in respect of which a credit institution cannot
demonstrate that its PD estimates meet the minimum requirements set out in Part
4, the PDs for these exposures shall be determined according to the following
methods: for senior claims on purchased corporate receivables PD shall be the
credit institutions estimate of EL divided by LGD for these receivables. For
subordinated claims on purchased corporate receivables PD shall be the credit
institutions estimate of EL. If a credit institution is permitted to use own
LGD estimates for corporate exposures and it can decompose its EL estimates for
purchased corporate receivables into PDs and LGDs in a reliable manner, the PD
estimate may be used. 
4.                      
The PD of obligors in
default shall be 100%. 
5.                      
Credit institutions
may recognise unfunded credit protection in the PD in accordance with the
provisions of Articles 90 to 93
6.                      
Credit institutions
using own LGD estimates may recognise unfunded credit protection by adjusting
PDs subject to paragraph 11. 
7.                      
For dilution risk of
purchased corporate receivables PD shall be set equal to EL estimate for
dilution risk. If a credit institution is permitted to use own LGD estimates
for corporate exposures and it can decompose its EL estimates for dilution risk
of purchased corporate receivables into PDs and LGDs in a reliable manner, the
PD estimate may be used.

1.2.                
LGD

8.                      
Credit institutions
shall use the following LGD values: 
(a)     Senior
exposures without eligible collateral: 45%. 
(b)     Subordinated
exposures without eligible collateral: 75%. 
(c)     Credit
institutions may recognise funded and unfunded credit protection in the LGD in
accordance with the provisions of Articles 90 to 93.
(d)     Covered
bonds as defined in Annex VI, Part 1, paragraphs 65 to 67 may be assigned an
LGD value of 12.5%.
(e)     For senior
purchased corporate receivables exposures where a credit institution cannot
demonstrate that its PD estimates meet the minimum requirements set out in Part
4, 45%.
(f)     For
subordinated purchased corporate receivables exposures where a credit
institution cannot demonstrate that its PD estimates meet the minimum
requirements set out in Part 4, 100%.
(g)     For dilution
risk of purchased corporate receivables: 75%
9.                      
Notwithstanding paragraph
8, for dilution and default risk if a credit institution is permitted to use
own LGD estimates for corporate exposures and it can decompose its EL estimates
for purchased corporate receivables into PDs and LGDs in a reliable manner, the
LGD estimate for purchased corporate receivables may be used. 
10.                  
Notwithstanding paragraph
8, if a credit institution is permitted to use own LGD estimates for exposures
to corporates, institutions, central governments and central banks, unfunded
credit protection may be recognised by adjusting PD or LGD estimates subject to
minimum requirements as specified in Part 4 and approval of competent
authorities. A credit institution shall not assign guaranteed exposures an
adjusted PD or LGD such that the adjusted risk weight would be lower than that
of a comparable, direct exposure to the guarantor. 

1.3.                
Maturity

11.                  
Subject to paragraph 12,
credit institutions shall assign to exposures arising from repurchase
transactions or securities or commodities lending or borrowing transactions a
maturity value (M) of 0.5 years and to all other exposures an M of 2.5 years.
Competent authorities may require all credit institutions in their jurisdiction
to use M for each exposure as set out under paragraph 12. 
12.                  
Credit institutions
permitted to use own LGDs or own conversion factors for exposures to
corporates, institutions or central governments and central banks shall
calculate M for each of these exposures as set out in (a) to (e) and subject to
paragraphs 13 to 15. In all cases, M shall be no greater than 5 years.
(a)     For an
instrument subject to a cash flow schedule M shall be calculated according to the
following formula:
M = MAX{1; MIN{ ; 5}}
where CFt denotes
the cash flows (principal, interest payments and fees) 
contractually payable by the obligor in period t.
(b)     For
derivatives subject to a master netting agreement M shall be the weighted average
remaining maturity of the exposure, where M shall be at least 1 year. The
notional amount of each exposure shall be used for weighting the maturity. 
(c)     For
exposures arising from repurchase transactions or securities or commodities
lending or borrowing transactions which are subject to a master netting
agreement M shall be the weighted average remaining maturity of the
transactions where M shall be at least 5 days. The notional amount of each
transaction shall be used for weighting the maturity. 
(d)     If a credit
institution is permitted to use own PD estimates for purchased corporate
receivables, for drawn amounts M shall equal the purchased receivables exposure
weighted average maturity, where M shall be at least 1 year. This same value of
M shall also be used for undrawn amounts under a committed purchase facility
provided the facility contains effective covenants, early amortisation
triggers, or other features that protect the purchasing credit institution
against a significant deterioration in the quality of the future receivables it
is required to purchase over the facility’s term. Absent such effective
protections, M for undrawn amounts shall be calculated as the sum of the
longest-dated potential receivable under the purchase agreement and the remaining
maturity of the purchase facility, where M shall be at least 1 year. 
(e)     For any
other instrument than mentioned in this paragraph or when a credit institution
is not in a position to calculate M as set out in (a), M shall be the maximum
remaining time (in years) that the obligor is permitted to take to fully
discharge its contractual obligations, where M shall be at least 1 year. 
13.                  
Notwithstanding paragraph
12 (a), (b), (d) and (e), for short-term exposures specified by the competent
authorities with a remaining maturity below one year and which are not part of
the credit institutions ongoing financing of the obligor M shall be at least
one-day. 
14.                  
The competent
authorities may allow for exposures to corporates situated in the Community and
having consolidated sales and consolidated assets of less than EUR 500 million
the use of M as set out in paragraph 11. 
15.                  
Maturity mismatches
shall be treated as specified in Articles 90-93. 

2.                      
Retail Exposures
2.1.                
PD

16.                  
The PD of an exposure
shall be at least 0.03%. 
17.                  
The PD of obligors or
where an obligation approach is used those of exposures in default shall be
100%. 
18.                  
For dilution risk of
purchased receivables PD shall be set equal to EL estimates for dilution risk.
If a credit institution can decompose its EL estimates for dilution risk of
purchased receivables into PDs and LGDs in a reliable manner, the PD estimate
may be used. 
19.                  
Unfunded credit
protection may be recognised by adjusting PDs subject to paragraph 21. 

2.2.                
LGD

20.                  
Credit institutions
shall provide own estimates of LGDs subject to minimum requirements as
specified in Part 4 and approval of competent authorities. For dilution
risk of purchased receivables an LGD value of 75% shall be used. If a credit
institution can decompose its EL estimates for dilution risk of purchased
receivables into PDs and LGDs in a reliable manner, the PD estimate may be
used.
21.                  
Unfunded credit
protection may be recognised by adjusting PD or LGD estimates subject to
minimum requirements as specified in Part 4, paragraphs 95 to 103 and
approval of competent authorities either in support of an individual exposure
or a pool of exposures. A credit institution shall not assign guaranteed
exposures an adjusted PD or LGD such that the adjusted risk weight would be
lower than that of a comparable, direct exposure to the guarantor.

3.                      
Equity Exposures
subject to PD/LGD Method
3.1.                
PD

22.                  
PDs shall be
determined according to the methods for corporate exposures. 
The following minimum
PDs shall apply:
(a)     0.09% for
exchange traded equity exposures where the investment is part of a long-term
customer relationship; 
(b)     0.09% for
non-exchange traded equity exposures where the returns on the investment are
based on regular and periodic cash flows not derived from capital gains; 
(c)     0.40% for
exchange traded equity exposures including other short positions as set out in
Part 1, paragraph 17; 
(d)     1.25% for
all other equity exposures including other short positions as set out in Part
1, paragraph 17. 

3.2.                
LGD

23.                  
Private equity
exposures in sufficiently diversified portfolios may be assigned an LGD of 65
%.
24.                  
All other exposures
shall be assigned an LGD of 90 %. 

3.3.                
Maturity

25.                  
M assigned to all
exposures shall be 5 years.
Part 3 -
Exposure value

1.                      
Exposures to
corporates, institutions, central governments and central banks and retail
exposures. 

1.                      
Unless noted otherwise
the exposure value of on-balance sheet exposures shall be measured gross of
value adjustments. This rule also applies to assets purchased at a price
different than the amount owed. For purchased assets, the difference between
the amount owed and the net value recorded on the balance-sheet of credit
institutions is denoted discount if the amount owed is larger, and premium if
it is smaller. 
2.                      
Where credit
institutions use Master netting agreements in relation to repurchase
transactions/security lending or borrowing transactions the exposure value
shall be calculated in accordance with Articles 90
to 93
3.                      
For on-balance sheet
netting of loans and deposits credit institutions shall apply for the
calculation of the exposure value the methods set out in Articles 90 to 93.
4.                      
The exposure value for
leases shall be the discounted lease payment stream. 
5.                      
In the case of any
item listed in Annex IV, the exposure value shall be determined by means of one
of the two methods set out in Annex III. 
6.                      
The exposure value for
the calculation of risk weighted exposure amounts of purchased receivables
shall be the outstanding amount minus the capital requirements for dilution
risk prior to credit risk mitigation.
7.                      
Notwithstanding paragraph
5, contracts traded on recognised exchanges, and foreign-exchange contracts
(except contracts concerning gold) with an original maturity of 14 calendar
days or less are exempt from the application of the methods set out in Annex III,
and will be attributed an exposure value of zero. 
8.                      
Notwithstanding paragraph
5, competent authorities may exempt from the application of the methods set out
in Annex III and attribute an exposure value of zero to over-the-counter (OTC)
contracts cleared by a clearing house where the latter acts as the legal
counterparty and all participants fully collateralise on a daily basis the
exposure they present to the clearing house, thereby providing a protection
covering both the current replacement cost and the potential future exposure. 
The posted collateral
shall either:
(a)     qualify for
a 0% risk weight
(b)     be cash
deposits placed with the lending credit institution
(c)     be
certificates of deposit or similar instruments issued by and lodged with the
latter
The competent
authority shall be satisfied that the risk of a build-up of the clearing
house's exposures beyond the market value of posted collateral is eliminated.
9.                      
The exposure value for
undrawn purchased commitments of revolving purchased corporate receivables
exposures shall be calculated as the committed but undrawn amount multiplied by
75%. 
10.                  
Where an exposure
takes the form of securities sold, posted or lent under a repurchase
transaction or securities or commodities lending or borrowing transaction, the
exposure value shall be the value of the securities or commodities determined
in accordance with Article 74. Where the Financial Collateral Comprehensive
Method as set out under Annex VIII, Part 3 is used, the exposure value shall be
increased by the volatility adjustment appropriate to such securities or
commodities as set out therein.
11.                  
The exposure value for
the following items, shall be calculated as the committed but undrawn amount
multiplied by a conversion factor. 
Credit institutions
shall use the following conversion factors:
(a)     For credit
lines which are uncommitted, that are unconditionally cancellable, or that
effectively provide for automatic cancellation, at any time by the institution
without prior notice, a conversion factor of 0 % shall apply. To apply a
conversion factor of 0% credit institutions shall actively monitor the
financial condition of the obligor, and their internal control systems shall
enable them to immediately detect a deterioration in the credit quality of the
obligor. Undrawn retail credit lines may be considered as unconditionally
cancellable if the terms permit the credit institution to cancel them to the
full extent allowable under consumer protection and related legislation. 
(b)     For
short-term letters of credit arising from the movement of goods, a conversion
factor of 20% shall apply for both the issuing and confirming institutions. 
(c)     For other
credit lines, note issuance facilities (NIFs), and revolving underwriting
facilities (RUFs), a conversion factor of 75% shall apply. 
(d)     Credit
institutions which meet the minimum requirements for the use of own estimates
of conversion factors as specified in Part 4 may use their own estimates of
conversion factors across different product types, subject to approval of the
competent authorities.
12.                  
Where a commitment
refers to the extension of another commitment, the lower of the two conversion
factors associated with the individual commitment shall be used.
13.                  
For all other
off-balance sheet items than mentioned in paragraphs 1 to 11, the exposure
value shall be determined according to Annex II. 

2.                      
Equity exposures

14.                  
The exposure value
shall be the value presented in the financial statements. Admissible equity
exposure measures are the following: 
(a)     For
investments held at fair value with changes in value flowing directly through
income and into own funds, the exposure value is the fair value presented in
the balance sheet. 
(b)     For
investments held at fair value with changes in value not flowing through income
but into a tax-adjusted separate component of equity, the exposure value is the
fair value presented in the balance sheet. 
(c)     For
investments held at cost or at the lower of cost or market, the exposure value
is the cost or market value presented in the balance sheet.

3.                      
Other non
credit-obligation assets

15.                  
The exposure value of
other non credit-obligation assets shall be the value presented in the
financial statements. 
Part 4 -
Minimum Requirements for IRB Approach

1.                      
Rating Systems

1.                      
A ‘rating system’
shall comprise all of the methods, processes, controls, data collection and IT
systems that support the assessment of credit risk, the assignment of exposures
to grades or pools (rating), and the quantification of default and loss
estimates for a certain type of exposure. 
2.                      
If a credit
institution uses multiple rating systems, the rationale for assigning an
obligor or a transaction to a rating system shall be documented and applied in
a manner that appropriately reflects the level of risk. 
3.                      
Assignment criteria
and processes shall be periodically reviewed to determine whether they remain
appropriate for the current portfolio and external conditions. 

1.1.                
Structure of rating
systems

4.                      
Where a credit
institution uses direct estimates of risk parameters these may be seen as the
outputs of grades on a continuous rating scale. 

1.1.1.          
Exposures to
corporates, institutions and central governments and central banks

5.                      
A rating system shall
take into account obligor and transaction risk characteristics. 
6.                      
A rating system shall
have an obligor rating scale which reflects exclusively quantification of the
risk of obligor default. The obligor rating scale shall have a minimum of 7
grades for non-defaulted obligors and one for defaulted obligors. 
7.                      
An ‘obligor grade’
shall mean a risk category within a rating system’s obligor rating scale, to
which obligors are assigned on the basis of a specified and distinct set of
rating criteria, from which estimates of PD are derived. A credit institution
shall document the relationship between obligor grades in terms of the level of
default risk each grade implies and the criteria used to distinguish that level
of default risk. 
8.                      
Credit institutions
with portfolios concentrated in a particular market segment and range of
default risk shall have enough obligor grades within that range to avoid undue
concentrations of obligors in a particular grade. Significant concentrations
within a single grade shall be supported by convincing empirical evidence that
the obligor grade covers a reasonably narrow PD band and that the default risk
posed by all obligors in the grade falls within that band. 
9.                      
To qualify for
recognition by the competent authorities of the use for capital requirement
calculation of own estimates of LGDs a rating system shall incorporate a
distinct facility rating scale which exclusively reflects LGD related
transaction characteristics. 
10.                  
To qualify for
recognition by the competent authorities of the use for capital requirement
calculation of own estimates of conversion factors a rating system shall
incorporate a distinct facility rating scale which exclusively reflects
conversion factor related transaction characteristics. 
11.                  
A ‘facility grade’
shall mean a risk category within a rating system’s facility scale, to which
exposures are assigned on the basis of a specified and distinct set of rating
criteria from which own estimates of either LGDs or conversion factors are
derived. The grade definition shall include both a description of how exposures
are assigned to the grade and of the criteria used to distinguish the level of
risk across grades. 
12.                  
Significant
concentrations within a single facility grade shall be supported by convincing
empirical evidence that the facility grade covers a reasonably narrow LGD or
conversion factor band, respectively, and that the risk posed by all exposures
in the grade falls within that band. 
13.                  
Credit institutions
using the methods set out in Part 1, paragraph 5 for assigning risk
weights for specialised lending exposures are exempt from the requirement to
have an obligor rating scale which reflects exclusively quantification of the
risk of obligor default for these exposures. Notwithstanding paragraph 6, these
institutions shall have for these exposures at least 4 grades for non-defaulted
obligors and at least one grade for defaulted obligors. 

1.1.2.          
Retail exposures

14.                  
Rating systems shall
reflect both obligor and transaction risk, and shall capture all relevant
obligor and transaction characteristics.
15.                  
The level of risk
differentiation shall ensure that the number of exposures in a given grade or
pool is sufficient to allow for meaningful
quantification and validation of the loss characteristics at the grade
or pool level. The distribution of exposures and obligors across grades or
pools shall be such as to avoid excessive concentrations. 
16.                  
Credit institutions
shall demonstrate that the process of assigning exposures to grades or pools
provides for a meaningful differentiation of risk, provides for a grouping of
sufficiently homogenous exposures, and allows for accurate and consistent
estimation of loss characteristics at grade or pool level. For purchased
receivables the grouping shall reflect the seller’s underwriting practices and
the heterogeneity of their customers. 
17.                  
Credit institutions
shall consider the following risk drivers when assigning exposures to grades or
pools: 
Obligor risk
characteristics
(a)     Transaction
risk characteristics, including product or collateral types or both. Credit
institutions shall explicitly address cases where several exposures benefit
from the same collateral
(b)     Delinquency, unless the credit institution
demonstrates to its competent authority that delinquency is not a material
driver of risk for the exposure
(c)     Assignment
to grades or pools
18.                  
A credit institution
shall have specific definitions, processes and criteria for assigning exposures
to grades or pools within a rating system. 
(a)     The grade or
pool definitions and criteria shall be sufficiently detailed to allow those
charged with assigning ratings to consistently assign obligors or facilities
posing similar risk to the same grade or pool. This consistency shall exist
across lines of business, departments and geographic locations. 
(b)     The
documentation of the rating process shall allow third parties to understand the
assignments of exposures to grades or pools, to replicate grade and pool
assignments and to evaluate the appropriateness of the assignments to a grade
or a pool.
(c)     The criteria
shall also be consistent with the credit institution’s internal lending
standards and its policies for handling troubled obligors and facilities.
19.                  
A credit institution
shall take all relevant information into account in assigning obligors and
facilities to grades or pools. Information shall be current and shall enable
the credit institution to forecast the future performance of the exposure. The
less information a credit institution has, the more conservative shall be its
assignments of exposures to obligor and facility grades or pools. If a credit
institution uses an external rating as a primary factor determining an internal
rating assignment, the credit institution shall ensure that it considers other
relevant information. 

1.2.                
Assignment of
exposures
1.2.1.          
Exposures to
corporates, institutions and central governments and central banks

20.                  
Each obligor shall be
assigned to an obligor grade as part of the credit approval process. 
21.                  
For those credit
institutions permitted to use own estimates of LGDs or conversion factors, each
exposure shall also be assigned to a facility grade as part of the credit
approval process.
22.                  
Credit institutions
using the methods set out in Part 1, paragraph 5 for assigning risk
weights for specialised lending exposures shall assign each of these exposures
to a grade in accordance with paragraph 13. 
23.                  
Each separate legal
entity to which the credit institution is exposed shall be separately rated. A
credit institution shall demonstrate to its competent authority that it has
acceptable policies regarding the treatment of individual obligor clients and
groups of connected clients. 
24.                  
Separate exposures to
the same obligor shall be assigned to the same obligor grade, irrespective of
any differences in the nature of each specific transaction. Exceptions, where
separate exposures are allowed to result in multiple grades for the same
obligor are:
(a)     country
transfer risk, this being dependent on whether the exposures are denominated in
local or foreign currency
(b)     where the
treatment of associated guarantees to an exposure may be reflected in an
adjusted assignment to an obligor grade 

1.2.2.          
Retail exposures

25.                  
Each exposure shall be
assigned to a grade or a pool as part of the credit approval process. 

1.2.3.          
Overrides

26.                  
For grade and pool
assignments credit institutions shall document the situations in which human
judgement may override the inputs or outputs of the assignment process and the
personnel that are responsible for approving these overrides. Credit institutions
shall document these overrides and the personnel responsible. Credit
institutions shall analyse the performance of the exposures whose assignments
have been overridden. This
analysis shall include assessment of the performance of exposures whose rating
has been overridden by a particular person, accounting for all the responsible
personnel. 

1.3.                
Integrity of
assignment process
1.3.1.          
Exposures to
corporates, institutions and central governments and central banks

27.                  
Assignments and
periodic reviews of assignments shall be completed or approved by an
independent party that does not directly benefit from decisions to extend the
credit. 
28.                  
Credit institutions
shall update assignments at least annually. High risk obligors and problem
exposures shall be subject to more frequent review. Credit institutions shall
undertake a new assignment if material information on the obligor or exposure
becomes available. 
29.                  
A credit institution
shall have an effective process to obtain and update relevant information on
obligor characteristics that affect PDs, and on transaction characteristics
that affect LGDs and conversion factors. 

1.3.2.          
Retail
exposures

30.                  
A credit institution
shall at least annually update obligor and facility assignments or review the loss characteristics and
delinquency status of each identified risk pool whichever applicable. A credit institution shall also at least annually review
in a representative sample the status of individual exposures within each pool
as a means of ensuring that exposures continue to be assigned to the correct
pool. 

1.4.                
Use of models

31.                  
If a credit
institution uses statistical models and other mechanical methods to assign
exposures to obligors or facilities grades or pools, then: 
(a)     The credit
institution shall demonstrate to its competent authority that the model has
good predictive power and that capital requirements are not distorted as a
result of its use. The input variables shall form a reasonable and effective
basis for the resulting predictions. The model shall not have material biases.
(b)     The credit
institution shall have in place a process for vetting data inputs into the
model which includes an assessment of the accuracy, completeness and
appropriateness of the data.
(c)     The credit
institution shall demonstrate that the data used to build the model is
representative of the population of the credit institution’s actual obligors or
exposures.
(d)     The credit
institution shall have a regular cycle of model validation that includes
monitoring of model performance and stability; review of model specification;
and testing of model outputs against outcomes.
(e)     The credit
institution shall complement the statistical model by human judgement and human
oversight to review model-based assignments and to ensure that the models are
used appropriately. Review procedures shall aim at finding and limiting errors
associated with model weaknesses. Human judgements shall take into account all
relevant information not considered by the model. The credit institution shall
document how human judgement and model results are to be combined.

1.5.                
Documentation of
rating systems

32.                  
The credit
institutions shall document the design and operational details of its rating
systems. The documentation shall evidence compliance with the minimum
requirements in this Part, and address topics including portfolio
differentiation, rating criteria, responsibilities of parties that rate
obligors and exposures, frequency of assignment reviews, and management
oversight of the rating process. 
33.                  
The credit institution
shall document the rationale for and analysis supporting its choice of rating
criteria. A credit institution shall document all major changes in the risk
rating process, and such documentation shall support identification of changes
made to the risk rating process subsequent to the last review by the competent
authorities. The organisation of rating assignment including the rating
assignment process and the internal control structure shall also be documented.

34.                  
The credit
institutions shall document the specific definitions of default and loss used
internally and demonstrate consistency with the definitions set out in this
Directive. 
35.                  
If the credit
institution employs statistical models in the rating process, the credit
institution shall document their methodologies. This material shall: 
(a)     provide a
detailed outline of the theory, assumptions and/or mathematical and empirical
basis of the assignment of estimates to grades, individual obligors, exposures,
or pools, and the data source(s) used to estimate the model;
(b)     establish a
rigorous statistical process (including out-of-time and out-of-sample
performance tests) for validating the model; and
(c)     indicate any
circumstances under which the model does not work effectively
36.                  
Use of a model
obtained from a third-party vendor that claims proprietary technology is not a
justification for exemption from documentation or any other of the requirements
for rating systems. The burden is on the credit institution to satisfy
competent authorities. 

1.6.                
Data maintenance

37.                  
Credit institutions
shall collect and store data on aspects of their internal ratings as required
under Articles 145 to 149.

1.6.1.          
Exposures to
corporates, institutions and central governments and central banks

38.                  
Credit institutions
shall collect and store: 
(a)     Complete
rating histories on obligors and recognised guarantors, 
(b)     The dates
the ratings were assigned, 
(c)     The key data
and methodology used to derive the rating, 
(d)     The person
responsible for the rating assignment, 
(e)     The identity
of obligors and exposures that defaulted, 
(f)     The date and
circumstances of such defaults, 
(g)     Data on the
PDs and realised default rates associated with rating grades and ratings
migration.
(h)     Credit
institutions not using own estimates of LGDs and/or conversion factors shall
collect and store data on comparisons of realised LGDs to the values as set out
in Part 2, paragraph 8 and realised conversion factors to the values as
set out in Part 3, paragraph 11. 
39.                  
Credit institutions
using own estimates of LGDs and/or conversion factors shall collect and store:
(a)     Complete
histories of data on the facility ratings and LGD and conversion factor
estimates associated with each rating scale, 
(b)     The dates
the ratings were assigned and the estimates were done,
(c)     The key data
and methodology used to derive the facility ratings and LGD and conversion
factor estimates,
(d)     The person
who assigned the facility rating and the person who provided LGD and conversion
factor estimates.
(e)     Data on the
estimated and realised LGDs and conversion factors associated with each defaulted
exposure. 
(f)     Data on the
LGD of the exposure before and after evaluation of the effects of a guarantee/
or credit derivative, for those credit institutions that reflect the credit
risk mitigating effects of guarantees or credit derivatives through LGD.
(g)     Data on the
components of loss for each defaulted exposure. 

1.6.2.          
Retail exposures

40.                  
Credit institutions
shall collect and store: 
(a)     Data used in
the process of allocating exposures to grades or pools,
(b)     Data on the
estimated PDs, LGDs and conversion factors associated with grades or pools of
exposures,
(c)     The identity
of obligors and exposures that defaulted,
(d)     For
defaulted exposures, data on the grades or pools to which the exposure was
assigned over the year prior to default and the realised outcomes on LGD and
conversion factor.
(e)     Data on loss
rates and margin income for qualifying revolving retail exposures. 

1.7.                
Stress tests used in
assessment of capital adequacy 

41.                  
A credit institution
shall have in place sound stress testing processes for use in the assessment of
its capital adequacy. Stress testing shall involve identifying possible events
or future changes in economic conditions that could have unfavourable effects
on a credit institution’s credit exposures and assessment of the credit institution’s
ability to withstand such changes. 
42.                  
A credit institution
shall regularly perform a credit risk stress test to assess the effect of
certain specific conditions on its total capital requirements for credit risk.
The test to be employed shall be one chosen by the credit institution, subject
to supervisory review. The test to be employed shall be meaningful and
reasonably conservative, considering at least the effect of mild recession
scenarios. A credit institution shall assess
migration in its ratings under the stress test scenarios. Stressed portfolios shall contain the vast
majority of a credit institution's total exposure. 

2.                      
Risk Quantification

43.                  
In determining the
risk parameters to be associated with rating grades or pools, credit
institutions shall apply the following requirements: 

2.1.                
Definition of default

44.                  
A ‘default’ shall be
considered to have occurred with regard to a particular obligor when either or
both of the two following events has taken place: 
(a)     The credit
institution considers that the obligor is unlikely to pay its credit
obligations to the credit institution, the parent undertaking or any of its
subsidiaries in full, without recourse by the credit institution to actions
such as realising security (if held).
(b)     The obligor
is past due more than 90 days on any material credit obligation to the credit
institution, the parent undertaking or any of its subsidiaries. 
Days past due
commence once an obligor has breached an advised limit, has been advised a
limit smaller than current outstandings, or has drawn credit without
authorisation.
An advised limit
shall mean a limit which has been brought to the knowledge of the obligor.
In the case of retail
exposures and exposures to public sector entities (PSE) the competent
authorities shall set a number of days past due as specified in paragraph 48. 
In the case of
corporate exposures the competent authorities may set a number of days past due
as specified in Article 154, paragraph 4.
In the case of retail
exposures credit institutions may apply this definition at a facility level. 
45.                  
Elements to be taken
as indications of unlikeliness to pay shall include: 
(a)     The credit
institution puts the credit obligation on non-accrued status.
(b)     The credit
institution makes a value adjustment resulting from a significant perceived
decline in credit quality subsequent to the credit institution taking on the
exposure. 
(c)     The credit
institution sells the credit obligation at a material credit-related economic
loss.
(d)     The credit
institution consents to a distressed restructuring of the credit obligation
where this is likely to result in a diminished financial obligation caused by
the material forgiveness, or postponement, of principal, interest or (where
relevant) fees. This includes in the case of equity exposures assessed under a
PD/LGD Approach, distressed restructuring of the equity itself. 
(e)     The credit
institution has filed for the obligor’s bankruptcy or a similar order in
respect of an obligor’s credit obligation to the credit institution, the parent
undertaking or any of its subsidiaries.
(f)     The obligor
has sought or has been placed in bankruptcy or similar protection where this
would avoid or delay repayment of a credit obligation to the credit
institution, the parent undertaking or any of its subsidiaries.
46.                  
Credit institutions
that use external data that is not itself consistent with the definition of
default, shall demonstrate to their competent authorities that appropriate
adjustments have been made to achieve broad equivalence with the definition of
default. 
47.                  
If the credit
institution considers that a previously defaulted exposure is such that no
trigger of default continues to apply, the credit institution shall rate the
obligor or facility as they would for a non-defaulted exposure. Should the definition
of default subsequently be triggered, another default would be deemed to have
occurred. 
48.                  
For Retail and PSE
exposures, the competent authorities of each Member States shall set the exact
number of days past due that all credit institutions in its jurisdiction shall
abide by under the definition of default set out in paragraph 44, for exposures
to such counterparts situated within this Member State. The specific number
shall fall within 90-180 days and may differ across product lines. For
exposures to such counterparts situated in the territories of other Member
States, the competent authorities shall set a number of days past due which is
not higher than the number set by the competent authority of the respective Member State. 

2.2.                
Overall requirements for
estimation

49.                  
A credit institution’s
own estimates of the risk parameters PD, LGD, conversion factor and EL shall
incorporate all relevant data, information and methods. The estimates shall be
derived using both historical experience and empirical evidence, and not based
purely on judgemental considerations. The estimates shall be plausible and
intuitive and shall be based on the material drivers of the respective risk
parameters. The less data a credit institution has, the more conservative it
shall be in its estimation.
50.                  
The credit institution
shall be able to provide a breakdown of its loss experience in terms of default
frequency, LGD, conversion factor, or loss where EL estimates are used, by the
factors it sees as the drivers of the respective risk parameters. The credit
institution shall demonstrate that its estimates are representative of long run
experience. 
51.                  
Any changes in lending
practice or the process for pursuing recoveries over the observation periods
referred to in paragraphs 66, 71, 81, 85, 92 and 94 shall be taken into
account. A credit institution’s estimates shall reflect the implications of
technical advances and new data and other information, as it becomes available.
Credit institutions shall review their estimates when new information comes to
light but at least on an annual basis. 
52.                  
The population of
exposures represented in the data used for estimation, the lending standards
used when the data was generated and other relevant characteristics shall be
comparable with those of the credit institution’s exposures and standards. The
credit institution shall also demonstrate that the economic or market
conditions that underlie the data is relevant to current and foreseeable
conditions. The number of exposures in the sample and the data period used for
quantification shall be sufficient to provide the credit institution with
confidence in the accuracy and robustness of its estimates.
53.                  
For purchased
receivables the estimates shall reflect all relevant information available to
the purchasing credit institution regarding the quality of the underlying
receivables, including data for similar pools provided by the seller, by the
purchasing credit institution, or by external sources. The purchasing credit
institution shall evaluate any data relied upon from the seller. 
54.                  
A credit institution
shall add to its estimates a margin of conservatism that is related to the
expected range of estimation errors. Where methods and data are less
satisfactory and the expected range of errors is larger, the margin of conservatism
shall be larger. 
55.                  
If credit institutions
use different estimates for the calculation of risk weights and internal
purposes it shall be documented and their reasonableness shall be demonstrated
to the competent authority. 
56.                  
If credit institutions
can demonstrate to its competent authorities that for data that have been
collected prior to the date of implementation of this Directive appropriate
adjustments have been made to achieve broad equivalence with the definitions of
default or loss, competent authorities may allow the credit institutions some
flexibility in the application of the required standards for data. 
57.                  
If a credit
institution uses data that is pooled across credit institutions it shall
demonstrate that: 
(a)     The rating
systems and criteria of other credit institutions in the pool are similar with
its own;
(b)     The pool
shall be representative for the portfolio for which the pooled data is used;
(c)     The pooled
data is used consistently over time by the credit institution for its permanent
estimates.
58.                  
If a credit
institution uses data that is pooled across credit institutions, it shall
remain responsible for the integrity of its rating systems. The credit
institution shall demonstrate to the competent authority that it has sufficient
in-house understanding of its rating systems, including effective ability to
monitor and audit the rating process. 

2.2.1.          
Requirements specific
to PD estimation

Exposures to
corporates, institutions and central governments and central banks
59.                  
Credit institutions
shall estimate PDs by obligor grade from long run averages of one-year default
rates. 
60.                  
For purchased
corporate receivables credit institutions may estimate ELs by obligor grade
from long run averages of one-year realised default rates. 
61.                  
If a credit
institution derives long run average estimates of PDs and LGDs for purchased
corporate receivables from an estimate of EL, and an appropriate estimate of PD
or LGD, the process for estimating total losses shall meet the overall
standards for estimation of PD and LGD set out in this Part, and the outcome
shall be consistent with the concept of LGD as set out in paragraph 73. 
62.                  
Credit institutions
shall use PD estimation techniques only with supporting analysis. Credit
institutions shall recognise the importance of judgmental considerations in
combining results of techniques and in making adjustments for limitations of
techniques and information. 
63.                  
To the extent that a
credit institution uses data on internal default experience for the estimation
of PDs it shall demonstrate in its analysis that the estimates are reflective
of underwriting standards and of any differences in the rating system that
generated the data and the current rating system. Where underwriting standards
or rating systems have changed, the credit institution shall add a greater
margin of conservatism in its estimate of PD 
64.                  
To the extent that a
credit institution associates or maps its internal grades to the scale used by
an ECAI or similar organisations and then attributes the default rate observed
for the external organisation’s grades to the credit institution’s grades,
mappings shall be based on a comparison of internal rating criteria to the
criteria used by the external organisation and on a comparison of the internal
and external ratings of any common obligors. Biases or inconsistencies in the
mapping approach or underlying data shall be avoided. The external
organisation’s criteria underlying the data used for quantification shall be
oriented to default risk only and not reflect transaction characteristics. The
credit institution’s analysis shall include a comparison of the default
definitions used, subject to the requirements in paragraphs 44 to 48. The
credit institution shall document the basis for the mapping. 
65.                  
To the extent that a
credit institution uses statistical default prediction models it is allowed to
estimate PDs as the simple average of default-probability estimates for
individual obligors in a given grade. The credit institution’s use of default
probability models for this purpose shall meet the standards specified in paragraph
31. 
66.                  
Irrespective
of whether a credit institution is using external, internal, or pooled data
sources, or a combination of the three, for its PD estimation, the length of the
underlying historical observation period used shall be at least five years for
at least one source. If the available observation period spans a longer period
for any source, and this data is relevant, this longer period shall be used.
This paragraph also applies to the PD/LGD Approach to equity. 
Retail exposures
67.                  
Credit institutions
shall estimate PDs by obligor grade or pool from long run averages of one-year
default rates. 
68.                  
Notwithstanding paragraph
67, PD estimates may also be derived from realised losses and appropriate
estimates of LGDs. 
69.                  
Credit institutions
shall regard internal data for assigning exposures to grades or pools as the
primary source of information for estimating loss characteristics. Credit
institutions are permitted to use external data (including pooled data) or
statistical models for quantification provided a strong link can be
demonstrated between:
(a)     the credit
institution’s process of assigning exposures to grades or pools and the process
used by the external data source
(b)     the credit
institution’s internal risk profile and the composition of the external data. 
For purchased retail
receivables credit institutions may use external and internal reference data.
Credit institutions shall use all relevant data sources as points of
comparison. 
70.                  
If a credit
institution derives long run average estimates of PD and LGD for retail from an
estimate of total losses, and an appropriate estimate of PD or LGD, the process
for estimating total losses shall meet the overall standards for estimation of
PD and LGD set out in this Part, and the outcome shall be consistent with the
concept of LGD as set out in paragraph 73. 
71.                  
Irrespective of
whether a credit institution is using external, internal, pooled data sources
or a combination of the three, for their estimation of loss characteristics,
the length of the underlying historical observation period used shall be at
least five years for at least one source. If the available observation spans a
longer period for any source, and these data are relevant, this longer period
shall be used. A credit institution need not give equal importance to historic
data if it can convince its competent authority that more recent data is a better
predictor of loss rates.
72.                  
Credit institutions
shall identify and analyse expected changes of risk parameters over the life of
credit exposures (seasoning effects).

2.2.2.          
Requirements specific
to own-LGD estimates

73.                  
Credit institutions
shall estimate LGDs by facility grade or pool on the basis of the average
realised LGDs by facility grade or pool using all observed defaults within the
data sources (default weighted average). 
74.                  
Credit institutions
shall use LGD estimates that are appropriate for an economic downturn if those
are more conservative than the long-run average. To the extent a rating system
is expected to deliver constant realised LGDs by grade or pool over time,
credit institutions shall make adjustments to their estimates of risk
parameters by grade or pool to limit the capital impact of an economic
downturn. 
75.                  
A credit institution
shall consider the extent of any dependence between the risk of the obligor
with that of the collateral or collateral provider. Cases where there is a
significant degree of dependence shall be addressed in a conservative manner. 
76.                  
Currency mismatches
between the underlying obligation and the collateral shall be treated
conservatively in the credit institution’s assessment of LGD. 
77.                  
To the extent, that
LGD estimates take into account the existence of collateral, these estimates
shall not solely be based on the collateral’s estimated market value. LGD estimates
shall take into account the effect of the potential inability of credit
institutions to expeditiously gain control of their collateral and liquidate
it. 
78.                  
To the extent, that a
credit institution does not meet the minimum requirements for collateral set
out in Annex VIII any amount expected to be recovered from such collateral
shall not be taken into account in its LGD estimates. 
79.                  
For the specific case
of exposures already in default, the credit institution shall use its best
estimate of expected loss for each exposure given current economic
circumstances and exposure status. 
80.                  
To the extent that
unpaid late fees have been capitalised in the credit institution’s income
statement, they shall be added to the credit institution’s measure of exposure
and loss. 
Exposures to
corporates, institutions and central governments and central banks
81.                  
Estimates of LGD shall
be based on data over a minimum of seven years for at least one data source. If
the available observation period spans a longer period for any source, and the
data is relevant, this longer period shall be used. 
Retail exposures
82.                  
Notwithstanding
paragraph 73, LGD estimates may be derived from realised losses and appropriate
estimates of PDs. 
83.                  
Notwithstanding
paragraph 88, credit institutions may reflect future drawings either in its
conversion factor or in its LGD estimates. 
84.                  
For purchased retail
receivables credit institutions may use external and internal reference data to
estimate LGDs.
85.                  
Estimates of LGD shall
be based on data over a minimum of five years. Notwithstanding paragraph 73, a
credit institution needs not give equal importance to historic data if it can
demonstrate to its competent authority that more recent data is a better
predictor of loss rates. 

2.2.3.          
Requirements specific
to own-conversion factor estimates

86.                  
Credit institutions
shall estimate conversion factors by facility grade or pool on the basis of the
average realised conversion factors by facility grade or pool using all
observed defaults within the data sources (default weighted average). 
87.                  
Credit institutions
shall use conversion factor estimates that are appropriate for an economic
downturn if those are more conservative than the long-run average. To the
extent a rating system is expected to deliver constant realised conversion
factors by grade or pool over time, credit institutions shall make adjustments
to their estimates of risk parameters by grade or pool to limit the capital
impact of an economic downturn. 
88.                  
Credit institutions
estimates of conversion factor shall reflect the possibility of additional
drawings by the obligor up to and after the time a default event is triggered. 
The conversion factor
estimate shall incorporate a larger margin of conservatism where a stronger
positive correlation can reasonably be expected between the default frequency
and the magnitude of conversion factor. 
89.                  
In arriving at
estimates of conversion factors credit institutions shall consider their
specific policies and strategies adopted in respect of account monitoring and
payment processing. Credit institutions shall also consider their ability and
willingness to prevent further drawings in circumstances short of payment
default, such as covenant violations or other technical default events. 
90.                  
Credit institutions
shall have adequate systems and procedures in place to monitor facility
amounts, current outstandings against committed lines and changes in
outstandings per obligor and per grade. The credit institution shall be able to
monitor outstanding balances on a daily basis. 
91.                  
If credit institutions
use different estimates of conversion factors for the calculation of risk
weighted exposure amounts and internal purposes it shall be documented and
their reasonableness shall be demonstrated to the competent authority. 
Exposures to
corporates, institutions and central governments and central banks
92.                  
Estimates of
conversion factor shall be based on data over a minimum of seven years for at
least one data source. If the available observation period spans a longer
period for any source, and the data is relevant, this longer period shall be
used.
Retail exposures
93.                  
Notwithstanding paragraph
88, credit institutions may reflect future drawings either in their conversion
factors or in their LGD estimates. 
94.                  
Estimates of
conversion factors shall be based on data over a minimum of five years.
Notwithstanding paragraph 86, a credit institution need not give equal
importance to historic data if it can demonstrate to its competent authority
that more recent data is a better predictor of draw downs. 

2.2.4.          
Minimum requirements
for assessing the effect of guarantees and credit derivatives

Exposures to
corporates, institutions and central governments and central banks where own
estimates of LGD are used and retail exposures.
95.                  
The requirements in paragraphs 96 to 103 shall not apply for guarantees
provided by institutions and central governments and central banks if the
credit institution has received approval to apply the rules of Articles 78 to 83
for exposures to such entities. In this case the requirements of Articles 90 to
93 shall apply. 
96.                  
For retail guarantees,
these requirements also apply to the assignment of exposures to grades or
pools, and the estimation of PD. 
Eligible guarantors
and guarantees
97.                  
Credit institutions
shall have clearly specified criteria for the types of guarantors they
recognise for the calculation of risk weighted exposures. 
98.                  
For recognised
guarantors the same rules as for obligors as set out in paragraphs 18 to
30 shall apply.
99.                  
The guarantee shall be
evidenced in writing, non-cancellable on the part of the guarantor, in force
until the obligation is satisfied in full (to the extent of the amount and
tenor of the guarantee) and legally enforceable against the guarantor in a
jurisdiction where the guarantor has assets to attach and enforce a judgement.
Guarantees prescribing conditions under which the guarantor may not be obliged
to perform (conditional guarantees) may be recognised subject to approval of
competent authorities. The credit institution shall demonstrate that the
assignment criteria adequately address any potential reduction in the risk
mitigation effect. 
Adjustment criteria
100.              
A credit institution
shall have clearly specified criteria for adjusting grades, pools or LGD
estimates, and in the case of retail and eligible purchased receivables, the
process of allocating exposures to grades or pools, to reflect the impact of
guarantees for the calculation of risk weighted assets. These criteria shall
comply with the minimum requirements set out in paragraphs 18 to 30. 
101.              
The criteria shall be
plausible and intuitive. They shall address the guarantor’s ability and
willingness to perform under the guarantee, the likely timing of any payments
from the guarantor, the degree to which the guarantor’s ability to perform
under the guarantee is correlated with the obligor’s ability to repay, and the
extent to which residual risk to the obligor remains. 
Credit derivatives
102.              
The minimum
requirements for guarantees in this Part shall apply also for single-name
credit derivatives. In relation to a
mismatch between the underlying obligation and the reference obligation of the
credit derivative or the obligation used for determining whether a credit event
has occurred the requirements set out under Annex VIII Part 2, paragraph 20 shall
apply. For retail exposures and eligible purchased receivables, this paragraph applies
to the process of allocating exposures to grades or pools. 
103.              
The criteria shall
address the payout structure of the credit derivative and conservatively assess
the impact this has on the level and timing of recoveries. The credit
institution shall consider the extent to which other forms of residual risk
remain. 

2.2.5.          
Minimum requirements
for purchased receivables

Legal certainty
104.              
The structure of the
facility shall ensure that under all foreseeable circumstances the credit institution
has effective ownership and control of all cash remittances from the
receivables. When the obligor makes payments directly to a seller or servicer
the credit institution shall verify regularly that payments are forwarded
completely and within the contractually agreed terms. Servicer shall mean an
entity that manages a pool of purchased receivables or the underlying credit
exposures on a day-to-day basis. Credit institutions shall have procedures to
ensure that ownership over the receivables and cash receipts is protected
against bankruptcy stays or legal challenges that could materially delay the
lender’s ability to liquidate or assign the receivables or retain control over
cash receipts. 
Effectiveness of
monitoring systems
105.              
The credit institution
shall monitor both the quality of the purchased receivables and the financial
condition of the seller and servicer. In particular: 
(a)     The credit
institution shall assess the correlation among the quality of the purchased
receivables and the financial condition of both the seller and servicer, and
have in place internal policies and procedures that provide adequate safeguards
to protect against such contingencies, including the assignment of an internal
risk rating for each seller and servicer. 
(b)     The credit
institution shall have clear and effective policies and procedures for
determining seller and servicer eligibility. The credit institution or its
agent shall conduct periodic reviews of sellers and servicers in order to
verify the accuracy of reports from the seller or servicer, detect fraud or
operational weaknesses, and verify the quality of the seller’s credit policies
and servicer’s collection policies and procedures. The findings of these
reviews shall be documented. 
(c)     The credit
institution shall assess the characteristics of the purchased receivables
pools, including over-advances; history of the seller’s arrears, bad debts, and
bad debt allowances; payment terms, and potential contra accounts. 
(d)     The credit
institution shall have effective policies and procedures for monitoring on an
aggregate basis single-obligor concentrations both within and across purchased
receivables pools. 
(e)     The credit
institution shall ensure that it receives from the servicer timely and
sufficiently detailed reports of receivables ageings and dilutions to ensure
compliance with the credit institution’s eligibility criteria and advancing
policies governing purchased receivables, and provide an effective means with
which to monitor and confirm the seller’s terms of sale and dilution. 
Effectiveness of
work-out systems
106.              
The credit institution
shall have systems and procedures for detecting deteriorations in the seller’s
financial condition and purchased receivables quality at an early stage, and
for addressing emerging problems pro-actively. In particular the credit
institution shall have clear and effective policies, procedures, and
information systems to monitor covenant violations, and clear and effective
policies and procedures for initiating legal actions and dealing with problem
purchased receivables. 
Effectiveness of
systems for controlling collateral, credit availability, and cash
107.              
The credit institution
shall have clear and effective policies and procedures governing the control of
purchased receivables, credit, and cash. In particular, written internal
policies shall specify all material elements of the receivables purchase
programme, including the advancing rates, eligible collateral, necessary
documentation, concentration limits, and the way cash receipts are to be
handled. These elements shall take appropriate account of all relevant and
material factors, including the seller’s and servicer’s financial condition,
risk concentrations, and trends in the quality of the purchased receivables and
the seller’s customer base, and internal systems shall ensure that funds are
advanced only against specified supporting collateral and documentation.
Compliance with the
credit institution’s internal policies and procedures
108.              
The credit institution
shall have an effective internal process for assessing compliance with all
internal policies and procedures. The process shall include regular audits of
all critical phases of the credit institution’s receivables purchase programme,
verification of the separation of duties between firstly the assessment of the
seller and servicer and the assessment of the obligor and secondly between the
assessment of the seller and servicer and the field audit of the seller and
servicer , and evaluations of back office operations, with particular focus on
qualifications, experience, staffing levels, and supporting automation systems.


3.                      
Validation of Internal
Estimates

109.              
Credit institutions
shall have robust systems in place to validate the accuracy and consistency of
rating systems, processes, and the estimation of all relevant risk parameters.
A credit institution shall demonstrate to its competent authority that the
internal validation process enables it to assess the performance of internal
rating and risk estimation systems consistently and meaningfully. 
110.              
Credit institutions
shall regularly compare realised default rates with estimated PDs for each
grade and where realised default rates are outside the expected range for that
grade credit institutions shall specifically analyse the reasons for the deviation.
Credit institutions using own estimates of LGDs or conversion factors shall
also perform analogous analysis for these estimates. Such comparisons shall
make use of historical data that cover as long a period as possible. The credit
institution shall document the methods and data used in such comparisons. This
analysis and documentation shall be updated at least annually. 
111.              
Credit institutions
shall also use other quantitative validation tools and comparisons with
relevant external data sources. The analysis shall be based on data that are
appropriate to the portfolio, are updated regularly, and cover a relevant
observation period. Credit institutions’ internal assessments of the
performance of their rating systems shall be based on as long a period as
possible. 
112.              
The methods and data
used for quantitative validation shall be consistent through time. Changes in
estimation and validation methods and data (both data sources and periods
covered) shall be documented. 
113.              
Credit institutions
shall have sound internal standards for situations where deviations in realised
PDs, LGDs, conversion factors and total losses where EL is used from
expectations become significant enough to call the validity of the estimates
into question. These standards shall take account of business cycles and
similar systematic variability in default experience. Where realised values
continue to be higher than expected values, credit institutions shall revise
estimates upward to reflect their default and loss experience. 

4.                      
Calculation of risk
weighted exposure amounts for equity exposures under the Internal Models
Approach
4.1.                
Capital requirement
and risk quantification

114.              
Credit institutions
shall meet for the purpose of calculating capital requirements the following
standards: 
(a)     The estimate
of potential loss shall be robust to adverse market movements relevant to the
long-term risk profile of the credit institution’s specific holdings. The data
used to represent return distributions shall reflect the longest sample period
for which data is available and meaningful in representing the risk profile of
the credit institution’s specific equity exposures. The data used shall be
sufficient to provide conservative, statistically reliable and robust loss
estimates that are not based purely on subjective or judgmental considerations.
Credit institutions shall demonstrate to competent authorities that the shock
employed provides a conservative estimate of potential losses over a relevant
long-term market or business cycle. The credit institution shall combine
empirical analysis of available data with adjustments based on a variety of
factors in order to attain model outputs that achieve appropriate realism and
conservatism. In constructing Value at Risk (VaR) models estimating potential
quarterly losses, credit institutions may use quarterly data or convert shorter
horizon period data to a quarterly equivalent using an analytically appropriate
method supported by empirical evidence and through a well-developed and
documented thought process and analysis. Such an approach shall be applied
conservatively and consistently over time. Where only limited relevant data is
available the credit institution shall add appropriate margins of conservatism.

(b)     The models
used shall be able to capture adequately all of the material risks embodied in
equity returns including both the general market risk and specific risk
exposure of the credit institution’s equity portfolio. The internal models
shall adequately explain historical price variation, capture both the magnitude
and changes in the composition of potential concentrations, and be robust to
adverse market environments. The population of risk exposures represented in
the data used for estimation shall be closely matched to or at least comparable
with those of the credit institution’s equity exposures. 
(c)     The internal
model shall be appropriate for the risk profile and complexity of a credit
institution's equity portfolio. Where a credit institution has material
holdings with values that are highly non-linear in nature the internal models
shall be designed to capture appropriately the risks associated with such
instruments. 
(d)     Mapping of
individual positions to proxies, market indices, and risk factors shall be
plausible, intuitive, and conceptually sound. 
(e)     Credit
institutions shall demonstrate through empirical analyses the appropriateness
of risk factors, including their ability to cover both general and specific
risk. 
(f)     The
estimates of the return volatility of equity exposures shall incorporate
relevant and available data, information, and methods. Independently reviewed
internal data or data from external sources (including pooled data) shall be
used. 
(g)     A rigorous
and comprehensive stress-testing programme shall be in place. 

4.2.                
Risk management
process and controls

115.              
With regard to the
development and use of internal models for capital requirement purposes, credit
institutions shall establish policies, procedures, and controls to ensure the
integrity of the model and modelling process. These policies, procedures, and
controls shall include the following: 
(a)     Full
integration of the internal model into the overall management information
systems of the credit institution and in the management of the banking book
equity portfolio. Internal models shall be fully integrated into the credit
institution’s risk management infrastructure if they are particularly used in:
measuring and assessing equity portfolio performance (including the
risk-adjusted performance); allocating economic capital to equity exposures and
evaluating overall capital adequacy and the investment management process.
(b)     Established
management systems, procedures, and control functions for ensuring the periodic
and independent review of all elements of the internal modelling process,
including approval of model revisions, vetting of model inputs, and review of
model results, such as direct verification of risk computations. These reviews
shall assess the accuracy, completeness, and appropriateness of model inputs
and results and focus on both finding and limiting potential errors associated
with known weaknesses and identifying unknown model weaknesses. Such reviews
may be conducted by an internal independent unit, or by an independent external
third party. 
(c)     Adequate
systems and procedures for monitoring investment limits and the risk exposures
of equity exposures. 
(d)     The units
responsible for the design and application of the model shall be functionally
independent from the units responsible for managing individual investments. 
(e)     Parties responsible
for any aspect of the modelling process shall be adequately qualified.
Management shall allocate sufficient skilled and competent resources to the
modelling function.

4.3.                
Validation and
documentation 

116.              
Credit institutions
shall have a robust system in place to validate the accuracy and consistency of
their internal models and modelling processes. All material elements of the
internal models and the modelling process and validation shall be documented. 
117.              
Credit institutions
shall use the internal validation process to assess the performance of its
internal models and processes in a consistent and meaningful way. 
118.              
The methods and data
used for quantitative validation shall be consistent through time. Changes in
estimation and validation methods and data (both data sources and periods
covered) shall be documented. 
119.              
Credit institutions
shall regularly compare actual equity returns (computed using realised and
unrealised gains and losses) with modelled estimates. Such comparisons shall
make use of historical data that is over as long a period as possible. The
credit institution shall document the methods and data used in such
comparisons. This analysis and documentation shall be updated at least
annually. 
120.              
Credit institutions
shall make use of other quantitative validation tools and comparisons with
external data sources. The analysis shall be based on data that are appropriate
to the portfolio, are updated regularly, and cover a relevant observation
period. Credit institutions’ internal assessments of the performance of their
models shall be based on as long a period as possible. 
121.              
Credit institutions
shall have sound internal standards for situations where comparison of actual
equity returns with the models estimates calls the validity of the estimates or
of the models as such into question. These standards shall take account of
business cycles and similar systematic variability in equity returns. All
adjustments made to internal models in response to model reviews shall be
documented and consistent with the credit institution’s model review standards.

122.              
The internal model and
the modelling process shall be documented, including the responsibilities of
parties involved in the modelling, and the model approval and model review
processes. 

5.                      
Corporate Governance
and Oversight
5.1.                
Corporate Governance

123.              
All material aspects
of the rating and estimation processes shall be approved by the credit
institution’s board of directors or a designated committee thereof and senior
management. These parties shall possess a general understanding of the credit
institution’s rating systems and detailed comprehension of its associated
management reports.
124.              
Senior management
shall provide notice to the board of directors or a designated committee
thereof of material changes or exceptions from established policies that will
materially impact the operations of the credit institution’s rating systems. 
125.              
Senior management
shall have a good understanding of the rating systems designs and operations.
Senior management shall ensure, on an ongoing basis that the rating systems are
operating properly. Senior management shall be regularly informed by the credit
risk control units about the performance of the rating process, areas needing
improvement, and the status of efforts to improve previously identified
deficiencies. 
126.              
Internal ratings-based
analysis of the credit institution's credit risk profile shall be an essential
part of the management reporting to these parties. Reporting shall include at
least risk profile by grade, migration across grades, estimation of the
relevant parameters per grade, and comparison of realised default rates and own
estimates of LGDs and conversion factors against expectations and stress-test
results. Reporting frequencies shall depend on the significance and type of
information and the level of the recipient. 

5.2.                
Credit risk control

127.              
The credit risk
control unit shall be independent from the personal and management functions
responsible for originating or renewing exposures and that reports directly to
senior management. The unit shall be responsible for the design or selection,
implementation, oversight and performance of the rating systems. It shall
regularly produce and analyse reports on the output of the rating systems. 
128.              
The areas of
responsibility for the credit risk control unit(s) shall include: 
(a)     Testing and
monitoring grades and pools;
(b)     Production
and analysis of summary reports from the credit institution’s rating systems; 
(c)     Implementing
procedures to verify that grade and pool definitions are consistently applied
across departments and geographic areas; 
(d)     Reviewing
and documenting any changes to the rating process, including the reasons for
the changes;
(e)     Reviewing
the rating criteria to evaluate if they remain predictive of risk. Changes to
the rating process, criteria or individual rating parameters shall be
documented and retained;
(f)     Active
participation in the design or selection, implementation and validation of
models used in the rating process; 
(g)     Oversight
and supervision of models used in the rating process; 
(h)     Ongoing
review and alterations to models used in the rating process. 
129.              
Notwithstanding paragraph
128, credit institutions using pooled data according to paragraphs 57 and 58
may outsource the following tasks: 
(a)     Production
of information relevant to testing and monitoring grades and pools;
(b)     Production
of summary reports from the credit institution’s rating systems;
(c)     Production
of information relevant to review of the rating criteria to evaluate if they
remain predictive of risk;
(d)     Documentation
of changes to the rating process, criteria or individual rating parameters;
(e)     Production
of information relevant to ongoing review and alterations to models used in the
rating process.
Credit institutions
making use of this paragraph shall ensure that the competent authorities have
access to all relevant information from the third party that is necessary for
examining compliance with the minimum requirements and that the competent
authorities may perform on-site examinations to the same extend as within the
credit institution.

5.3.                
Internal Audit

130.              
Internal audit shall
review at least annually the credit institution’s rating systems and its
operations, including the operations of the credit function and the estimation
of PDs, LGDs, ELs and conversion factors. Areas of review shall include
adherence to all applicable minimum requirements.
Annex VIII
– Credit risk mitigation
Part 1- Eligibility
1.                      
This Part sets out
eligible forms of credit risk mitigation for the purposes of Article 92.
2.                      
For the purposes of
this Annex:
‘Secured lending
transaction’ shall mean any transaction giving rise to an exposure secured by
collateral which does not include a provision conferring upon the credit
institution the right to receive margin frequently.
‘Capital market-driven
transaction’ shall mean any transaction giving rise to an exposure secured by
collateral which includes a provision conferring upon the credit institution
the right to receive margin frequently. 

1.                      
Funded credit
protection
1.1.                
On-balance sheet
netting

3.                      
The on-balance sheet
netting of mutual claims between the credit institution and its counterparty
may be recognised. 
4.                      
Without prejudice to paragraph
5, eligibility is limited to reciprocal cash balances between the credit
institution and the counterparty. Only loans and deposits of the lending credit
institution may be subject to a modification of risk-weighted exposure amounts
and, as relevant, expected loss amounts as a result of an on-balance sheet
netting agreement. 

1.2.                
Master netting
agreements covering repurchase transactions and/or securities or commodities
lending or borrowing transactions and/or other capital market-driven
transactions

5.                      
For credit
institutions adopting the Financial Collateral Comprehensive Method under Part
3 of this Annex, the effects of bilateral netting contracts covering repurchase
transactions, securities or commodities lending or borrowing transactions,
and/or other capital market-driven transactions with a counterparty may be
recognised. Without prejudice to Annex II of Directive [93/6/EEC] to be
recognised the collateral taken and securities or commodities borrowed within
such agreements must comply with the eligibility requirements for collateral
set out at paragraphs 7 to 11.

1.3.                
Collateral

6.                      
Where the credit risk
mitigation technique used relies on the right of the credit institution to
liquidate or retain assets, eligibility depends upon whether risk-weighted
exposure amounts, and, as relevant, expected loss amounts, are calculated under
Articles 78 to 83 or Articles 84 to 89. Eligibility further depends upon
whether the Financial Collateral Simple Method is used or the Financial
Collateral Comprehensive Method under Part 3. In relation to repurchase
transactions and securities or commodities lending or borrowing transactions,
eligibility also depends upon whether the transaction is booked in the
non-trading book or the trading book.

1.3.1.          
Eligibility under all
approaches and methods

7.                      
The following
financial items may be recognised as eligible collateral under all approaches
and methods:
(a)     Cash on
deposit with, or cash assimilated instruments held by, the lending credit
institution.
(b)     Debt
securities issued by central governments or central banks which securities have
a credit assessment by an ECAI or export credit agency recognised as eligible
for the purposes of Articles 78 to 83 which has been determined by the
competent authority to be associated with credit quality step 4 or above under
the rules for the risk weighting of exposures to central governments and
central banks under Articles 78 to 83.
(c)     Debt
securities issued by institutions which securities have a credit assessment by
an eligible ECAI which has been determined by the competent authority to be
associated with credit quality step 3 or above under the rules for the risk
weighting of exposures to credit institutions under Articles 78 to 83.
(d)     Debt
securities issued by other entities which securities have a credit assessment
by an eligible ECAI which has been determined by the competent authority to be
associated with credit quality step 3 or above under the rules for the risk
weighting of exposures to corporates under Articles 78 to 83;
(e)     Debt
securities with a short-term credit assessment by an eligible ECAI which has
been determined by the competent authority to be associated with credit quality
step 3 or above under the rules for the risk weighting of short term exposures
under Articles 78 to 83;
(f)     Equities or
convertible bonds that are included in a main index; 
(g)     Gold.
For the purposes of
sub-paragraph (b), ‘debt securities issued by central governments or central
banks shall be deemed to include –
(i)      debt
securities issued by regional governments or local authorities exposures to
which are treated as exposures to the central government in whose jurisdiction
they are established under Annex VI;
(ii)     debt
securities issued by multilateral development banks to which a 0% risk weight
is applied under Articles 78 to 83;
(iii)    debt
securities issued by international organisations which are assigned a 0% risk
weight under Articles 78 to 83;
For the purposes of
sub-paragraph (c), ‘debt securities issued by institutions’ include
(i)      ebt
securities issued by regional governments or local authorities other than those
exposures to which are treated as exposures to the central government in whose
jurisdiction they are established under Articles 78 to 83;
(ii)     debt
securities issued by public sector entities, exposures to which are treated as
exposures to credit institutions under Articles 78 to 83;
(iii)    debt
securities issued by multilateral development banks other than those to which a
0% risk weight is applied under;
8.                      
Debt securities issued
by institutions which securities do not have a credit assessment by an eligible
ECAI may be recognised as eligible collateral if they fulfil the following
criteria:
(a)     they are
listed on a recognised exchange;
(b)     they qualify
as senior debt;
(c)     all other
rated issues by the issuing institution of the same seniority having a credit
assessment by a recognised ECAI have a credit assessment by an eligible ECAI
which has been determined by the competent authorities to be associated with
credit quality step 3 or above under the rules for the risk weighting of
exposures to institutions or short term exposures under Articles 78 to 83.
(d)     the lending
credit institution has no information to suggest that the issue would justify a
credit assessment below that indicated in (c); 
(e)     the credit
institution can demonstrate to the competent authorities that the market
liquidity of the instrument is sufficient for these purposes.
9.                      
Units in collective
investment undertakings may be recognised as eligible collateral if the
following conditions are satisfied:
(a)     they have a
daily public price quote;
(b)     the
collective investment undertaking is limited to investing in instruments that
are eligible for recognition under paragraphs 7 and 8.
The use (or potential
use) by a collective investment undertaking of derivative instruments to hedge
permitted investments shall not prevent units in that undertaking from being
eligible.
10.                  
In relation to points
(b) to (e) of Paragraph 7, where a security has two credit assessments by
eligible ECAIs, the less favourable assessment shall be deemed to apply. In
cases where a security has more than two credit assessments by eligible ECAIs,
the two most favourable assessments shall be deemed to apply. If the two most
favourable credit assessments are different, the less favourable of the two
shall be deemed to apply. 

1.3.2.          
Additional eligibility
under the Financial Collateral Comprehensive Method 

11.                  
In addition to the
collateral set out in paragraphs 7 to 10, where a credit institution uses the
Financial Collateral Comprehensive Method under Part 3, the following financial
items may be recognised as eligible collateral:
(a)     Equities or
convertible bonds not included in a main index but traded on a recognised
exchange.
(b)     Units in
collective investment undertakings if the following conditions are met:
(i)      they have a
daily public price quote; and
(ii)     the
collective investment undertaking is limited to investing in instruments that
are eligible for recognition under paragraph 7 and 8 and the items mentioned in
the point (a) of this paragraph.
The use (or potential
use) by a collective investment undertaking of derivative instruments to hedge
permitted investments shall not prevent units in that undertaking from being
eligible.

1.3.3.          
Additional eligibility
for calculations underArticles 84 to 89

12.                  
In addition to the
collateral set out above the provisions of paragraphs 13 to 22 apply where a
credit institution calculates risk-weighted exposure amounts and expected loss
amounts under the approach set out in Articles 84 to 89:
(a)      Real estate
collateral
13.                  
Residential real
estate property which is or will be occupied or let by the owner and commercial
real estate i.e. offices and other commercial premises may be recognised as
eligible collateral where the following conditions are met:
(a)     The value of
the property does not materially depend upon the credit quality of the obligor.
This requirement is not intended to preclude situations where purely
macro-economic factors affect both the value of the property and the
performance of the borrower.
(b)     The risk of
the borrower does not materially depend upon the performance of the underlying
property or project, but rather on the underlying capacity of the borrower to
repay the debt from other sources. As such, repayment of the facility does not
materially depend on any cash flow generated by the underlying property serving
as collateral.
14.                  
Credit institutions
may also recognise as eligible collateral shares in Finnish residential housing
companies operating in accordance with the Finnish Housing Company Act of 1991
or subsequent equivalent legislation in respect of residential property which
is or will be occupied or let by the owner, as residential real estate
collateral, provided that these conditions are met.
15.                  
The competent
authorities may also authorise their credit institutions to recognise as
eligible collateral shares in Finnish housing companies operating in accordance
with the Finnish Housing Company Act of 1991 or subsequent equivalent
legislation as commercial real estate collateral, provided that these
conditions are met.
16.                  
The competent
authorities may waive the requirement for their credit institutions to comply
with condition (b) in paragraph 13 for exposures secured by residential real
estate property situated within the territory of that Member State, if the competent authorities have evidence that the relevant market is well-developed
and long-established with loss-rates which are sufficiently low to justify such
action. This shall not prevent the competent authorities of a Member State, which do not use this waiver from recognising as eligible residential real estate
property recognised as eligible in another Member State by virtue of the
waiver. Member States shall disclose publicly the use they make of this waiver.
17.                  
The competent
authorities of the Member States may waive the requirement for their
institutions to comply with condition (b) in paragraph 13 for commercial real
estate property situated within the territory of that Member State, if the
competent authorities have evidence that the relevant market is well-developed
and long-established and that loss-rates stemming from lending secured by
commercial real estate propery satisfy the following conditions:
(a)     up to 50 %
of the market value (or where applicable and if lower 60 % of the
mortgage-lending-value) does not exceed 0.3 % of the outstanding loans secured
by commercial real estate property in any given year.
(b)     overall
losses stemming from lending secured by commercial real estate does not exceed
0.5 % of the outstanding loans in any given year. 
18.                  
If either of these
conditions is not satisfied in a given year, the eligibility to use this
treatment will cease until the conditions are satisfied in a subsequent year. 
19.                  
The competent
authorities of a Member State, which do not use the waiver in paragraph 17, may
recognise as eligible commercial real estate property recognised as eligible in
another Member State by virtue of the waiver. 
(b)     Receivables
20.                  
The competent
authorities may recognise as eligible collateral amounts receivable linked to a
commercial transaction or transactions with an original maturity of less than
or equal to one year. Eligible receivables do not include those associated with
securitisations, sub-participations or credit derivatives or amounts owed by
affiliated parties.
(c)      Other
physical collateral
21.                  
The competent
authorities may recognise as eligible collateral physical items of a type other
than those types indicated in paragraphs 13 to 19 if satisfied as to the
following:
(a)     the
existence of liquid markets for disposal of the collateral in an expeditious
and economically efficient manner; and
(b)     the
existence of well-established, publicly available market prices for the
collateral. The institution must be able to demonstrate that there is no
evidence that the net prices it receives when collateral is realised deviates
significantly from these market prices.
(d)     Leasing
22.                  
Subject to the provisions
of Part 3, Paragraph 73, where the requirements set out in Part 2, paragraph 11
are met, exposures arising from transactions whereby a credit institution
leases property to a third party will be treated the same as loans
collateralised by the type of property leased. 

1.4.                
Other funded credit
protection
1.4.1.          
Cash on deposit with,
or cash assimilated instruments held by, a third party institution.

23.                  
Cash on deposit with,
or cash assimilated instruments held by, a third party institution in a
non-custodial arrangement and pledged to the lending credit institution may be
recognised as eligible credit protection. 

1.4.2.          
Life insurance
policies pledged to the lending credit institution

24.                  
Life insurance
policies pledged to the lending credit institution may be recognised as eligible
credit protection. 

1.4.3.          
Institution
instruments repurchased on request

25.                  
Instruments issued by
third party institutions which will be repurchased by that institution on
request may be recognised as eligible credit protection.

2.                      
Unfunded Credit
Protection
2.1.                
Eligibility of
protection providers under all approaches

26.                  
The following parties
may be recognised as eligible providers of unfunded protection:
(a)     Central
governments and central banks; 
(b)     regional
governments or local authorities; 
(c)     multi-lateral
development banks;
(d)     international
organisations exposures to which receive a 0% risk weight under Articles 78 to
83;
(e)     public
sector entities, claims on which are treated by the competent authorities as
claims on institutions under Articles 78 to 83;
(f)     institutions;
(g)     Other
corporate entities, including parent, subsidiary and affiliate corporate
entites of the credit institution, that 
(i)      have a
credit assessment by a recognised ECAI which has been determined by the
competent authorities to be associated with credit quality step 2 or above
under the rules for the risk weighting of exposures to corporates under Articles
78 to 83; 
(ii)     in the case
of credit institutions calculating risk-weighted exposure amounts and expected
loss amounts under Articles 84 to 89, do not have a credit assessment by a
recognised ECAI and are internally rated as having a probability of default
equivalent to that associated with the credit assessments of ECAIs determined
by the competent authorities to be associated with credit quality step 2 or
above under the rules for the risk weighting of exposures to corporates under Articles
78 to 83.
27.                  
Where risk-weighted
exposure amounts and expected loss amounts are calculated under Articles 84o 89,
to be eligible a guarantor must be internally rated by the credit institution
in accordance with the provisions of Annex VII, Part 4.
28.                  
By way of derogation
from paragraph 26, the Member States may also recognise as eligible providers
of unfunded protection, other financial institutions authorised and supervised
by the competent authorities responsible for the authorisation and supervision
of credit institutions and subject to prudential requirements equivalent to
those applied to credit institutions.

3.                      
Types of credit
derivatives

29.                  
The following types of
credit derivatives, and instruments that may be composed of such credit
derivatives or that are economically effectively similar, may be recognised as
eligible.
(a)     credit
default swaps
(b)     total return
swaps
(c)     credit
linked notes to the extent of their cash funding
30.                  
Where a credit
institution buys credit protection through a total return swap and records the
net payments received on the swap as net income, but does not record offsetting
deterioration in the value of the asset that is protected (either through
reductions in fair value or by an addition to reserves), the credit protection
shall not be recognised. 

3.1.                
Internal hedges

31.                  
When a credit
institution conducts an internal hedge using a credit derivative - i.e. hedges
the credit risk of an exposure in the non-trading book with a credit derivative
booked in the trading book - in order for the protection to be recognised for
the purposes of this Annex the credit risk transferred to the trading book
shall be transferred out to a third party or parties. In such circumstances,
subject to the compliance of such transfer with the requirements for the
recognition of credit risk mitigation set out in this Annex, the rules for the
calculation of risk-weighted exposure amounts and expected loss amounts where unfunded
credit protection is acquired set out in Parts 3 to 6 shall be applied.
Part 2 -
Minimum Requirements
1.                      
The credit institution
must satisfy the competent authorities that it has adequate risk management
processes to control those risks to which the credit institution may be exposed
as a result of carrying out credit risk mitigation practices. 
2.                      
Notwithstanding the
presence of credit risk mitigation taken into account for the purposes of
calculating risk-weighted exposure amounts and as relevant expected loss
amounts, credit institutions shall continue to undertake full credit risk
assessment of the underlying exposure and be in a position to demonstrate the
fulfilment of this requirement to the competent authorities. In the case of
repurchase transactions and/or securities or commodities lending or borrowing
transactions the underlying exposure shall, for the purposes of this paragraph only,
be deemed to be the net amount of the exposure. 

1.                      
Funded credit
protection
1.1.                
On-balance sheet
netting (other than master netting agreements covering repurchase transactions,
securities or commodities lending or borrowing transactions and/or other
capital market-driven transactions)

3.                      
For on-balance sheet
netting agreements - other than master netting agreements covering repurchase
transactions, securities or commodities lending or borrowing transactions
and/or other capital market-driven transactions - to be recognised for the
purposes of Articles 90 to 93 the following conditions shall be satisfied: 
(a)     they must
have a well-founded legal basis and be legally enforceable under applicable
law, including in the event of the insolvency or bankruptcy of a counterparty;
(b)     the credit
institution must be able to determine at any time those assets and liabilities
that are subject to the netting agreement;
(c)     the credit
institution must monitor and control the risks associated with the termination
of the credit protection; 
(d)     the credit
institution must monitor and control the relevant exposures on a net basis.

1.2.                
Master netting agreements
covering repurchase transactions and/or securities or commodities lending or
borrowing transactions and/or other capital market driven transactions

4.                      
For master netting
agreements covering repurchase transactions and/or securities or commodi.ties lending
or borrowing transactions and/or other capital market driven transactions to be
recognised for the purposes of Articles 90 to 93, they shall: 
(a)     have a well
founded legal basis and be legally enforceable under applicable law, including
in the event of the bankruptcy or insolvency of the counterparty 
(b)     give the
non-defaulting party the right to terminate and close-out in a timely manner
all transactions under the agreement upon the event of default, including in
the event of the bankruptcy or insolvency of the counterparty
(c)     provide for
the netting of gains and losses on transactions closed out under a master
agreement so that a single net amount is owed by one party to the other.
5.                      
In addition the
minimum requirements for the recognition of financial collateral under the
Financial Collateral Comprehensive Method set out in paragraph 6 shall be
fulfilled.

1.3.                
Financial collateral
1.3.1.          
Minimum requirements
for the recognition of financial collateral under all Approaches and Methods

6.                      
For the recognition of
financial collateral and gold, the following conditions shall be met:
(a)     Low
correlation
The credit quality of
the obligor and the value of the collateral must not have a material positive
correlation. 
Securities issued by
the obligor, or any related group entity are not eligible.
(b)     Legal
certainty
Credit institutions
shall fulfil any contractual and statutory requirements in respect of, and take
all steps necessary to ensure, the enforceability of the collateral
arrangements under the law applicable to their interest in the collateral.
Credit institutions
shall have conducted sufficient legal review confirming the enforceability of
the collateral arrangements in all relevant jurisdictions. They shall
re-conduct such review as necessary to ensure continuing enforceability.
(c)     Operational
requirements 
The collateral
arrangements shall be properly documented, with a clear and robust procedure
for the timely liquidation of collateral.
Credit institutions
shall employ robust procedures and processes to control risks arising from the
use of collateral – including risks of failed or reduced credit protection,
valuation risks, risks associated with the termination of the credit
protection, concentration risk arising from the use of collateral and the
interaction with the credit institution’s overall risk profile.
The credit
institution shall have documented policies and practices concerning the types
and amounts of collateral accepted.
Credit institutions
shall calculate the market value of the collateral, and revalue it accordingly,
with a minimum frequency of once every six months and whenever the credit
institution has reason to believe that there has occurred a significant
decrease in its market value. 
Where the collateral
is held by a third party, credit institutions must take reasonable steps to
ensure that the third party segregates the collateral from its own assets.

1.3.2.          
Additional minimum
requirements for the recognition of financial collateral under the Financial
Collateral Simple Method 

7.                      
In addition to the requirements
set out in paragraph 6 above, for the recognition of financial collateral under
the Financial Collateral Simple Method the residual maturity of the protection
must be at least as long as the residual maturity of the exposure.

1.4.                
Minimum requirements
for the recognition of real estate collateral 

8.                      
For the recognition of
real estate collateral the following conditions shall be met:
(a)     Legal
certainty
The mortgage or
charge shall be legally enforceable in all relevant jurisdictions, and the
mortgage or charge shall be properly filed on a timely basis. The arrangements
shall reflect a perfected lien (i.e. all legal requirements for establishing
the pledge shall been fulfilled). The protection agreement and the legal
process underpinning it shall enable the credit institution to realise the
value of the protection within a reasonable timeframe.
(b)     Monitoring
of property values
The value of the
property shall be monitored on a frequent basis and at a minimum once every
year. More frequent monitoring shall be carried out where the market is subject
to significant changes in conditions. Statistical methods may be used to
monitor the value of the property and to identify property that needs
revaluation. The property shall be valued by an independent valuer when
information indicates that the value of the property may have declined
materially relative to general market prices. For loans exceeding EUR 3 million
or 5% of the own funds of the credit institution, the property shall be
evaluated by an independent valuer at least every three years. 
‘Independent valuer’
shall mean a person who possesses the necessary qualifications, ability and
experience to execute a valuation and who is independent from the credit
decision process.
(c)     Documentation
The types of residential
and commercial real estate accepted by the credit institution and its lending
policies in this regard shall be clearly documented.
(d)     Insurance
The credit
institution shall have procedures to monitor that the property taken as
protection is adequately insured against damage.

1.5.                
Minimum requirements
for the recognition of receivables as collateral

9.                      
For the recognition of
receivables the following conditions shall be met:
(a)     Legal
certainty
(i)      The legal
mechanism by which the collateral is provided shall be robust and effective and
ensure that the lender has clear rights over the proceeds. 
(ii)     Credit
institutions must take all steps necessary to fulfil local requirements in
respect of the enforceability of security interest. There shall be a framework
which allows the lender to have a first priority claim over the collateral
subject to national discretion to allow such claims to be subject to the claims
of preferential creditors provided for in legislative or implementing
provisions.
(iii)    Credit institutions
shall have conducted sufficient legal review confirming the enforceability of
the collateral arrangements in all relevant jurisdictions.
(iv)    The
collateral arrangements must be properly documented, with a clear and robust
procedure for the timely collection of collateral. Credit institutions
procedures shall ensure that any legal conditions required for declaring the
default of the customer and timely collection of collateral are observed. In
the event of the borrower’s financial distress or default, the credit
institution shall have legal authority to sell or assign the receivables to
other parties without consent of the receivables obligors. 
(b)     Risk
management
(i)      The credit
institution must have a sound process for determining the credit risk associated
with the receivables. Such a process shall include, among other things,
analyses of the borrower’s business and industry and the types of customers
with whom the borrower does business. Where the credit institution relies on
the borrower to ascertain the credit risk of the customers, the credit
institution must review the borrower’s credit practices to ascertain their
soundness and credibility. 
(ii)     The margin
between the amount of the exposure and the value of the receivables must
reflect all appropriate factors, including the cost of collection,
concentration within the receivables pool pledged by an individual borrower,
and potential concentration risk within the credit institution’s total
exposures beyond that controlled by the credit institution’s general
methodology. The credit institution must maintain a continuous monitoring
process appropriate to the receivables. Observance of the credit institution’s
overall concentration limits shall be monitored. Additionally, compliance with
loan covenants, environmental restrictions, and other legal requirements shall
be reviewed on a regular basis.
(iii)    The
receivables pledged by a borrower shall be diversified and not be unduly
correlated with the borrower. Where there is material positive correlation, the
attendant risks shall be taken into account in the setting of margins for the
collateral pool as a whole. 
(iv)    Receivables
from affiliates of the borrower (including subsidiaries and employees) shall
not be recognised as risk mitigants. 
(v)     The credit
institution shall have a documented process for collecting receivable payments
in distressed situations. The requisite facilities for collection shall be in
place, even when the credit institution normally looks to the borrower for
collections.

1.6.                
Minimum requirements
for the recognition of other physical collateral 

10.                  
For the recognition of
other physical collateral the following conditions shall be met:
(a)     The
collateral arrangement shall be legally enforceable under all applicable laws
and shall enable the credit institution to realise the value of the property
within a reasonable timeframe.
(b)     With the sole exception of permissible prior claims referred to
in paragraph 9(a)(ii), only first liens on, or charges over, collateral are
permissible. As such, the credit institution shall have priority over all other
lenders to the realised proceeds of the collateral. 
(c)     The value of
the property shall be monitored on a frequent basis and at a minimum once every
year. More frequent monitoring shall be required where the market is subject to
significant changes in conditions. 
(d)     The loan agreement shall include detailed descriptions of the
collateral plus detailed specifications of the manner and frequency of
revaluation. 
(e)     The types of physical collateral accepted by the credit
institution and policies and practices in respect of the appropriate amount of
each type of collateral relative to the exposure amount shall be clearly
documented in internal credit policies and procedures available for examination.
(f)     The credit institution’s credit policies with regard to the
transaction structure shall address appropriate collateral requirements
relative to the exposure amount, the ability to liquidate the collateral
readily, the ability to establish objectively a price or market value, the
frequency with which the value can readily be obtained (including a
professional appraisal or valuation), and the volatility of the value of the
collateral.
(g)     Both initial valuation and revaluation shall take fully into account
any deterioration or obsolescence of the collateral. Particular attention must
be paid in valuation and revaluation to the effects of the passage of time on
fashion- or date-sensitive collateral.
(h)     The credit institution must have the right to phsically inspect
the property. It shall have policies and procedures addressing its exercise of
the right to physical inspection.
(i)      The credit
institution must have procedures to monitor that the property taken as
protection is adequately insured against damage.

1.7.                
Minimum requirements
for treating lease exposures as collateralised

11.                  
For the exposures
arising from leasing transactions to be treated as collateralised by the type
of property leased, the following conditions shall be met:
(a)     The
conditions set out in paragraphs 8 or 10 as appropriate for the recognition as
collateral of the type of property leased shall be met;
(b)     There shall
be robust risk management on the part of the lessor with respect to the
location of the asset, the use to which it is put, its age, and planned
obsolescence;
(c)     There shall
be in place a robust legal framework establishing the lessor’s legal ownership
of the asset and its ability to exercise its rights as owner in a timely
fashion; and
(d)     The
difference between the rate of depreciation of the physical asset and the rate
of amortisation of the lease payments must not be so large as to overstate the
credit risk mitigation attributed to the leased assets.

1.8.                
Minimum requirements
for the recognition of other funded credit protection
1.8.1.          
Cash on deposit with,
or cash assimilated instruments held by, a third party institution

12.                  
To be eligible for the
treatment set out at Part 3, Paragraph 80, the protection referred to in Part
1, paragraph 23 must satisfy the following conditions:
(a)     The borrower’s
claim against the third party institution is openly pledged or assigned to the
lending credit institution;
(b)     The third
party institution is notified of the pledge or assignment;
(c)     As a result
of the notification, the third party institution is able to make payments
solely to the lending credit institution or to other parties with the lending
credit institution’s consent.
(d)     The pledge
or assignment is unconditional and irrevocable.

1.8.2.          
Life insurance
policies pledged to the lending credit institution.

13.                  
For life insurance
policies pledged to the lending credit institution to be recognised the
following conditions shall be met:
(a)     the company
providing the life insurance may be recognised as an eligible unfunded
protection provider under Part 1, paragraph 26;
(b)     the life
insurance policy is openly pledged or assigned to the lending credit
institution;
(c)     the company
providing the life insurance is notified of the pledge or assignment and as a
result may not cancel the contract or pay amounts payable under the contract
without the consent of the lending credit institution;
(d)     the policy
must have a declared surrender value which is a non-reducible amount;
(e)     the lending
credit institution must have the right to cancel the policy and receive the
surrender value in a timely way in the event of the default of the borrower;
(f)     the lending
credit institution is informed of any non-payments under the policy by the
policy-holder;
(g)     the credit
protection must be provided for the maturity of the loan; and 
(h)     the pledge
must be legally enforceable in all relevant jurisdictions.

2.                      
Unfunded credit
protection and credit linked notes
2.1.                
Requirements common to
guarantees and credit derivatives

14.                  
Subject to paragraph 16,
for the credit protection deriving from a guarantee or credit derivative to be
recognised the following conditions shall be met:
(a)     The credit
protection shall be direct. 
(b)     The extent
of the credit protection shall be clearly defined and incontrovertible.
(c)     The credit
protection contract shall not contain any clause, the fulfilment of which is
outside the direct control of the lender, that:
(i)      would allow
the protection provider unilaterally to cancel the protection; 
(ii)     would
increase the effective cost of protection as a result of deteriorating credit
quality of the protected exposure;
(iii)    could
prevent the protection provider from being obliged to pay out in a timely
manner in the event that the original obligor fails to make any payments due;
or
(iv)    could allow
the maturity of the credit protection to be reduced by the protection provider.
(d)     It must be
legally enforceable in all relevant jurisdictions.

2.1.1.          
Operational
requirements

15.                  
The credit institution
shall satisfy its supervisor that it has systems in place to manage potential
concentration of risk arising from the credit institution’s use of guarantees
or credit derivatives. The credit institution must be able to demonstrate how
its strategy in respect of its use of credit derivatives and guarantees
interacts with its management of its overall risk profile. 

2.2.                
Sovereign and other
public sector counter-guarantees

16.                  
Where an exposure is
protected by a guarantee which is counter-guaranteed by a central government or
central bank, a regional government or local authority claims on which are
treated as claims on the sovereign in whose jurisdiction they are established
under Articles 78 to 83, a multi-lateral development bank to which a 0% risk
weight is applied under or by virtue of Articles 78 to 83, or a public sector
entity claims on which are treated as claims on credit institutions under Articles
78 to 83, the exposure may be treated as protected by a guarantee provided by
the entity in question provided the following conditions are satisfied:
(a)     the
counter-guarantee covers all credit risk elements of the claim;
(b)     both the
original guarantee and the counter-guarantee meet the requirements for
guarantees set out in paragraphs 14, 15 and 17, except that the
counter-guarantee need not be direct;
(c)     the
competent authority is satisfied that the cover is robust and that nothing in
the historical evidence suggests that the coverage of the counter-guarantee is
less than effectively equivalent to that of a direct guarantee by the entity in
question.

2.3.                
Additional
requirements for guarantees 

17.                  
For a guarantee to be
recognised the following conditions shall also be met:
(a)     On the
qualifying default/non-payment of the counterparty, the lending credit
institution shall have the right to pursue, in a timely manner, the guarantor
for any monies due under the claim in respect of which the protection is
provided. Payment by the guarantor shall not be subject to the lending credit
institution first having to pursue the oligor.
(b)     The
guarantee shall be an explicitly documented obligation assumed by the
guarantor. 
(c)     Subject to
the following sentence, the guarantee shall cover all types of payments the
obligor is expected to make in respect of the claim. Where certain types of
payment are excluded from the guarantee, the recognised value of the guarantee
shall be adjusted to reflect the limited coverage. 
18.                  
In the case of
guarantees provided in the context of mutual guarantee schemes recognised for
these purposes by the competent authorities or provided by or
counter-guaranteed by entities referred to in paragraph 16, the requirements in
paragraph (a) may be considered to be satisfied where either of the following
conditions are met: 
(a)     the
competent authorities are satisfied that the lending credit institution has the
right to obtain in a timely manner a provisional payment by the guarantor
calculated to represent a robust estimate of the amount of the economic loss,
including losses resulting from the non-payment of interest and other types of
payment which the borrower is obliged to make, likely to be incurred by the
lending credit institution proportional to the coverage of the guarantee; 
(b)     the
competent authorities are otherwise satisfied as to the loss-protecting effects
of the guarantee, including losses resulting from the non-payment of interest
and other types of payment which the borrower is obliged to make. 

2.4.                
Additional
requirements for credit derivatives

19.                  
For a credit
derivative to be recognised the following conditions shall also be met:
(a)     Subject to
(b), the credit events specified under the credit derivative shall at a minimum
include:
(i)      the failure
to pay the amounts due under the terms of the underlying obligation that are in
effect at the time of such failure (with a grace period that is closely in line
with or shorter than the grace period in the underlying obligation); and
(ii)     the
bankruptcy, insolvency or inability of the obligor to pay its debts, or its
failure or admission in writing of its inability generally to pay its debts as
they become due, and analogous events.
(iii)    the
restructuring of the underlying obligation involving forgiveness or
postponement of principal, interest or fees that results in a credit loss event
(i.e. value adjustment or other similar debit to the profit and loss account). 
(b)     Where the
credit events specified under the credit derivative do not include
restructuring of the underlying obligation as described in the third indent of
(a), the credit protection may nonetheless be recognised subject to a reduction
in the recognised value as specified in Part 3, paragraph 84. 
(c)     In the case
of credit derivatives allowing for cash settlement a robust valuation process
shall be in place in order to estimate loss reliably. There shall be a clearly
specified period for obtaining post-credit-event valuations of the underlying
obligation. 
(d)     If the
protection purchaser’s right and ability to transfer the underlying obligation
to the protection provider is required for settlement, the terms of the
underlying obligation shall provide that any required consent to such transfer
may not be unreasonably withheld. 
(e)     The identity
of the parties responsible for determining whether a credit event has occurred
shall be clearly defined. This determination shall not be the sole
responsibility of the protection seller. The protection buyer shall have the
right/ability to inform the protection provider of the occurrence of a credit
event;
20.                  
A mismatch between the
underlying obligation and the reference obligation under the credit derivative
(i.e. the obligation used for the purposes of determining cash settlement value
or the deliverable obligation) or between the underlying obligation and the
obligation used for purposes of determining whether a credit event has occurred
is permissible only if the following conditions are met:
(a)     the
reference obligation or the obligation used for purposes of determining whether
a credit event has occurred, as the case may be, ranks pari passu with or is
junior to the underlying obligation;
(b)     the
underlying obligation and the reference obligation or the obligation used for
purposes of determining whether a credit event has occurred, as the case may
be, share the same obligor (i.e., the same legal entity) and there are in place
legally enforceable cross-default or cross-acceleration clauses. 
Part 3 -
Calculating the effects of credit risk mitigation
1.                      
Subject to Parts 4 to
6, where the provisions in Parts 1 and 2 are satisfied, the calculation of
risk-weighted exposure amounts under Subsection 1 Articles 78 to 83 and the
calculation of risk-weighted exposure amounts and expected loss amounts under Articles
84 to 89 may be modified in accordance with the provisions of this Part.
2.                      
Cash, securities or
commodities purchased, borrowed or received under a repurchase transaction or
securities or commodities lending or borrowing transaction shall be treated as
collateral. 

1.                      
Funded Credit
rotection
1.1.                
Credit linked notes.

3.                      
Investments in credit
linked notes issued by the lending credit institution may be treated as cash
collateral.

1.2.                
On-balance sheet
netting 

4.                      
Loans and deposits with
the lending credit institution subject to on-balance sheet netting are to be
treated as cash collateral.

1.3.                
Master netting
agreements covering repurchase transactions and/or securities or commodities
lending or borrowing transactions and/or other capital market-driven
transactions
1.3.1.          
Calculation Of the
fully-adjusted exposure value

(a)          Using
the ‘Supervisory’ volatility adjustments or the ‘Own Estimates’ volatility
adjustments approaches
5.                      
Subject to paragraphs
12 to 22, in calculating the ‘fully adjusted exposure value’ (E*) for the
exposures subject to an eligible master netting agreement covering repurchase
transactions and/or securities or commodities lending or borrowing transactions
and/or other capital market-driven transactions, the volatility adjustments to
be applied shall be calculated in the manner set out below either using the
Supervisory volatility adjustments approach or the Own estimates volatility
adjustments approach as set out in paragraphs 35 to 60 for the Financial
Collateral Comprehensive Method. For the use of the Own estimates approach the
same conditions and requirements shall apply as apply under the Financial
Collateral Comprehensive Method.
6.                      
The net position in
each type of security shall be calculated by subtracting from the total value
of the securities of that type lent, sold or provided under the master netting
agreement, the total value of securities of that type borrowed, purchased or
received under the agreement.
7.                      
For the purposes of
paragraph 6, type of security means securities which are issued by the same
entity, have the same issue date, the same maturity and are subject to the same
terms and conditions and are subject to the same liquidation periods as
indicated in paragraphs 35 to 60.
8.                      
The net position in
each currency other than the settlement currency of the master netting
agreement, shall be calculated by subtracting from the total value of
securities denominated in that currency lent, sold or provided under the master
netting agreement added to the amount of cash in that currency lent or
transferred under the agreement, the total value of securities denominated in
that currency borrowed, purchased or received under the agreement added to the
amount of cash in that currency borrowed or received under the agreement.
9.                      
The volatility
adjustment appropriate to a given type of security or cash position shall be
applied to the positive or negative net position in the securities of that
type.
10.                  
The foreign exchange
risk (fx) volatility adjustment shall be applied to the net positive or negative
position in each currency other than the settlement currency of the master
netting agreement.
11.                  
E* shall be calculated
according to the following formula:
E* = max {0,
[(∑(E) - ∑(C)) + ∑(|net position in each security| x Hsec)
+ + (∑|Efx| x Hfx)]} 
Where risk-weighted
exposure amounts are calculated under Articles 78 to 83, E is the exposure
value for each separate exposure under the agreement that would apply in the
absence of the credit protection.
Where risk-weighted
exposure amounts and expected loss amounts are calculated under Articles 84 to
89, E is the exposure value for each separate exposure under the agreement that
would apply in the absence of the credit protection.
C is the value of the
securities or commodities borrowed, purchased or received or the cash borrowed
or received in respect of each such exposure.
∑(E) is the sum
of all Es under the agreement.
∑(C) is the sum
of all Cs under the agreement.
Efx is the
net position (positive or negative) in a given currency other than the
settlement currency of the agreement as calculated under paragraph 8.
Hsec is
the volatility adjustment appropriate to a particular type of security.
Hfx is the
foreign exchange volatility adjustment.
E* is the fully
adjusted exposure value.
(b)          Using
the Internal Models approach
12.                  
As an alternative to
using the Supervisory volatility adjustments approach or the Own Estimates
volatility adjustments approach in calculating the fully adjusted exposure
value (E*) resulting from the application of an eligible master netting
agreement covering repurchase transactions, securities or commodities lending
or borrowing transactions, and/or other capital market driven transactions
other than derivative transactions, credit institutions may be permitted to use
an internal models approach which takes into account correlation effects
between security positions subject to the master netting agreement as well as the liquidity of the
instruments concerned. Internal models used in this approach shall provide
estimates of the potential change
in value of the unsecured exposure amount (∑E - ∑C).
13.                  
A credit institution
may choose to use an internal models approach independently of the choice it
has made between the Standardised Approach and the IRB Foundation Approach to
credit risk. However, if a credit institution seeks to use an internal models
approach, it must do so for all counterparties and securities, excluding
immaterial portfolios where it may use the Supervisory volatility adjustments
approach or the Own estimates volatility adjustments approach as set out in paragraphs
5 to 11.
14.                  
The internal models
approach is available to credit institutions that have received recognition for
an internal risk-management model under Annex V of Directive [93/6/EEC].
15.                  
Credit institutions
which have not received supervisory recognition for use of such a model under
Directive 93/6/EEC, may apply to the competent authorities for recognition
of an internal risk-measurement model for the purposes of these paragraphs.
16.                  
Recognition shall only
be given if the competent authority is satisfied that the credit institution's
risk-management system for managing the risks arising on the transactions
covered by the master netting agreement is conceptually sound and implemented
with integrity and that, in particular, the following qualitative standards are
met:
(a)     the internal
risk-measurement model used for calculation of potential price volatility for
the transactions is closely integrated into the daily risk-management process
of the credit institution and serves as the basis for
reporting risk exposures to senior management of the credit institution;
(b)     the credit institution has a risk control unit that
is independent from business trading units and reports directly to senior
management. The unit must be responsible for designing and implementing the credit institution's risk-management system. It
shall produce and analyse daily reports on the output of the risk-measurement
model and on the appropriate measures to be taken in terms of position limits;
(c)     the daily
reports produced by the risk-control unit are reviewed by a level of management
with sufficient authority to enforce reductions of positions taken and of
overall risk exposure;
(d)     the credit institution has sufficient numbers of
staff skilled in the use of sophisticated models in the risk control unit;
(e)     the credit institution has established procedures for
monitoring and ensuring compliance with a documented set of internal policies
and controls concerning the overall operation of the risk-measurement system;
(f)     the credit institution's models have a proven track
record of reasonable accuracy in measuring risks demonstrated through the backtesting of
its output using at least one year of data;
(g)     the credit institution frequently conducts a rigorous
programme of stress testing and the results of these tests are reviewed by
senior management and reflected in the policies and limits it sets;
(h)     the credit institution must conduct, as part of its
regular internal auditing process, an independent review of its
risk-measurement system. This review must include both the activities of the
business trading units and of the independent risk-control unit;
(i)      at least
once a year, the credit institution must conduct a review of its risk
management system. 
17.                  
The calculation of potential change in value shall be subject to the following
minimum standards:
(a)     at least
daily calculation of potential change in value;
(b)     a 99th
percentile, one-tailed confidence interval;
(c)     a 5-day
equivalent liquidation period, except in the case of transactions other than
repurchase transactions or securities or commodities lending or borrowing
transactions when a 10-day equivalent liquidation period shall be used;
(d)     an effective
historical observation period of at least one year except where a shorter
observation period is justified by a significant upsurge in price volatility;
(e)     three-monthly
data set updates.
18.                  
The competent
authorities shall require that the internal risk-measurement model captures a
sufficient number of risk factors in order to capture all material price risks.
19.                  
The competent
authorities may allow credit institutions to use empirical correlations within
risk categories and across risk categories if they are satisfied that the
institution's system for measuring correlations is sound and implemented with
integrity`.
20.                  
A credit institution
using the internal models approach shall be required to backtest the output of
the model using a sample of 20 counterparties, identified on an annual basis.
These counterparties shall include the 10 largest as determined by the credit
institution according to its own exposure measurement approach and 10 others
selected at random. For each day and for each counterparty, the credit
institution should compare the actual change in the value of the exposure to
the counterparty over a 1-day horizon with the estimated change in the exposure
value using the internal models approach calculated as of the previous close of
business. An exception occurs for each observation in which the actual change
in exposure exceeds the internal model estimate. Depending on the number of
exceptions in the observations for the 20 counterparties over the most recent
250 business days (encompassing 5000 observations), the estimate output of the
internal model shall be increased using the multiplier set out in Table 1 . 
Table 1
 Zone || Number of exceptions || Multiplier 
 Green Zone ||             0-99 ||             1 
   ||             100-119 ||             1.13 
   ||             120-139 ||             1.17 
 Yellow Zone ||             140-159 ||             1.22 
   ||             160-179 ||             1.25 
   ||             180-199 ||             1.28 
 Red Zone ||             200 or more ||             1.33 
As part of its
backtesting, the credit institution shall confirm that exceptions are not
concentrated in its exposures to one or more counterparties. 
21.                  
The fully adjusted
exposure value (E*) for credit institutions using the Internal models approach
shall be calculated according to the following formula:
E* = max {0,
[(∑E - ∑C) + (estimate output of of the internal models x
multiplier as appropriate)]}
Where risk-weighted
exposure amounts are calculated under Subsection 1 Articles 78 to 83, E is the
exposure value for each separate exposure under the agreement that would apply
in the absence of the credit protection.
Where risk-weighted
exposure amounts and expected loss amounts are calculated under Articles 84 to
89, E is the exposure value for each separate exposure under the agreement that
would apply in the absence of the credit protection.
C is the current
market value of the securities borrowed, purchased or received or the cash
borrowed or received in respect of each such exposure.
∑(E) is the sum
of all Es under the agreement
∑(C) is the sum
of all Cs under the agreement.
22.                  
In calculating capital
requirements using internal models, credit institutions shall use the previous
business day’s model output.

1.3.2.          
Calculating
risk-weighted exposure amounts and expected loss amounts for repurchase
transactions and/or securities or commodities lending or borrowing transactions
and/or other capital market-driven transactions covered by master netting
agreements

Standardised Approach
23.                  
E* as calculated under
paragraphs 5 to 22 shall be taken as the exposure value of the exposure to the
counterparty arising from the transactions subject to the master netting
agreement for the purposes of Article 80. 
IRB Foundation
Approach
24.                  
E* as calculated under
paragraphs 5 to 22 shall be taken as the exposure value of the exposure to the
counterparty arising from the transactions subject to the master netting
agreement for the purposes of Annex VII.

1.4.                
Financial collateral
1.4.1.          
Financial Collateral
Simple Method

25.                  
The Financial Collateral
Simple Method shall be available only where risk-weighted exposure amounts are
calculated under Articles 78 to 83. A credit institution shall not use both the
Financial Collateral Simple Method and the Financial Collateral Comprehensive
Method.
Valuation
26.                  
Under this method,
recognised financial collateral is assigned a value equal to its market value
as determined in accordance with Part 2, paragraph 6.
Calculating
risk-weighted exposure amounts
27.                  
The risk weight that
would apply under Articles 78 to 83 if the lender had a direct exposure to the
collateral instrument shall apply to those portions of claims collateralised by
the market value of recognised collateral. The risk weight on the collateralised
portion shall be a minimum of 20% except as specified in paragraphs 28 to 30.
The remainder of the exposure shall receive the risk weight that would be
applied to an unsecured exposure to the counterparty under Articles 78 to 83. 
Repurchase
transactions and securities lending or borrowing transactions
28.                  
A risk weight of 0%
shall be applied to the collateralised portion of the exposure arising from
transactions which fulfil the criteria enumerated in paragraphs 59 and 60. If
the counterparty to the transaction is not a core market participant a risk
weight of 10% shall be
applied.
OTC derivative
transactions subject to daily mark-to-market
29.                  
A risk weight of 0%
shall, to the extent of the collateralisation, be applied to the exposure
values determined under Annex III for the derivative instruments listed in Annex
IV and subject to daily marking-to-market, collateralised by cash or
cash-assimilated instruments where there is no currency mismatch. A risk weight
of 10% shall apply to
the extent of the collateralisation to the exposure values of such transactions
collateralised by debt securities issued by central governments or central
banks which receive a 0% risk weight under Articles 78 to 83.
For the purposes of
this paragraph ‘debt securities issued by central governments or central banks
shall be deemed to include – 
(a)     debt
securities issued by regional governments or local authorities exposures to
which are treated as exposures to the central government in whose jurisdiction
they are established under Articles 78 to 83;
(b)     debt
securities issued by multilateral development banks to which a 0% risk weight
is applied under or by virtue of Articles 78 to 83;
(c)     debt
securities issued by international organisations which are assigned a 0% risk
weight under Articles 78 to 83.
Other transactions
30.                  
A 0% risk weight may
be applied where the exposure and the collateral are denominated in the same
currency, and either:
(a)     the
collateral is cash on deposit or a cash assimilated instrument; or
(b)     the
collateral is in the form of debt securities issued by central governments or
central banks eligible for a 0% risk weight under Articles 78 to 83, and its
market value has been discounted by 20%.
For the purposes of
this paragraph ‘debt securities issued by central governments or central banks
shall be deemed to include those indicated under the previous heading.

1.4.2.          
Financial Collateral
Comprehensive Method 

31.                  
In valuing financial
collateral for the purposes of the Financial Collateral Comprehensive Method,
‘volatility adjustments’ shall be applied to the market value of collateral, as
set out in paragraphs 35 to 60 below, in order to take account of price
volatility.
32.                  
Subject to the
treatment for currency mismatches in the case of OTC derivatives transactions
set out in paragraph 33, where collateral is denominated in a currency that
differs from that in which the underlying exposure is denominated, an
adjustment reflecting currency volatility shall be added to the volatility
adjustment appropriate to the collateral as set out in paragraphs 35 to 60. 
33.                  
In the case of OTC
derivatives transactions covered by netting agreements recognised by the
competent authorities under Annex III, a volatility adjustment reflecting
currency volatility shall be applied when there is a mismatch between the
collateral currency and the settlement currency. Even in the case where
multiple currencies are involved in the transactions covered by the netting
agreement, only a single volatility adjustment shall be applied.
(a)          Calculating
adjusted values
34.                  
The
volatility-adjusted value of the collateral to be taken into account is
calculated as follows in the case of all transactions except those transactions
subject to recognised master netting agreements to which the provisions set out
in paragraphs 5 to 24 are be applied:
CVA = C x
(1-HC-HFX)
The volatility-adjusted
value of the exposure to be taken into account is calculated as follows:
EVA = E x
(1+HE), and in the case of OTC derivative transactions EVA = E.
The fully adjusted
value of the exposure, taking into account both volatility and the
risk-mitigating effects of collateral is calculated as follows:
E* = max {0, [EVA
- CVAM]}
Where
E is the exposure
value as would be determined under Articles 78 to 83 or Articles 84 to 89 as
appropriate if the exposure was not collateralised.
EVA is the
volatility-adjusted exposure amount.
CVA is the
volatility-adjusted value of the collateral.
CVAM is CVA
further adjusted for any maturity mismatch in accordance with the provisions of
Part 4.
HE is the
volatility adjustment appropriate to the exposure (E), as calculated under paragraphs
35 to 60.
HC is the
volatility adjustment appropriate for the collateral, as calculated under paragraphs
35 to 60.
HFX is the
volatility adjustment appropriate for currency mismatch, as calculated under paragraphs
35 to 60.
E* is the fully adjusted
exposure value taking into account volatility and the risk-mitigating effects
of the collateral.
(b)          Calculation
of volatility adjustments to be applied
35.                  
Volatility adjustments
may be calculated in two ways: the Supervisory volatility adjustments approach
and the Own estimates of volatility adjustments approach (the ‘Own estimates’
approach).
36.                  
A credit institution
may choose to use the Supervisory volatility adjustments approach or the Own
estimates approach independently of the choice it has made between the Articles
78 to 83 and Articles 84 to 89 for the calculation of risk-weighted exposure
amounts. However, if credit institutions seek to use the Own estimates
approach, they must do so for the full range of instrument types, excluding
immaterial portfolios where they may use the Supervisory volatility adjustments
approach.
Where the collateral
consists of a number of recognised items, the volatility adjustment shall be ,
where ai is the proportion of an item to the
collateral as a whole and Hi is the volatility adjustment applicable
to that item.
(i)           Supervisory
volatility adjustments
37.                  
The volatility
adjustments to be applied under the Supervisory volatility adjustments approach
(assuming daily revaluation) shall be those set out in tables 2 to 5. 
VOLATILITY
ADJUSTMENTS
Table 2
 Credit quality step with which the credit assessment of the debt security is associated || Residual Maturity || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (b) || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (c) and (d) 
   ||   || 20 day liquid- ation period (%) || 10 day liquid- ation period (%) || 5 day liquid- ation period (%) || 20 day liquid- ation period (%) || 10 day liquid- ation period (%) || 5 day liquid- ation period (%) 
 1 || ≤ 1 year || 0.707 || 0.5 || 0.354 || 1.414 || 1 || 0.707 
   || >1 ≤ 5 years || 2.828 || 2 || 1.414 || 5.657 || 4 || 2.828 
   || > 5 years || 5.657 || 4 || 2.828 || 11.314 || 8 || 5.657 
 2-3 || ≤ 1 year || 1.414 || 1 || 0.707 || 2.828 || 2 || 1.414 
   || >1 ≤ 5 years || 4.243 || 3 || 2.121 || 8.485 || 6 || 4.243 
   || > 5 years || 8.485 || 6 || 4.243 || 16.971 || 12 || 8.485 
 4 || ≤ 1 year || 21.213 || 15 || 10.607 || N/A || N/A || N/A 
   || >1 ≤ 5 years || 21.213 || 15 || 10.607 || N/A || N/A || N/A 
   || > 5 years || 21.213 || 15 || 10.607 || N/A || N/A || N/A 
Table 3
 Credit quality step with which the credit assessment of a short term debt security is associated || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (b) with short-term credit assessments || Volatility adjustments for debt securities issued by entities described in Part 1, paragraph 7 (c) and (d) with short-term credit assessments 
     || 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%) || 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%) 
 1 || 0.707 || 0.5 || 0.354 || 1.414 || 1 || 0.707 
 2-3 || 1.414 || 1 || 0.707 || 2.828 || 2 || 1.414 
Table 4
 Other collateral or exposure types 
   || 20 day liquidation period (%) || 10 day liquidation period (%) || 5 day liquidation period (%) 
 Main Index Equities, Main Index Convertible Bonds || 21.213 || 15 || 10.607 
 Other Equities or Convertible Bonds listed on a recognised exchange || 35.355 || 25 || 17.678 
 Cash || 0 || 0 || 0 
 Gold || 21.213 || 15 || 10.607 
Table 5
 Volatility adjustment for currency mismatch 
 20 day liquidation period (%) || 20 day liquidation period (%) || 5 day liquidation period (%) 
 11.314 || 8 || 5.657 
38.                  
For secured lending
transactions the liquidation period shall be 20 business days. For repurchase
transactions (except insofar as such transactions involve the transfer of
commodities or guaranteed rights relating to title to commodities) and
securities lending or borrowing transactions the liquidation period shall be 5
business days. For other capital market driven transactions, the liquidation
period shall be 10 business days.
39.                  
In
tables 2 to 5 and in paragraphs 40 to 42, the credit quality step with which a
credit assessment of the debt security is associated is the credit quality step with
which the external credit assessment is determined by the competent authorities
to be associated under Articles 78 to 83. For these purposes Part 1, paragraph 10 also applies.
40.                  
For non-eligible
securities lent or sold under repurchase transactions or securities lending or
borrowing transactions, the volatility adjustment is the same as for non-main
index equities listed on a recognised exchange.
41.                  
For eligible units in
collective investment undertakings the volatility adjustment is the highest
volatility adjustment that would be apply, having regard to the liquidation
period of the transaction as specified in paragraph 38, to any of the assets in
which the fund has the right to invest.
42.                  
For unrated debt
securities issued by institutions and satisfying the eligibility criteria in Part 1, paragraph 8
the volatility adjustments shall be the same as for securities issued by
institutions or corporates with an external credit assessment associated with
credit quality steps 2 or 3.
(ii)          Own
estimates of volatility adjustments
43.                  
The competent
authorities may permit institutions complying with the requirements set out in paragraphs
48 to 57 to use their own estimates of volatility for calculating the volatility
adjustments to be applied to collateral and exposures. 
44.                  
When debt securities
have a credit assessment from a recognised ECAI equivalent to investment grade
or better, the competent authorities may allow credit institutions to calculate
a volatility estimate for each category of security. 
45.                  
In determining
relevant categories, credit institutions shall take into account the type of
issuer of the security the external credit assessment of the securities, their
residual maturity, and their modified duration. Volatility estimates must be
representative of the securities included in the category by the credit
institution.
46.                  
For debt securities
having a credit assessment from a recognised ECAI equivalent to below
investment grade and for other eligible collateral the volatility adjustments
must be calculated for each individual item.
47.                  
Credit institutions
using the Own estimates approach must estimate volatility of the collateral or
foreign exchange mismatch without taking into account any correlations between
the unsecured exposure, collateral and/or exchange rates. 
Quantitative Criteria
48.                  
In calculating the
volatility adjustments, a 99th percentile one-tailed confidence
interval$ shall be used.
49.                  
The liquidation period
shall be 20 business days for secured lending transactions; 5 business days for
repurchase transactions except insofar as such transactions involve the
transfer of commodities or guaranteed rights relating to title to commodities
and securities lending or borrowing transactions; and 10 business days for other
capital market driven transactions. 
50.                  
Credit institutions
may use volatility adjustment numbers calculated according to shorter or longer
liquidation periods, scaled up or down to the liquidation period set out in paragraph
49 for the type of transaction in question, using the square root of time
formula:
where TM is
the relevant liquidation period;
HM is the
volatility adjustment under the relevant liquidation period;
HN is the
volatility adjustment based on the liquidation period TN;
51.                  
Credit institutions
shall take into account the illiquidity of lower-quality assets. The
liquidation period shall be adjusted upwards in cases where there is doubt
concerning the liquidity of the collateral. They shall also identify where
historical data may understate potential volatility, e.g. a pegged currency.
Such cases shall be dealt with by means of a stress scenario.
52.                  
The historical
observation period (sample period) for calculating volatility adjustments shall
be a minimum length of one year. For credit institutions that use a weighting
scheme or other methods for the historical observation period, the effective
observation period shall be at least one year (that is, the weighted average
time lag of the individual observations shall not be less than 6 months). The
competent authorities may also require a credit institution to calculate its
volatility adjustments using a shorter observation period if, in the competent
authorities’ judgement, this is justified by a significant upsurge in price
volatility.
53.                  
Credit institutions
shall update their data sets no less frequently than once every three months
and shall also reassess them whenever market prices are subject to material
changes. This implies that volatility adjustments shall be computed at least
every three months. 
Qualitative Criteria
54.                  
The volatility
estimates shall be used in the day-to-day risk management process of the credit
institution including in relation to its internal exposure limits.
55.                  
If the liquidation
period used by the credit institution in its day-to-day risk management process
is longer than that set out in this Part for the type of transaction in
question, the credit institution’s volatility adjustments shall be scaled up in
accordance with the square root of time formula set out in paragraph 50.
56.                  
The credit institution
shall have established procedures for monitoring and ensuring compliance with a
documented set of policies and controls for the operation of its system for the
estimation of volatility adjustments and for the integration of such estimations
into its risk management process. 
57.                  
An independent review
of the credit institution’s system for the estimation of volatility adjustments
shall be carried out regularly in the credit institution´s own internal
auditing process. A review of the overall system for the estimation of
volatility adjustments and for integration of those adjustments into the credit
institution’s risk management process shall take place at least once a year and
shall specifically address, at a minimum:
(a)     the
integration of estimated volatility adjustments into daily risk management;
(b)     the
validation of any significant change in the process for the estimation of
volatility adjustments;
(c)     the
verification of the consistency, timeliness and reliability of data sources
used to run the system for the estimation of volatility adjustments, including
the independence of such data sources;
(d)     the accuracy
and appropriateness of the volatility assumptions.
(iii)         Scaling
up of volatility adjustments
58.                  
The volatility
adjustments set out in paragraphs 37 to 42 are the volatility adjustments to be
applied where there is daily revaluation. Similarly where an credit institution
uses its own estimates of the volatility adjustments in accordance with paragraphs
43 to 57, these must be calculated in the first instance on the basis of daily
revaluation. If the frequency of revaluation is less than daily, larger
volatility adjustments shall be applied. These shall be calculated by scaling
up the daily revaluation volatility adjustments, using the following ‘square
root of time’ formula :
where
H is the volatility
adjustment to be applied
HM     is
the volatility adjustment where there is daily revaluation
NR is the
actual number of business days between revaluation
TM is the
liquidation period for the type of transaction in question.
(iv)         Conditions
for applying a 0% volatility adjustment
59.                  
In relation to
repurchase transactions and securities lending or borrowing transactions, where
a credit institution uses the Supervisory volatility adjustments approach or
the Own Estimates approach and where the conditions set out in points (a) to
(h) are satisfied, the competent authorities may allow credit institutions not
to apply the volatility adjustments calculated under paragraphs 35 to 58 and to
instead apply a 0% volatility adjustment. This option is not available in
respect of credit institutions using the internal models approach set out in paragraphs
12 to 22.
(a)     Both the
exposure and the collateral are cash or securities falling within Part 1, paragraph
7(b); 
(b)     Both the
exposure and the collateral are denominated in the same currency. 
(c)     Either the
maturity of the transaction is no more than one day or both the exposure and
the collateral are subject to daily marking-to-market or daily remargining;
(d)     It is
considered that the time between the last marking-to-market before a failure to
remargin by the counterparty and the liquidation of the collateral shall be no
more than four business days;
(e)     The
transaction is settled across a settlement system proven for that type of
transaction;
(f)     The
documentation covering the agreement is standard market documentation for
repurchase transactions or securities lending or borrowing transactions in the
securities concerned;
(g)     The
transaction is governed by documentation specifying that if the counterparty
fails to satisfy an obligation to deliver cash or securities or to deliver
margin or otherwise defaults, then the transaction is immediately terminable; 
(h)     The
counterparty is considered a ‘core market participant’ by the competent
authorities. Core market
participants may include the following entities :
–              
The entities mentioned
in paragraph 7(b) of Part 1 exposures to which receive a 0% risk weight under Articles 78 to 83; 
–              
institutions; 
–              
other financial companies
(including insurance companies) exposures to which receive a 20 % risk weight
under Articles 78 to 83 or which, in the case of credit
institutions calculating risk-weighted exposure amounts and expected loss
amounts under Articles 83 to
89, do not have a credit
assessment by a recognised ECAI and are internally rated as having a
probability of default equivalent to that associated with the credit
assessments of ECAIs determined by the competent authorities to be associated
with credit quality step 2 or above under the rules for the risk weighting of
exposures to corporates under Articles
78 to 83.
–              
regulated collective investment undertakings that
are subject to capital or leverage requirements;
–              
regulated pension funds; and
–              
recognised clearing organisations.
60.                  
Where a competent
authority permits the treatment set out in paragraph 59 to be applied in the
case of repurchase transactions or securities lending or borrowing transactions
in securities issued by its domestic government, then other competent authorities
may choose to allow credit institutions incorporated in their jurisdiction to
adopt the same approach to the same transactions.
(c)          Calculating
risk-weighted exposure amounts and expected loss amounts
Standardised Approach
61.                  
E* as calculated under
paragraph 34 shall be taken as the exposure value for the purposes of Article
80.
IRB Foundation
Approach
62.                  
LGD* (the effective
Loss Given Default) calculated as set out in this paragraph shall be taken as
the LGD for the purposes of Annex VII.
LGD* = Max {0, LGD x
[(E*/E]} 
where 
LGD is the loss given
fault that would apply to the exposure under Articles 84 to 89 if the exposure
was not collateralised;
E is the exposure
value under Articles 84 to 89;
E* is as calculated
under paragraph 34.

1.5.                
Other eligible collateral
for Articles 84 to 89
1.5.1.          
Valuation

(a)          Real
estate collateral
63.                  
The property shall be
valued by an independent valuer at or less than the market value. In those
Member States that have laid down rigorous criteria for the assessment of the
mortgage lending value in statutory or regulatory provisions the property may
instead be valued by an independent valuer at or less than the mortgage lending
value.
64.                  
Market value means the
estimated amount for which the property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s-length
transaction after proper marketing wherein the parties had each acted
knowledgeably, prudently and without compulsion. The market value shall be
documented in a transparent and clear manner.
65.                  
Mortgage lending value
means the value of the property as determined by a prudent assessment of the
future marketability of the property taking into account long-term sustainable
aspects of the property, the normal and local market conditions, the current use
and alternative appropriate uses of the property. Speculative elements shall
not be taken into account in the assessment of the mortgage lending value. The
mortgage lending value shall be documented in a transparent and clear manner. 
66.                  
The value of the collateral
shall be the market value or mortgage lending value reduced as appropriate to
reflect the results of the monitoring required under Part 2, paragraph 8 and to
take account of the any prior claims on the property.
(b)          Receivables
67.                  
The value of receivables
shall be the amount receivable.
(c)          Other
physical collateral
68.                  
The property shall be
valued at its market value – that is the estimated amount for which the
property would exchange on the date of valuation between a willing buyer and a
willing seller in an arm’s-length transaction.

1.5.2.          
Calculating
risk-weighted exposure amounts and expected loss amounts

(a)          General
treatment
69.                  
LGD* (the effective
Loss Given Default) calculated as set out in paragraphs 70 to 73 shall be taken
as the LGD for the purposes of Annex VII.
70.                  
Where the ratio of the
value of the collateral (C) to the exposure value (E) is below a
threshold level of C* (the required minimum collateralisation
level for the exposure) as laid down in Table 6, LGD* shall be the LGD laid
down in Annex VII for uncollateralised exposures to the counterparty.
71.                  
Where the ratio of the
value of the collateral to the exposure value exceeds a second, higher
threshold level of C** (i.e. the required level of collateralisation to
receive full LGD recognition) as laid down in Table 6, LGD* shall be that
prescribed in the following table. 
72.                  
For these purposes,
where the required level of collateralisation C** is not achieved in respect of
the exposure as a whole, the exposure shall be considered to be two exposures –
that part in respect of which the required level of collateralisation C** is
achieved and the remainder.
73.                  
Table 6 sets out the
applicable LGD* and required collateralisation levels for the secured parts of
exposures:
Table 6
Minimum LGD for
secured portion of exposures
   || LGD* for senior claims or contingent claims || LGD* for subordinated claims or contingent claims || Required minimum collateralisation level of the exposure (C*) || Required minimum collateralisation level of the exposure (C**) 
 Receivables || 35% || 65% || 0% || 125% 
 Residential real estate/commercial real estate || 35% || 65% || 30% || 140% 
 Other collateral || 40% || 70% || 30% || 140% 
By way of derogation,
until 31 December 2012 the competent authorities may, subject to the indicated levels of collateralisation
(a)     allow credit
institutions to assign a 30% LGD for senior exposures in the form of Commercial Real Estate leasing; and 
(b)     allow credit
institutions to assign a 35% LGD for senior exposures in the form of equipment
leasing.
At the end of this
period, this derogation shall be reviewed. 
(b)          Alternative
treatment for real estate collateral
74.                  
Subject to the
requirements of this paragraphs and paragraph 75 and as an alternative to the
treatment in paragraphs 69 to 73, the competent authorities of a Member State
may authorise credit institutions to apply a 50% risk weighting to the part of
the exposure fully collateralised by residential real estate property or
commercial real estate property situated within the territory of the Member
State if they have evidence that the relevant markets are well-developed and
long-established with loss-rates from lending collateralised by residential
real estate property or commercial real estate property respectively that do
not exceed the following limits:
(a)     up to 50 %
of the market value (or where applicable and if lower 60 % of the
mortgage-lending-value) must not exceed 0.3 % of the outstanding residential
real estate and/or commercial real estate loans in any given year.
(b)     overall
losses stemming from lending collateralised by residential real estate property
or commercial real estate property respectively must not exceed 0.5 % of the
outstanding loans collateralised by that form of real estate property in any
given year. 
75.                  
If either of the
conditions in paragraph 74 is not satisfied in a given year, the eligibility to
use this treatment shall cease until the conditions are satisfied in a
subsequent year. 
76.                  
The competent
authorities, which do not authorise the treatment in paragraph 73, may
authorise credit institutions to apply the risk weights permitted under this
treatment in respect of exposures collateralised by residential real estate
property of commercial real estate property respectively located in the
territory of those Member States the competent authorities of which authorise
this treatment subject to the same conditions as apply in that Member State.

1.6.                
Calculating
risk-weighted exposure amounts and expected loss amounts in the case of mixed
pools of collateral

77.                  
Where risk-weighted
exposure amounts and expected loss amounts are calculated under Articles 84 to
89, and an exposure is collateralised by both financial collateral and other eligible collateral, LGD* (the effective Loss Given
Default) to be taken as the LGD for the purposes of Annex VII shall be
calculated as follows.
78.                  
The credit institution
shall be required to subdivide the volatility-adjusted value of the exposure
(i.e. the value after the application of the volatility adjustment as set out
in paragraph 34) into portions each covered by only one type of collateral.
That is, the credit institution must divide the exposure into the portion
covered by eligible financial collateral, the portion covered by receivables,
the portions covered by commercial real estate property collateral and/or
residential real estate property collateral, the portion covered by other
eligible collateral, and the unsecured portion, as relevant. 
79.                  
LGD* for each portion
of exposure shall be calculated separately in accordance with the relevant
provisions of this Annex. 

1.7.                
Other funded credit
protection
1.7.1.          
Deposits with third
party institutions

80.                  
Where the conditions
set out in Part 2, paragraph 12 are satisfied, credit protection falling within
the terms of Part 1, paragraph 23 may be treated as a guarantee by the third
party institution.

1.7.2.          
Life insurance
policies pledged to the lending credit institution

81.                  
Where the conditions
set out in Part 2, paragraph 13 are satisfied, credit protection falling within
the terms of Part 1, paragraph 24 may be treated as a guarantee by the company
providing the life insurance. The value of the credit protection recognised
shall be the surrender value of the life insurance policy.

1.7.3.          
Institution
instruments repurchased on request

82.                  
Instruments eligible
under Part 1, paragraph 25 may be treated as a guarantee by the issuing
institution. 
83.                  
For these purposes the
value of the credit protection recognised shall be the following:
(a)     where the
instrument will be repurchased at its face value, the value of the protection
shall be that amount;
(b)     where the
instrument will be repurchased at market price, the value of the protection
shall be the value of the instrument valued in the same way as the debt
securities specified in Part 1, paragraph 8.

2.                      
Unfunded credit
protection
2.1.                
Valuation

84.                  
The value of unfunded
credit protection (G) shall be the amount that the protection provider has
undertaken to pay in the event of the default or non-payment of the borrower or
on the occurrence of other specified credit events. In the case of credit
derivatives which do not include as a credit event restructuring of the underlying
obligation involving forgiveness or postponement of principal, interest or fees
that result in a credit loss event (e.g. value adjustment, the making of a
value adjustment or other similar debit to the profit and loss account), the
value of the credit protection calculated under the first sentence of this
paragraph shall be reduced by 40%.
85.                  
Where unfunded credit
protection is denominated in a currency different from that in which the
exposure is denominated (a currency mismatch) the value of the credit
protection shall be reduced by the application of a volatility adjustment HFX
as follows:
G* = G x (1-HFX)
where 
G is the nominal
amount of the credit protection; 
G* is G
adjusted for any foreign exchange risk, and 
Hfx is the
volatility adjustment for any currency mismatch between the credit protection
and the underlying obligation.
Where there is no
currency mismatch
G* = G
86.                  
The volatility
adjustments to be applied for any currency mismatch may be calculated based on
the Supervisory volatility adjustments approach or the Own estimates approach
as set out in paragraphs 35 to 58.

2.2.                
Calculating
risk-weighted exposure amounts and expected loss amounts
2.2.1.          
Partial protection –
tranching 

87.                  
Where
the credit institution transfers a portion of the risk of a loan in one or more
tranches, the rules set out in Articles
94 to 101 shall apply. Materiality
thresholds on payments below which no payment shall be made in the event of
loss are considered to be equivalent to retained first loss positions and to
give rise to a tranched transfer of risk.

2.2.2.          
Standardised Approach

(a)          Full
protection
88.                  
For the purposes of
Article 80, g shall be the risk weight to be assigned to an exposure which is
fully protected by unfunded protection (GA), 
where
g is the risk weight
of exposures to the protection provider as specified under Articles 78 to 83;
and
GA is the
value of G* as calculated under paragraph 85 further adjusted for any maturity
mismatch as laid down in Part 4. 
(b)          Partial
protection – equal seniority
89.                  
Where the protected
amount is less than the exposure value and the protected and unprotected
portions are of equal seniority – ie the credit institution and the protection
provider share losses on a pro-rata basis, proportional regulatory capital
relief shall be afforded. For the purposes of Article 80 risk-weighted exposure
amounts shall be calculated in accordance with the following formula:
(E-GA) x r
+ GA x g
where 
E is the exposure
value;
GA is the
value of G* as calculated under paragraph 85 further adjusted for any maturity
mismatch as laid down in Part 4;
r is the risk weight
of exposures to the obligor as specified under Articles 78 to 83;
g is the risk weight
of exposures to the protection provider as specified under Articles 78 to 83. 
(c)          Sovereign
guarantees 
90.                  
The competent
authorities may extend the treatment provided for in Annex VI, paragraphs 4 to
6 to exposures or portions of exposures guaranteed by the central government or
central bank, where the guarantee is denominated in the domestic currency of
the borrower and the exposure is funded in that currency.

2.2.3.          
IRB Foundation
Approach

Full protection /
Partial protection – equal seniority
91.                  
For the covered
portion of the exposure (based on the adjusted value of the credit protection GA),
the PD for the purposes of Annex VII, Part 2 may be the PD of the protection
provider, or a PD between that of the borrower and that of the guarantor if a
full substitution is deemed not to be warranted. In the case of subordinated
exposures and non-subordinated unfunded protection, the LGD to be applied for
the purposes of Annex VII, Part 2 may be that associated with senior claims. 
92.                  
For any uncovered
portion of the exposure the PD shall be that of the borrower and the LGD shall
be that of the underlying exposure.
93.                  
GA is the
value of G* as calculated under paragraph 85 above further adjusted for any
maturity mismatch as laid down in Part 4.
Part 4 -
Maturity Mismatches 
1.                      
For the purposes of
calculating risk-weighted exposure amounts, a maturity mismatch occurs when the
residual maturity of the credit protection is less than that of the protected
exposure. Protection of less than three months residual maturity, the maturity
of which is less than the maturity of the underlying exposure, shall not be
recognised. 
2.                      
Where there is a
maturity mismatch the credit protection shall not be recognised where
(a)     the original
maturity of the protection is less than 1 year; or
(b)     the exposure
is a short term exposure specified by the competent authorities as being
subject to a one–day floor rather than a one-year floor in respect of the
maturity value (M) under Annex VII, Part 2, paragraph 13.

1.                      
Definition of maturity

3.                      
Subject to a maximum
of 5 years, the effective maturity of the underlying shall be the longest
possible remaining time before the obligor is scheduled to fulfil its
obligations. Subject to paragraph 4, the maturity of the credit protection
shall be the time to the earliest date at which the protection may terminate or
be terminated. 
4.                      
Where there is an
option to terminate the protection which is at the discretion of the protection
seller, the maturity of the protection shall be taken to be the time to the
earliest date at which that option may be exercised. Where there is an option
to terminate the protection which is at the discretion of the protection buyer
and the terms of the arrangement at origination of the protection contain a
positive incentive for the credit institution to call the transaction before
contractual maturity, the maturity of the protection shall be taken to be the
time to the earliest date at which that option may be exercised; otherwise such
an option may be considered not to affect the maturity of the protection.
5.                      
Where a credit
derivative is not prevented from terminating prior to expiration of any grace
period required for a default on the underlying obligation to occur as a result
of a failure to pay the maturity of the protection shall be reduced by the
amount of the grace period.

2.                      
Valuation of
protection 
2.1.                
Transactions subject
to funded credit protection – Financial Collateral Simple Method

6.                      
Where there is a
mismatch between the maturity of the exposure and the maturity of the
protection, the collateral shall not be recognised.

2.2.                
Transactions subject
to funded credit protection - Financial Collateral Comprehensive Method

7.                      
The maturity of the
credit protection and that of the exposure must be reflected in the adjusted
value of the collateral according to the following formula:
CVAM = CVA
x (t-t*)/(T-t*)
where 
CVA is the
volatility adjusted value of the collateral as specified in Part 3,
paragraph 34 or the amount of the exposure, whichever is the lowest;
t is the number of
years remaining to the maturity date of the credit protection calculated in
accordance with paragraphs 3 to 5, or the value of T, whichever is the lower;
T is the number of
years remaining to the maturity date of the exposure calculated in accordance
with paragraphs 3 to 5, or 5 years, whichever is the lower; and
t* is 0.25.
CVAM shall
be taken as CVA further adusted for maturity mismatch to be included
in the formula for the calculation of the fully adjusted value of the exposure
(E*) set out at Part 3, paragraph 34.

2.3.                
Transactions subject
to unfunded credit protection 

8.                      
The maturity of the
credit protection and that of the exposure must be reflected in the adjusted
value of the credit protection according to the following formula 
GA = G* x
(t-t*)/(T-t*)
where 
G* is the amount of
the protection adjusted for any currency mismatch 
GA is G*
adjusted for any maturity mismatch
t is the number of
years remaining to the maturity date of the credit protection calculated in
accordance with paragraphs 3 to 5, or the value of T, whichever is the lower;
T is the number of
years remaining to the maturity date of the exposure calculated in accordance
with paragraphs 3 to 5, or 5 years, whichever is the lower; and
t* is 0.25.
GA is then
taken as the value of the protection for the purposes of Part 3,
paragraphs 84 to 93. 
Part 5 -
Combinations of credit risk mitigation in the Standardised Approach
9.                      
In the case where a
credit institution calculating risk-weighted exposure amounts under Articles 78
to 83 has more than one form of credit risk mitigation covering a single
exposure (e.g. a credit institution has both collateral and a guarantee
partially covering an exposure), the credit institution shall be required to
subdivide the exposure into portions covered by each type of credit risk
mitigation tool (e.g. a portion covered by collateral and a portion covered by
guarantee) and the risk-weighted exposure amount for each portion must be calculated
separately in accordance with the provisions of Articles 78 to 83 and this
Annex. 
10.                  
When credit protection
provided by a single protection provider has differing maturities, a similar
approach to that described in paragraph 1 shall be applied.
Part 6 -
Basket CRM techniques 

1.                      
First-to-default
credit derivatives

1.                      
Where a credit
institution obtains credit protection for a number of exposures under terms
that the first default among the exposures shall trigger payment and that this
credit event shall terminate the contract, the credit institution may modify
the calculation of the risk-weighted exposure amount and, as relevant, the
expected loss amount of the exposure which would in the absence of the credit
protection produce the lowest risk-weighted exposure amount under Articles 78
to 83 or Articles 84 to 89 as appropriate in accordance with this Annex, but
only if the exposure value is less than or equal to the value of the credit
protection.

2.                      
nth-to-default
credit derivatives

2.                      
In the case where the nth
default among the exposures triggers payment under the credit protection, the
credit institution purchasing the protection may only recognise the protection
for the calculation of risk-weighted exposure amounts and, as relevant,
expected loss amounts if protection has also been obtained for defaults 1 to n-1
or when n-1 defaults have already occurred. In such cases the
methodology shall follow that set out in paragraph 1 for first-to-default
derivatives appropriately modified for nth-to-default products.
ANNEX IX –
Securitisation
Part 1 - Definitions for purposes of Annex X
1.                      
For the purposes of
this Annex
–              
‘Excess spread’ means
finance charge collections and other fee income received in respect of the
securitised exposures net of costs and expenses.
–              
‘Clean-up call option’
means a contractual option for the originator to repurchase or extinguish the
securitisation positions before all of the underlying exposures have been
repaid, when the amount of outstanding exposures falls below a specified level.
–              
‘Liquidity facility’
means the securitisation position arising from a contractual agreement to
provide funding to ensure timeliness of cashflows to investors.
–              
‘Kirb’ means 8% of the
risk-weighted exposure amounts that would be calculated under Articles 84 to 89
in respect of the securitised exposures had they not been securitised plus the
amount of expected losses associated with those exposures calculated under those
Articles.
–              
‘Ratings based method’
means the method of calculating risk-weighted exposure amounts for securitisation
positions in accordance with Part 4, paragraphs 45 to 49.
–              
‘Supervisory formula
method’ means the method of calculating risk-weighted exposure amounts for
securitisation positions in accordance with Part 4, paragraphs 50 to 52.
–              
‘Unrated position’
means a securitisation position which does not have an eligible credit
assessment by an eligible ECAI as defined in Article 97.
–              
‘Rated position’ means
a securitisation position which has an eligible credit assessment by an
eligible ECAI as defined in Article 97. 
–              
‘Asset-backed
commercial paper programme’ (‘ABCP’ programme) means a programme of
securitisations the securities issued by which predominantly take the form of
commercial paper with an original maturity of one year or less.
Part 2 -
Minimum requirements for recognition of significant credit risk transfer and
calculation of risk-weighted exposure amounts and expected loss amounts for
securitised exposures

1.                      
Minimum requirements
for recognition of significant credit risk transfer in a traditional securitisation

1.                      
The originator credit
institution of a traditional securitisation may exclude securitised exposures
from the calculation of risk-weighted exposure amounts and expected loss
amounts if significant credit risk associated with the securitised exposures
has been transferred to third parties and the transfer complies with the
following conditions: 
(a)     The
securitisation documentation reflects the economic substance of the
transaction.
(b)     The
securitised exposures are put beyond the reach of the originator credit
institution and its creditors, including in bankruptcy and receivership. This
shall be supported by the opinion of qualified legal counsel
(c)     The
securities issued do not represent payment obligations of the originator credit
institution. 
(d)     The
transferee is a securitisation special-purpose entity (SSPE).
(e)     The
originator credit institution does not maintain effective or indirect control
over the transferred exposures. An originator shall be considered to have
maintained effective control over the transferred exposures if it has the right
to repurchase from the transferee the previously transferred exposures in order
to realise their benefits or if it is obligated to re-assume transferred risk.
The originator credit institution’s retention of servicing rights or
obligations in respect of the exposures shall not of itself constitute indirect
control of the exposures. 
(f)     Where there
is a clean-up call option, the following conditions are satisfied:
(i)      The
clean-up call option is exercisable at the discretion of the originator credit
institution;
(ii)     The
clean-up call option may only be exercised when 10% or less of the original
value of the exposures securitised remains unamortised; and
(iii)    The
clean-up call option is not structured to avoid allocating losses to credit
enhancement positions or other positions held by investors and is not otherwise
structured to provide credit enhancement.
(g)     The
securitisation documentation does not contain clauses that
(i)      other than
in the case of early amortisation provisions, require positions in the
securitisation to be improved by the originator credit institution institution including but not limited to
altering the underlying credit exposures or increasing the yield payable to
investors in response to a deterioration in the credit quality of the
securitised exposures, or
(ii)     increase
the yield payable to holders of positions in the securitisation in response to
a deterioration in the credit quality of the underlying pool.

2.                      
Minimum requirements
for recognition of significant credit risk transfer in a synthetic
securitisation

2.                      
An originator credit
institution of a synthetic securitisation may calculate risk-weighted exposure
amounts, and, as relevant, expected loss amounts, for the securitised exposures
in accordance with paragraphs 3 and 4 below, if significant credit risk has
been transferred to third parties either through funded or unfunded credit
protection and the transfer complies with the following conditions. 
(a)     The
securitisation documentation reflects the economic substance of the
transaction.
(b)     The credit
protection by which the credit risk is transferred complies with the
eligibility and other requirements under Articles 90 to 93 for the recognition
of such credit protection. For these purposes, special purpose entities shall
not be recognised as eligible unfunded protection providers. 
(c)     The
instruments used to transfer credit risk do not contain terms or conditions
that 
(i)      impose
significant materiality thresholds below which credit protection is deemed not
to be triggered if a credit event occurs;
(ii)     allow for
the termination of the protection due to deterioration of the credit quality of
the underlying exposures;
(iii)    other than
in the case of early amortisation provisions, require positions in the
securitisation to be improved by the originator credit institution;
(iv)    increase the
credit institutions’ cost of credit protection or the yield payable to holders
of positions in the securitisation in response to a deterioration in the credit
quality of the underlying pool.
(d)     An opinion
is obtained from qualified legal counsel confirming the enforceability of the
credit protection in all relevant jurisdictions.

3.                      
Originator credit
institutions’ calculation of risk-weighted exposure amounts for exposures
securitised in a synthetic securitisation

3.                      
In calculating
risk-weighted exposure amounts for the securitised exposures, where the
conditions in paragraph 2 are met, the originator credit institution of a
synthetic securitisation shall, subject to paragraphs 5 to 8, use the relevant
calculation methodologies set out in Part 4 and not those set out in Articles 78
to 89. For credit institutions calculating risk-weighted exposure amounts and
expected loss amounts under Articles 84 to 89, the expected loss amount in
respect of such exposures shall be zero.
4.                      
For clarity, paragraph
3 refers to the entire pool of exposures included in the securitisation.
Subject to paragraphs 5 to 8, the originator credit institution is required to
calculate risk-weighted exposure amounts in respect of all tranches in the
securitisation in accordance with the provisions of Part IV including those
relating to the recognition of credit risk mitigation. For example, where a
tranche is transferred by means of unfunded credit protection to a third party,
the risk weight of that third party shall be applied to the tranche in the
calculation of the originator credit institution’s risk-weighted exposure
amounts.

3.1.                
Treatment of maturity
mismatches in synthetic securitisations 

5.                      
For the purposes of
calculating risk-weighted exposure amounts in accordance with paragraph 3, any
maturity mismatch between the credit protection by which the tranching is
achieved and the securitised exposures shall be taken into consideration in accordance
with paragraphs 6 to 8. The maturity of the securitised exposures shall be
taken to be the longest maturity of any of those exposures subject to a maximum
of five years. 
6.                      
The maturity of the
securitied exposures shall be taken to be the longest maturity of any of those
exposures subject to a maximum of five years. The maturity of the credit
protection shall be determined in accordance with Annex VIII . 
7.                      
Where an originator
credit institution uses Part 4, paragraphs 6 to 35 for the calculation of risk-weighted
exposure amounts, it shall ignore any maturity mismatch in calculating
risk-weighted exposure amounts for tranches that are unrated or rated below
investment grade. For all other tranches the maturity mismatch treatment set
out in Annex VIII shall be applied in accordance with the following formula:
RW* is [RW(SP) x
(t-t*)/(T-t*)] + [RW(Ass) x (T-t)/(T-t*)] 
Where 
RW* is Risk-weighted
exposure amounts for the purposes of Article 75(a) ;
RW(Ass) is
Risk-weighted exposure amounts for exposures if they had not been securitised
calculated on a pro-rata basis;
RW(SP) is
Risk-weighted exposure amounts calculated under paragraph 3 if there was no
maturity mismatch;
T is maturity of the
underlying exposures expressed in years;
t is maturity of
credit protection. expressed in years;
t* is 0.25.
8.                      
Where an originator
credit institution uses Part 4, paragraphs 36 to 74 for the calculation of
risk-weighted exposure amounts, it shall ignore any maturity mismatch in
calculating risk-weighted exposure amounts for tranches or parts of tranches
which are associated with a risk weight of 1250% under those paragraphs. For
all other tranches or parts of tranches the maturity mismatch treatment set out
in Annex VIII shall be applied in accordance with the formula in paragraph 7.
Part 3 -
External credit assessments

1.                      
Requirements to be met
by the credit assessments of ECAIS

1.                      
To be used for the
purposes of calculating risk-weighted exposure amounts under Part 4 of this Annex,
a credit assessment of an eligible ECAI shall comply with the following
conditions.
(a)     There shall
be no mismatch between the types of payments reflected in the credit assessment
and the types of payment to which the credit institution is entitled under the
contract giving rise to the securitisation position in question.
(b)     It shall be
available publicly to the market. Credit ssessments are c$onsidered to be
publicly available only if they have been published in a publicly accessible
forum and they are included in the ECAI’s transition matrix. Credit assessments
that are made available only to a limited number of entities shall not be
considered to be publicly available.

2.                      
Use of credit
assessments

2.                      
A credit institution
may nominate one or more eligible ECAIs the credit assessments of which shall
be used in the calculation of its risk-weighted exposure amounts under Articles
94 to 101 (a ‘nominated ECAI’).
3.                      
Subject to paragraphs
5 to 7 below, a credit institution must use credit assessments from nominated
ECAIs consistently in respect of its securitisation positions. 
4.                      
Subject to paragraphs
5 and 6, a credit institution may not use an ECAI’s credit assessments for its
positions in some tranches and another ECAI’s credit assessments for its
positions in other tranches within the same structure that may or may not be
rated by the first ECAI. 
5.                      
In cases where a
position has two credit assessments by nominated ECAIs, the credit institution
shall use the less favourable credit assessment.
6.                      
In cases where a
position has more than two credit assessments by nominated ECAIs, the two most
favourable credit assessments shall be used. If the two most favourable
assessments are different, the least favourable of the two shall be used.
7.                      
Where credit
protection eligible under Articles 90 to 93 is provided directly to the SSPE,
and that protection is reflected in the credit assessment of a position by a
nominated ECAI, the risk weight associated with that credit assessment may be
used. If the protection is not eligible under Articles 90 to 93, the credit
assessment shall not be recognised. In the situation where the credit
protection is not provided to the SSPE but rather directly to a securitisation
position, the credit assessment shall not be recognised.

3.                      
Mapping

8.                      
The
competent authorities shall determine with which credit quality step in the
tables set out in Part 4 each credit assessment of an eligible ECAI shall be
associated. In doing so the competent authorities shall differentiate between
the relative degrees of risk expressed by each assessment. They shall consider
quantitative factors, such as default and/or loss rates, and qualitative
factors such as the range of transactions assessed by the ECAI and the meaning
of the credit assessment.
9.                      
The
competent authorities shall seek to ensure that securitisation positions to
which the same risk weight is applied on the basis of the credit assessments of
eligible ECAIs are subject to equivalent degrees of credit risk. This shall
include modifying their determination as to the credit quality step with which
a particular credit assessment shall be associated as appropriate.
Part 4 -
Calculation

1.                      
Calculation of
risk-weighted exposure amounts

1.                      
For the purposes of
Article 96, the risk-weighted exposure amount of a securitisation position
shall be calculated by applying to the exposure value of the position the
relevant risk weight as set out in this Part. 
2.                      
Subject to paragraph
3, 
(a)     where a
credit institution calculates risk-weighted exposure amounts under paragraphs 6
to 35, the exposure value of an on-balance sheet securitisation position shall
be its balance sheet value; 
(b)     where a
credit institution calculates risk-weighted exposure amounts under paragraphs
36 to 74, the exposure value of an on-balance sheet securitisation position
shall be measured gross of value adjustments; and 
(c)     the exposure
value of an off-balance sheet securitisation position shall be its nominal
value multiplied by a conversion figure as prescribed in this Annex. This
conversion figure shall be 100% unless otherwise specified.
3.                      
The exposure value of
a securitisation position arising from a derivative instrument listed in Annex
IV, shall be determined in accordance with Annex III. 
4.                      
Where a securitisation
position is subject to funded credit protection, the exposure value of that
position may be modified in accordance with and subject to the requirements in
Annex VIII as further specified in this Annex.
5.                      
Where a credit
institution has two or more overlapping positions in a securitisation, it will
be required to the extent that they overlap to include in its calculation of
risk-weighted exposure amounts only the position or portion of a position
producing the higher risk-weighted exposure amounts. For these purposes
‘overlapping’ means that the positions, wholly or partially, represent an
exposure to the same risk such that to the extent of the overlap there is a
single exposure.

2.                      
Calculation of
risk-weighted exposure amounts under the Standardised Approach

6.                      
Subject to paragraph 8
and 9, the risk-weighted exposure amount of a rated securitisation position
shall be calculated by applying to the exposure value the risk weight
associated with the credit quality step with which the credit assessment has
been determined to be associated by the competent authorities in accordance
with Article 98 as laid down in the following tables 1 and 2. 
Table 1
Positions other than
ones with short-term credit assessments
 Credit quality step || 1 || 2 || 3 || 4 || 5 and below 
 Risk weight || 20% || 50% || 100% || 350% || 1250% 
Table 2
Positions with
short-term credit assessments
 Credit quality step || 1 || 2 || 3 || All other credit assessments 
 Risk weight || 20% || 50% || 100% || 1250% 
7.                      
Subject to paragraphs
10 to 16 , the risk-weighted exposure amount of an unrated securitisation
position shall be calculated by applying a risk weight of 1250%.

2.1.                
Originator and sponsor
credit institutions

8.                      
Originator credit
institutions and sponsor credit institutions shall apply a risk weight of 1250%
to all retained and repurchased securitisation positions which have a credit
assessment by a nominated ECAI which has been determined by the competent
authorities to be associated with a credit quality step below credit quality
step 3. In determining whether a position has such a credit assessment the
provisions of Part 3, paragraphs 2 to 7 shall apply.
9.                      
For an originator
credit institution or sponsor credit credit institution, the risk-weighted
exposure amounts calculated in respect of its positions in a securitisation may
be limited to the risk-weighted exposure amounts which would be calculated for
the securitised exposures had they not been securitised subject to the presumed
application of a 150% risk weight to all past due items and items belonging to
‘regulatory high risk categories’ amongst the securitised exposures. 

2.2.                
Treatment of unrated
positions

10.                  
Competent authorities
may permit a credit institution having an unrated securitisation position to
apply the treatment set out in paragraph 11 for calculating the risk-weighted
exposure amount for that position provided the composition of the pool of
exposures securitised is known at all times. 
11.                  
A credit institution may
apply the weighted-average risk weight that would be applied to the securitised
exposures Articles 78 to 83 by a credit institution holding the exposures
multiplied by a concentration ratio. This concentration ratio is equal to the
sum of the nominal amounts of all the tranches divided by the sum of the
nominal amounts of the tranches junior to or pari passu with the tranche in
which the position is held including that tranche itself. The resulting risk
weight shall not be higher than 1250% or lower than any risk weight applicable
to a rated more senior tranche. Where the credit institution is unable to
determine the risk weights that would be applied to the securitised exposures
under Articles 78 to 83, it shall apply a risk weight of 1250% to the position.

2.3.                
Treatment of
securitisation positions in a second loss tranche or better in an ABCP
programme

12.                  
Subject to the
availability of a more favourable treatment by virtue of the provisions
concerning liquidity facilities in paragraphs 14 to 16, a credit institution
may apply to securitisation positions meeting the conditions set out in
paragraph 13 a risk weight that is the greater of (i) 100% or (ii) the highest
of the risk weights that would be applied to any of the securitised exposures
under Articles 78 to 83 by a credit institution holding the exposures.
13.                  
For the treatment in
the paragraph 12 to be available, the securitisation position shall be
(a)     in a tranche
which is economically in a second loss position or better in the securitisation
and the first loss tranche must provide meaningful credit enhancement to the
second loss tranche;
(b)     of a quality
the equivalent of investment grade or better; and
(c)     held by a a
credit institution which does not hold a position in the first loss tranche. 

2.4.                
Treatment of unrated
liquidity facilities
2.4.1.          
Eligible liquidity
facilities

14.                  
When the following
conditions are met, to determine its exposure value a conversion figure of 20%
may be applied to the nominal amount of a liquidity facility with
an original maturity of one year or less and a conversion figure of 50% may be
applied to the nominal amount of a liquidity facility with an original maturity
of more than one year. 
(a)     The
liquidity facility documentation shall clearly identify and limit the
circumstances under which the facility may be drawn. 
(b)     The facility
shall not be able to be drawn so as to provide credit support by covering
losses already incurred at the time of draw – for example, by providing
liquidity in respect of exposures in default at the time of draw or by
acquiring assets at more than fair value.
(c)     The facility
shall not be used to provide permanent or regular funding for the
securitisation.
(d)     Repayment of
draws on the facility shall not be subordinated to the claims of investors
other than to claims arising in respect of interest rate or currency derivative
contracts, fees or other such payments, nor be subject to waiver or deferral.. 
(e)     It shall not
be possible for the facility to be drawn after all applicable credit
enhancements from which the liquidity facility would benefit are exhausted;
(f)     The facility
must include a provision that results in an automatic reduction in the amount
that can be drawn by the amount of exposures that are in default, where default
has the meaning given to it under Articles 84 to 89, or where the pool of
securitised exposures consists of rated instruments, that terminates the
facility if the average quality of the pool falls below investment grade.
The risk weight to be
applied shall be the highest risk weight that would be applied to any of the
securitised exposures under Articles 78 to 83 by a credit institution holding
the exposures.

2.4.2.          
Liquidity facilities
that may be drawn only in the event of a general market disruption

15.                  
To determine its
exposure value a conversion figure of 0% may be applied to the nominal amount
of a liquidity facility that may be drawn only in the event of a general market
disruption (i.e. where more than one SPE across different transactions are
unable to roll over maturing commercial paper and that inability is not the
result of an impairment of the SPE’s credit quality of the credit quality of
the securitised exposures), provided that the conditions set out in paragraph
14 are satisfied.

2.4.3.          
Cash advance
facilities

16.                  
To determine its
exposure value, a conversion figure of 0% may be applied to the nominal amount
of a liquidity facility that is unconditionally cancellable provided that the
conditions set out at paragraph 14 are satisfied and that repayment of draws on the facility are
senior to any other claims on the cash flows arising from the securitised
exposures.

2.5.                
Additional capital
requirements for securitisations of revolving exposures with early amortisation
provisions

17.                  
In addition to the
risk-weighted exposure amounts calculated in respect of its securitisation
positions, an originator credit institution shall calculate a risk-weighted exposure
amount according to the method set out in paragraphs 18 to 32 when it sells revolving
exposures into a securitisation that contains an early amortisation provision.
18.                  
The credit institution
shall calculate a risk-weighted exposure amount in respect of the sum of the
originator’s interest and the investors’ interest. 
19.                  
For securitisation
structures where the securitised exposures comprise revolving and non-revolving
exposures, an originator credit institution shall apply the treatment set out
below to that portion of the underlying pool containing revolving exposures. 
20.                  
For these purposes,
‘originator’s interest’ means the nominal amount of that notional part of a pool
of drawn amounts sold into a securitisation, the proportion of which in
relation to the amount of the total pool sold into the structure determines the
proportion of the cashflows generated by principal and interest collections and
other associated amounts which are not available to make payments to those
having securitisation positions in the securitisation. 
To qualify as such
the originator’s interest may not be subordinate to the investors’ interest. 
‘Investors’ interest’
means the nominal amount of the remaining notional part of the pool of drawn
amounts. 
21.                  
The exposure of the
originator credit institution associated with its rights in respect of the
originator’s interest shall not be considered a securitisation position but as
a pro rata exposure to the securitised exposures as if they had not been
securitised.

2.5.1.          
Exemptions from early
amortisation treatment

22.                  
Originators of the
following types of securitisaton are exempt from the capital requirement in
paragraph 17:
(a)     Securitisations
of revolving exposures whereby investors remain fully exposed to all future
draws by borrowers so that the risk on the underlying facilities does not
return to the originator credit institution even after an early amortisation
event has occurred are exempt from the early amortisation treatment, and
(b)     securitisations
where any early amortisation provision is solely triggered by events not
related to the performance of the securitised assets or the originator credit
institution, such as material changes in tax laws or regulations.

2.5.2.          
Maximum capital
requirement 

23.                  
For an originator
credit institution subject to the requirement in paragraph 17 the total of the
risk-weighted exposure amounts in respect of its positions in the investors’
interest and the risk-weighted exposure amounts calculated under paragraph 17
shall be no greater than the greater of 
(a)     the
risk-weighted exposure amounts calculated in respect of its positions in the
investors’ interest, 
(b)     the
risk-weighted exposure amounts that would be calculated in respect of the
securitised exposures by a credit institution holding the exposures as if they
had not been securitised in an amount equal to the investors’ interest.
24.                  
Deduction of net
gains, if any, arising from the capitalisation of future income required under
Article 57 shall be treated outside the maximum amount indicated in paragraph
23. 

2.5.3.          
Calculation of
risk-weighted exposure amounts

25.                  
The risk-weighted
exposure amount to be calculated in accordance with paragraph 17 shall be
determined by multiplying the amount of the investors’ interest by the product
of the appropriate conversion figure as indicated in paragraphs 27 to 32 and
the weighted average risk weight that would apply to the securitised exposures
if the exposures had not been securitised. 
26.                  
An early amortisation
provision shall be considered to be ‘controlled’ where the following conditions
are met.
(a)     The
originator credit institution has an appropriate capital/liquidity plan in
place to ensure that it has sufficient capital and liquidity available in the
event of an early amortisation.
(b)     Throughout
the duration of the transaction there is a pro rata sharing between the
originator’s interest and the investors’ interest of payments of interest and
principal, expenses, losses and recoveries based on the beginning of the month
balance of receivables outstanding. 
(c)     The
amortisation period is considered sufficient for 90% of the total debt
(originator’s and investors’ interest) outstanding at the beginning of the
early amortisation period to have been repaid or recognised as in default;
(d)     The speed of
repayment is no more rapid than would be achieved by straight-line amortisation
over the period set out in condition (c).
27.                  
In the case of
securitisations subject to an early amortisation provision of retail exposures
which are uncommitted and unconditionally cancellable without prior notice,
where the early amortisation is triggered by the excess spread level falling to
a specified level, credit institutions shall compare the three-month average
excess spread level with the excess spread levels at which excess spread is
required to be trapped.
28.                  
In cases where the
securitisation does not require excess spread to be trapped, the trapping point
is deemed to be 4.5 percentage points greater than the excess spread level at
which an early amortisation is triggered. 
29.                  
The conversion figure
to be applied shall be determined by the level of the actual three month
average excess spread in accordance with Table 3.
Table 3
   || Securitisations subject to a controlled early amortisation provision || Securitisations subject to a non-controlled early amortisation provision 
 3 months average excess spread || Conversion factor || Conversion factor 
 Above level A || 0% || 0% 
 Level A || 1% || 5% 
 Level B || 2% || 15% 
 Level C || 20% || 50% 
 Level D || 20% || 100% 
 Level E || 40% || 100% 
30.                  
In Table 3, ‘Level A’
means levels of excess spread less than 133.33% of the trapping level of excess
spread but not less than 100% of that trapping level; ‘Level B’ means levels of
excess spread less than 100% of the trapping level of excess spread but not
less than 75% of that trapping level; ‘Level C’ means levels of excess spread
less than 75% of the trapping level of excess spread but not less than 50% of
that trapping level; ‘Level D’ means levels of excess spread less than 50% of
the trapping level of excess spread but not less than 25% of that trapping
level; and ‘Level E’ means levels of excess spread less than 25% of the
trapping level of excess spread.
31.                  
All other
securitisations subject to a controlled early amortisation provision of revolving
exposures shall be subject to a credit conversion figure of 90%.
32.                  
All other
securitisations subject to a non-controlled early amortisation provision of
revolving exposures shall be subject to a credit conversion figure of 100%.

2.6.                
Recognition of credit
risk mitigation on securitisation positions

33.                  
Where credit
protection is obtained on a securitisation position, the calculation of
risk-weighted exposure amounts may be modified in accordance with Annex VIII.

2.7.                
Reduction in
risk-weighted exposure amounts

34.                  
As provided in Article
66(2), in respect of a securitisation position in respect of which a 1250% risk
weight applies, credit institutions may, as an alternative to including the
position in their calculation of risk-weighted exposure amounts, deduct from
own funds the exposure value of the position. For these purposes, the
calculation of the exposure value may reflect eligible funded protection in a
manner consistent with paragraph 33.
35.                  
Where a credit
institution makes use of the alternative indicated in paragraph 34, 12.5 times
the amount deducted in accordance with that paragraph shall, for the purposes
of paragraph 9, be subtracted from the amount specified in that paragraph as
the maximum risk-weighted exposure amount to be calculated by the credit
institutions there indicated.

3.                      
Calculation of
risk-weighted exposure amounts under the Internal Ratings Based Approach
3.1.                
Hierarchy of methods

36.                  
For the purposes of
Article 96, the risk-weighted exposure amount of a securitisation positions
shall be calculated in accordance with paragraphs 36 to 74.
37.                  
For a rated position
or a position in respect of which an inferred rating may be used, the Ratings
Based Method set out in paragraphs 45 to 49 shall be used to calculate the
risk-weighted exposure amount. 
38.                  
For an unrated
position the Supervisory Formula Method as set out in paragraphs 50 to 52 shall
be used except wherethe Internal Assessment Approach is permitted to be used as
set out in paragraphs 42 and 43.
39.                  
A credit institution
other than an originator credit institution or a sponsor credit institution may
only use the Supervisory Formula Method with the approval of the competent
authorities. 
40.                  
In the case of an
originator or sponsor credit institution unable to calculate Kirb
and which has not obtained approval to use the Internal Assessment Approach for
positions in ABCP programmes, and in the case of other credit institutions
where they have not obtained approval to use the Supervisory Formula Method or,
for positions in ABCP programmes, the Internal Assessment Approach, a risk weight
of 1250% shall be applied to securitisation positions which are unrated and in
respect of which an inferred rating may not be used. 

3.1.1.          
Use of inferred
ratings

41.                  
When the following
minimum operational requirements are satisfied a institution shall attribute to
an unrated position an inferred credit assessment equivalent to the credit
assessment of those rated positions (the ‘reference positions’) which are the
most senior positions which are in all respects subordinate to the unrated
securitisation position in question. 
(a)     The
reference positions must be subordinate in all respects to the unrated
securitisation tranche. 
(b)     The maturity
of the reference positions must be equal to or longer than that of the unrated
position in question. 
(c)     On an ongoing
basis, any inferred rating must be updated to reflect any changes in the credit
assessment of the reference securitisation positions.

3.1.2.          
The ‘Internal
Assessment Approach’ for positions in ABCP programmes

42.                  
Subject to the
approval of the competent authorities, when the following conditions are
satisfied a credit institution may attribute to an unrated position in an asset
backed commercial paper programme a derived rating as laid down in paragraph 43.
(a)     Positions in
the commercial paper issued from the programme shall be rated positions.
(b)     The credit
institution shall satisfy the competent authorities that its internal
assessment of the credit quality of the position reflects the publicly
available assessment methodology of one or more eligible ECAIs, for the rating
of securities backed by the exposures of the type securitised..
(c)     The ECAIs,
the methodology of which shall be reflected as required by the point (b), shall
include those ECAIs which have provided an external rating for the commercial
paper issued from the programme. Quantitative elements – such as stress factors
– used in assessing the position to a particular credit quality must be at
least as conservative as those used in the relevant assessment methodology of
the ECAIs in question
(d)     In developing
its internal assessment methodology the credit institution shall take into
consideration all published ratings methodologies of eligible ECAIs for the the
rating of securities backed by the exposures of the type securitised. This
consideration shall be documented by the credit institution and updated at
least once a year.
(e)     The credit
institution’s internal assessment methodology shall include rating grades.
There shall be a correspondence between such rating grades and the credit
assessments of eligible ECAIs. This correspondence shall be explicitly
documented.
(f)     The internal
assessment methodology shall be used in the credit institution’s internal risk
management processes, including its decision making, management information and
capital allocation processes.
(g)     Internal or
external auditors, an ECAI, or the credit institution’s internal credit review
or risk management function shall perform regular reviews of the internal
assessment process and the quality of the internal assessments of the credit
quality of the credit institution’s exposures to an ABCP programme. If the
credit institution’s internal audit, credit review, or risk management
functions perform the review, then these functions shall be independent of the
ABCP programme business line, as well as the customer relationship.
(h)     The credit
institution shall track the performance of its internal ratings over time to
evaluate the performance of its internal assessment methodology and shall make
adjustments, as necessary, to that methodology when the performance of the
exposures routinely diverges from that indicated by the internal ratings.
(i)      The ABCP
programme shall incorporate underwriting standards in the form of credit and
investment guidelines. In deciding on an asset purchase, the programme
administrator shall consider the type of asset being purchased, the type and
monetary value of the exposures arising from the provision of liquidity
facilities and credit enhancements, the loss distribution, and the legal and
economic isolation of the transferred assets from the entity selling the
assets. A credit analysis of the asset seller’s
risk profile shall be performed and shall include analysis of past and expected
future financial performance, current market position, expected future competitiveness,
leverage, cash flow, and interest coverage, and debt rating. In addition, a
review of the seller’s underwriting standards, servicing capabilities, and
collection processes shall be performed.
(j)      The ABCP
programme’s underwriting standards shall establish minimum asset eligibility
criteria that, in particular,
(i)      excludes
the purchase of assets that are significantly past due or defaulted;
(ii)     limits
excess concentration to individual obligor or geographic area; and
(iii)    limits the
tenor of the assets to be purchased.
(k)     The ABCP
program shall have collections policies and processes that take into account
the operational capability and credit quality of the servicer. The programme
shall mitigate seller/servicer risk through various methods, such as triggers
based on current credit quality that would preclude co-mingling of funds.
(l)      The
aggregated estimate of loss on an asset pool that the ABCP programme is
considering purchasing must take into account all sources of potential risk,
such as credit and dilution risk. If the seller-provided credit enhancement is
sized based on only credit-related losses, then a separate reserve shall be
established for dilution risk, if dilution risk is material for the particular
exposure pool. In addition, in sizing the required enhancement level, the
program shall review several years of historical information, including losses,
delinquencies, dilutions, and the turnover rate of the receivables. 
(m)    The ABCP
programme shall incorporate structural features – for example wind down
triggers - into the purchase of exposures in order to mitigate potential credit
deterioration of the underlying portfolio. 
The requirement for
the assessment methodology of the ECAI to be publicly available may be waived
by the competent authorities where they are satisfied that due to the specific
features of the securitisation – for example its unique structure - there is as
yet no publicly available ECAI assessment methodology.
43.                  
The unrated position
shall be assigned by the credit institution to one of the rating grades
described in paragraph 42. The position shall be attributed a derived rating
the same as the credit assessments corresponding to that rating grade as laid
down in paragraph 42. Where this derived rating is, at the inception of the
securitisation at the level of investment grade or better, it shall be
considered the same as an eligible credit assessment by an eligible ECAI for
the purposes of calculating risk-weighted exposure amounts.

3.2.                
Maximum risk-weighted
exposure amounts

44.                  
For an originator
credit institution, a sponsor credit institution, or for other credit
institutions which can calculate KIRB, the risk-weighted exposure
amounts calculated in respect of its positions in a securitisation may be
limited to that which would produce a capital requirement under Article 75(a)
equal to the sum of 8% of the risk-weighted exposure amounts which would be
produced if the securitised assets had not been securitised and were on the
balance sheet of the credit institution plus the expected loss amounts of those
exposures. 

3.3.                
Ratings Based Method

45.                  
Under the Ratings
Based Method, the risk-weighted exposure amount of a rated securitisation
position shall be calculated by applying to the exposure value the risk weight
associated with the credit quality step with which the credit assessment has
been determined to be associated by the competent authorities in accordance
with Article 98 as set out in the Tables 4 and 5. 
Table 4
Positions other than
ones with short-term credit assessments
 Credit Quality Step (CQS) || Risk weight 
   || A || B || C 
 CQS 1 || 7% || 12% || 20% 
 CQS 2 || 8% || 15% || 25% 
 CQS 3 || 10% || 18% || 35%3 
 CQS 4 || 12% || 20% || 35% 
 CQS 5 || 20% || 35% || 35% 
 CQS 6 || 35% || 50% || 50% 
 CQS 7 || 60% || 75% || 75% 
 CQS 8 || 100% || 100% || 100% 
 CQS 9 || 250% || 250% || 250% 
 CQS 10 || 425% || 425% || 425% 
 CQS 11 || 650% || 650% || 650% 
 Below CQS 11 || 1250% || 1250% || 1250% 
Table 5
Positions with short
term credit assessments
 Credit Quality Step (CQS) || Risk weight 
   || A || B || C 
 CQS 1 || 7% || 12% || 20% 
 CQS 2 || 12% || 20% || 35% 
 CQS 3 || 60% || 75% || 75% 
 All other credit assessments || 1250% || 1250% || 1250% 
46.                  
Subject to paragraph 47,
the risk weights in column A of each table shall be applied where the position
is in the most senior tranche of a securitisation. When determining whether a
tranche is the most senior for these purposes, it is not required take into
consideration amounts due under interest rate or currency derivative contracts,
fees due, or other similar payments.
47.                  
The risk weights in
column C of each table shall be applied where the position is in a
securitisation where the effective number of exposures securitised is less than
six. In calculating the effective number of exposures securitised multiple
exposures to one obligor must be treated as one exposure. The effective number
of exposures is calculated as: 
where EADi
represents the sum of the exposure values of all exposures to the ith obligor.
In the case of resecuritisation (securitisation of securitisation exposures),
the credit institution must look at the number of securitisation exposures in
the pool and not the number of underlying exposures in the original pools from
which the underlying securitisation exposures stem. If the portfolio share associated with the largest
exposure, C1, is available, the credit institution may compute N as 1/C1.
48.                  
The risk weights in
Column B shall be applied to all other positions.
49.                  
Credit risk mitigation
on securitisation positions may be recognised in accordance with paragraphs 58
to 60.

3.4.                
Supervisory Formula
Method 

50.                  
Subject to paragraphs
56 and 57, under the Supervisory Formula Method, the risk weight for a
securitisation position shall be the greater of 7% or the risk weight to be
applied in accordance with paragraph 51.
51.                  
Subject to paragraphs
56 and 57, the risk weight to be applied to the exposure amount shall be 
12.5 x (S[L+T] –
S[L]) / T
where
where
t = 1000, 
and w = 20.
In these expressions,
Beta [x; a, b] refers to the cumulative beta distribution with parameters a and
b evaluated at x. 
T
(the thickness of the tranche in which the position is held) is measured as the
ratio of (a) the nominal amount of the tranche to (b) the sum of the exposure
values of the exposures that have been securitised. For these purposes the
exposure value of a derivative instrument listed in Annex IV shall, where the current
replacement cost is not a positive value, be the potential future credit
exposure calculated in Accordance with Annex III;
Kirbr is the ratio of (a) Kirb to (b) the sum of the exposure values of the
exposures that have been securitised. Kirbr
is expressed in decimal form (e.g. Kirb equal to 15% of
the pool would be expressed as Kirbr of 0.15). 
L (the credit
enhancement level) is measured as the ratio of the nominal amount of all
tranches subordinate to the tranche in which the position is held to the sum of
the exposure values of the exposures that have been securitised. Capitalised
future income shall not be included in the measured L. Amounts due by
counterparties to derivative instruments listed in Annex IV that represent
tranches more junior than the tranche in question may be measured at their
current replacement cost (without the potential future credit exposures) in
calculating the enhancement level. 
N is the effective
number of exposures calculated in accordance with paragraph 47.
ELGD, the
exposure-weighted average loss-given-default, is calculated as follows: 
where LGDi
represents the average LGD associated with all exposures to the ith
obligor, where LGD is determined in accordance with Articles 84 to 89. In the
case of resecuritisation, an LGD of 100% shall be applied to the securitised
positions. When default and
dilution risk for purchased receivables are treated in an aggregate manner
within a securitisation (e.g. a single reserve or over-collateralisation is
available to cover losses from either source), the LGD input shall be
constructed as a weighted average of the LGD for credit risk and the 75% LGD
for dilution risk. The weights shall be the stand-alone capital charges for
credit risk and dilution risk respectively.
Simplified inputs
If the exposure value
of the largest securitised exposure, C1, is no more than
3% of the sum of the exposure values of the securitised exposures, then for the
purposes of the Supervisory Formula Method the credit institution may set LGD=
50% and N equal to either
 .
or
N=1/ C1.
Cm is the
ratio of the sum of the exposure values of the largest 'm' exposures to the sum
of the exposure values of the exposures securitised . The level of ‘m’ may be
set by the credit institution.
For securitisations
involving retail exposures, the competent authorities may permit the Supervisory
Formula Method to be implemented using the simplifications: h = 0 and
v = 0. 
52.                  
Credit risk mitigation
on securitisation positions may be recognised in accordance with paragraphs 58,
59 and 61 to 65.

3.5.                
Liquidity Facilities

53.                  
The provisions in
paragraphs 54 and 55 apply for the purposes of determining the exposure value
of an unrated securitisation position in the form of certain types of liquidity
facility.

3.5.1.          
Liquidity Facilities
Only Available in the Event of General Market Disruption

54.                  
A conversion figure of
20% may be applied to the nominal amount of a liquidity facility that may only
be drawn in the event of a general market disruption and that meets the
conditions to be an ‘eligible liquidity facility’ set out in paragraph 14. 

3.5.2.          
Cash advance
facilities

55.                  
A conversion figure of
0% may be applied to the nominal amount of a liquidity facility that meets the conditions set out in paragraph 16.
Exceptional treatment
where Kirb cannot be calculated.
56.                  
When it is not
practical for the credit institution to calculate the risk-weighted exposure
amounts for the securitised exposures as if they had not been securitised, a
credit institution may, on an exceptional basis and subject to the consent of
the competent authorities, temporarily be allowed to apply the following method
for the calculation of risk-weighted exposure amounts for an unrated
securitisation position in the form of a liquidity facility. 
57.                  
The highest risk
weight that would be applied under Articles 78 to 83 to any of the securitised
exposures had they not been securitised may be applied to the securitisation
position represented by the liquidity facility. To determine the exposure value
of the position a conversion figure of 50% may be applied to the nominal amount
of the liquidity facility if the facility has an original maturity of one year
or less. If the liquidity facility complies with the conditions in paragraph 54
a conversion figure of 20% may be applied. 

3.6.                
Recognition of credit
risk mitigation in respect of securitisation positions
3.6.1.          
Funded protection

58.                  
Eligible funded
protection is limited to that which is eligible for the calculation of
risk-weighted exposure amounts under Articles 78 to 83 as laid down under
Articles 90 to 93 and recognition is subject to compliance with the relevant
minimum requirements as laid down under those Articles.

3.6.2.          
Unfunded protection

59.                  
Eligible unfunded
protection and unfunded protection providers are limited to those which are
eligible under Articles 90 to 93 and recognition is subject to compliance with
the relevant minimum requirements laid down under those Articles. 

3.6.3.          
Calculation of capital
requirements for securitisation positions with credit risk mitigation

Ratings Based Method
60.                  
Where risk-weighted
exposure amounts are calculated using the Ratings Based Method, the exposure
value and/or the risk-weighted exposure amount for a securitisation position in
respect of which credit protection has been obtained may be modified in
accordance with the provisions of Annex VIII as they apply for the calculation
of risk-weighted exposure amounts under Articles 78 to 83.
Supervisory Formula
Method – full protection
61.                  
Where risk-weighted
exposure amounts are calculated using the Supervisory Formula Method, the
credit institution shall determine the ‘effective risk weight’ of the position.
It shall do this by dividing the risk-weighted exposure amount of the positon
by the exposure value of the position and multiplying the result by 100. 
62.                  
In the case of funded
credit protection, the risk-weighted exposure amount of the securitisation
position shall be calculated by multiplying the funded protection-adjusted
exposure amount of the position (E*, as calculated under Articles 90 to 93 for
the calculation of risk-weighted exposure amounts under Articles 78 to 83 taking
the amount of the securitisation position to be E) by the effective risk
weight.
63.                  
In the case of
unfunded credit protection, the risk-weighted exposure amount of the
securitisation position shall be calculated by multiplying GA (the
amount of the protection adjusted for any currency mismatch and maturity
mismatch in accordance with the provisions of Annex VIII) by the risk weight of
the protection provider; and adding this to the amount arrived at by
multiplying the amount of the securitisation position minus GA by
the effective risk weight.
Supervisory formula
method - partial protection
64.                  
If the credit risk
mitigation covers the ‘first loss’ or losses on a proportional basis on the
securitisation position, the credit institution may apply the provisions in paragraphs
61 to 63.
65.                  
In other cases the credit
institution shall treat the securitisation position as two or more positions
with the uncovered portion being considered the position with the lower credit
quality. For the purposes of calculating the risk-weighted exposure amount for
this position, the provisions in paragraphs 50 to 52 shall apply subject to the
modifications that ‘T’ shall be adjusted to e* in the case of funded
protection; and to T-g in the case of unfunded protection, where e* denotes the
ratio of E* to the total notional amount of the underlying pool, where E* is
the adjusted exposure amount of the securitisation position calculated in
accordance with the provisions of Annex VIII as they apply for the calculation
of risk-weighted exposure amounts under Articles 78 to 83 taking the amount of
the securitisation position to be E; and g is the ratio of the nominal amount
of credit protection (adjusted for any currency or maturity mismatch in
accordance with the provisions of Annex VIII) to the sum of the exposure
amounts of the securitised exposures. In the case of unfunded credit protection
the risk weight of the protection provider shall be applied to that portion of
the position not falling within the adjusted value of ‘T’.

3.7.                
Additional capital
requirements for securitisations of revolving exposures with early amortisation
provisions

66.                  
In addition to the
risk-weighted exposure amounts calculated in respect of its securitisation
positions, an originator credit institution shall be required to calculate a
risk-weighted exposure amount according to the methodology set out in
paragraphs 17 to 32 when it sells revolving exposures into a securitisation
that contains an early amortisation provision.
67.                  
For the purposes of
paragraph 66, paragraphs 68 and 69 shall replace paragraphs 20 and 21.
68.                  
For the purposes
of these provisions, “originator’s interest” shall be the sum of
(a)     the nominal
amount of that notional part of a pool of drawn amounts sold into a
securitisation, the proportion of which in relation to the amount of the total
pool sold into the structure determines the proportion of the cashflows
generated by principal and interest collections and other associated amounts
which are not available to make payments to those having securitisation
positions in the securitisation; plus
(b)     the nominal
amount of that part of the pool of undrawn amounts of the credit lines, the
drawn amounts of which have been sold into the securitisation, the proportion
of which to the total amount of such undrawn amounts is the same as the
proportion of the nominal amount described in point (a) to the nominal amount
of the pool of drawn amounts sold into the securitisation.
To qualify as such
the originator’s interest may not be subordinate to the investors’ interest. 
“Investors’ interest”
means the nominal amount of the notional part of the pool of drawn amounts not
falling within point (a) plus the nominal amount of that part of the pool of
undrawn amounts of credit lines, the drawn amounts of which have been sold into
the securtisation, not falling within point (b). 
69.                  
The exposure of the
originator credit institution associated with its rights in respect of that
part of the originator’s interest described in paragraph 68 point (a) shall not
be considered a securitisation position but as a pro rata exposure to the securitised
drawn amounts exposures as if they had not been securitised in an amount equal
to that described in paragraph 68 point (a). The originator credit institution
shall also be considered to have a pro rata exposure to the undrawn amounts of
the credit lines, the drawn amounts of which have been sold into the
securitisation, in an amount equal to that described in paragraph 68point (b). 

3.8.                
Reduction in
risk-weighted exposure amounts

70.                  
The risk-weighted
exposure amount of a securitisation position to which a 1250% risk weight is
applied may be reduced by 12.5 times the amount of any value adjustments
made by the credit institution in respect of the securitised exposures. To the
extent that value adjustments are taken account of for this purpose they shall
not be taken account of for the purposes of the calculation indicated in Annex
VII, Part 1, paragraph 34.
71.                  
The risk-weighted
exposure amount of a securitisation position may be reduced by 12.5 times the
amount of any value adjustments made by the credit institution in respect of
the position.
72.                  
As provided in Article
66(2), in respect of a securitisation position in respect of which a 1250% risk
weight applies, credit institutions may, as an alternative to including the
position in their calculation of risk-weighted exposure amounts, deduct from
own funds the exposure value of the position. 
73.                  
For the purposes of
paragraph 73
(a)     the exposure
value of the position may be derived from the risk-weighted exposure amounts
taking into account any reductions made in accordance with paragraphs 70 and
71;
(b)     the
calculation of the exposure value may reflect eligible funded protection in a
manner consistent with the methodology prescribed in paragraphs 58 to 65;
(c)     where the
Supervisory Formula Method is used to calculate risk-weighted exposure amounts
and L < KIRBR and [L+T] > KIRBR the position
may be treated as two positions with L equal to KIRBR for the more
senior of the positions.
74.                  
Where a credit
institution makes use of the alternative indicated in paragraph 72, 12.5 times
the amount deducted in accordance with that paragraph shall, for the purposes
of paragraph 44, be subtracted from the amount specified in that paragraph as
the maximum risk-weighted exposure amount to be calculated by the credit institutions
there indicated.
Annex X
Operational Risk
Part 1 - Basic Indicator Approach

1.                      
Capital requirement 

1.                      
Under the Basic
Indicator Approach, the capital requirement for operational risk is equal to
15% of the relevant indicator defined below. 

2.                      
Relevant indicator

2.                      
The relevant indicator
is the average over three years of the sum of net interest income, and net
non-interest income.
3.                      
The three-year average
is calculated on the basis of the last six twelve-monthly observations at the
middle and at the end of the financial year. When audited figures are not
available, business estimates may be used. 
4.                      
If for any given
observation, the sum of net interest income and net non-interest income is
negative or equal to zero, this figure shall not be taken into account in the
calculation of the three-year average. The relevant indicator shall be
calculated as the sum of positive figures divided by the number of positive
figures.

2.1.                
Credit institutions
subject to Directive 86/635/EEC

5.                      
Based on the
accounting categories for the profit and loss account of credit institutions
under Article 27 of Directive 86/635/EEC, the relevant indicator shall be expressed as the sum of the
elements listed in Table 1. Each element shall be included in the sum with its positive or negative sign. 
6.                      
These elements may
need to be adjusted to reflect the qualifications in paragraphs 7 and 8.
Table 1:
 1          Interest receivable and similar income 2          Interest payable and similar charges 
 3          Income from securities: a) from shares and other variable-yield securities b) from participating interests c) from shares in affiliated undertakings 
 4          Commissions/fees receivable 5          Commissions/fees payable 
 6          Net profit or net loss on financial operations 
 7          Other operating income 

2.1.1.          
Qualifications:

7.                      
The
indicator shall be calculated before the deduction of any provisions and
operating expenses.
8.                      
The
following elements shall not be used in the calculation of the indicator:
(a)     Realised profits/losses from the sale of non-trading book items
(b)     Income from extraordinary or irregular items
(c)     Income derived from insurance.
When revaluation of
trading items is part of the profit and loss statement, revaluation could be
included. When Article 36 (2) of Directive 86/635/EEC is applied, revaluation
booked in the profit and loss account should be included.

2.2.                
Credit institutions
subject to a different accounting framework

9.                      
When credit
institutions are subject to an accounting framework different from the one
established by Directive 86/635/EC, they should calculate the relevant
indicator on the basis of data that best reflect the above definition.
Part 2 -
Standardised Approach

1.                      
Capital requirement

1.                      
Under the Standardised
Approach, the capital requirement for operational risk is the simple sum of the
capital requirements calculated for each of the business lines in table 2 .
2.                      
The capital
requirement for a given business line is equal to a certain percentage of a
relevant indicator.
3.                      
The indicator is
calculated for each business line individually.
4.                      
For each business
line, the relevant indicator is the average over three years of the sum of net
interest income, and annual net non-interest income, as defined in Part 1, paragraphs
5 to 9.
5.                      
The three-year average
is calculated on the basis of the last six twelve-monthly observations at the
middle and at the end of the financial year. When audited figures are not
available, business estimates may be used.
6.                      
If for any given
observation, the sum of net interest income and net non-interest income is
negative, this figure shall be assigned the value zero.
Table 2:
 Business line || List of activities || Percentage 
 Corporate finance || Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis Services related to underwriting Investment advice Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to the mergers and the purchase of undertakings Investment research and financial analysis and other forms of general recommendation relating to transactions in financial instruments || 18% 
 Trading and sales || Dealing on own account Money broking Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Placing of financial instruments without a firm commitment basis Operation of Multilateral Trading Facilities || 18% 
 Retail brokerage (Activities with a individual physical persons or with small and medium sized entities meeting the criteria set out in Article 55 for the retail exposure class) || Reception and transmission of orders in relation to one or more financial instruments Execution of orders on behalf of clients Placing of financial instruments without a firm commitment basis || 12% 
 Commercial banking || Acceptance of deposits and other repayable funds Lending Financial leasing Guarantees and commitments || 15% 
 Retail banking (Activities with a individual physical persons or with small and medium sized entities meeting the criteria set out in Article 55 for the retail exposure class) || Acceptance of deposits and other repayable funds Lending Financial leasing Guarantees and commitments || 12% 
 Payment and settlement || Money transmission services, Issuing and administering means of payment || 18% 
 Agency services || Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management || 15% 
 Asset management || Portfolio management Managing of UCITS Other forms of asset management || 12% 
7.                      
Competent authorities
may authorise a credit institution to calculate its capital requirement for
operational risk using an alternative standardised approach, as set out in paragraphs
9 to 16.

2.                      
Principles for
business line mapping

8.                      
Credit institutions
must develop and document specific policies and criteria for mapping the
indicator for current business lines and activities into the standardised
framework. The criteria must be reviewed and adjusted as appropriate for new or
changing business activities and risks. The principles for business line
mapping are :
(a)     All
activities must be mapped into the business lines in a mutually exclusive and
jointly exhaustive manner; 
(b)     Any activity
which cannot be readily mapped into the business line framework, but which
represents an ancillary function to an activity included in the framework, must
be allocated to the business line it supports. If more than one business line
is supported through the ancillary activity, an objective mapping criteria must
be used;
(c)     If an
activity cannot be mapped into a particular business line then the business
line yielding the highest percentage must be used. The same business line
equally applies to any associated ancillary activity.
(d)     Credit
institutions may use internal pricing methods to allocate the indicator between
business lines. Costs generated in one business line which are imputable to a
different business line may be reallocated to the business line to which they
pertain, for instance by using a treatment based on internal transfer costs
between the two business lines.
(e)     The mapping
of activities into business lines for operational risk capital purposes must be
consistent with the categories used for credit and market risks.
(f)     Senior
management is responsible for the mapping policy under the control of the
governing bodies of the credit institution;
(g)     The mapping
process to business lines must be subject to independent review.

3.                      
Alternative indicators
for certain business lines
3.1.                
Modalities

9.                      
The competent
authorities may authorise the credit institution to use an alternative
indicator for the business lines: retail banking and commercial banking.
10.                  
For these business
lines, the relevant indicator shall be a normalised income indicator equal to
the three-year average of the total nominal amount of loans and advances
multiplied by 0.035.
11.                  
For the retail banking
business line, the loans and advances shall consist of the total drawn amounts
in the following credit portfolios: retail, SMEs treated as retail, and
purchased retail receivables.
12.                  
For the commercial
banking business line, the loans and advances shall consist of the drawn
amounts in the following credit portfolios: Corporate, Sovereign, Institutions,
Specialised Lending, SMEs treated as Corporate and Purchased Corporate
Receivables. Securities held in the non-trading book shall also be included.

3.2.                
Conditions

13.                  
The
authorization to use alternative indicators shall be subject to the conditions in
paragraphs 14 to 16.

3.2.1.          
General
condition

14.                  
The credit institution
meets the qualifying criteria set out in paragraph 17.

3.2.2.          
Conditions specific to
retail banking and commercial banking

15.                  
The credit institution
is overwhelmingly active in retail and commercial banking activities, which
shall account for at least 90% of its income.
16.                  
The credit institution
is able to demonstrate to the competent authorities that a significant
proportion of its retail and/or commercial banking activities comprise loans
associated with a high probability of default, and that the alternative
standardised approach provides an improved basis for assessing the operational
risk.

4.                      
Qualifying criteria

17.                  
Credit institutions
must meet the following qualifying criteria listed below, in addition to the
general risk management standards set out in Article 22 and Annex V.
(a)     Credit
institutions shall have a well-documented assessment and management system for operational
risk with clear responsibilities assigned for this system. They shall identify
their exposures to operational risk and track relevant operational risk data,
including material loss data. This system shall be subject to regular
independent review.
(b)     The
operational risk assessment system must be closely integrated into the risk
management processes of the credit institution. Its output must be an integral
part of the process of monitoring and controlling the credit institution’s
operational risk profile.
(c)     Credit
institutions shall implement a system of management reporting that provides
operational risk reports to relevant functions within the credit institution.
Credit institutions shall have procedures for taking appropriate action
according to the information within the management reports. 
Part 3 -
Advanced Measurement Approaches

1.                      
Qualifying criteria

1.                      
To be eligible for an
Advanced Measurement Approach, credit institutions must satisfy the competent
authorities that they meet the qualifying criteria below, in addition to the
general risk management standards in Article 22 and Annex V.

1.1.                
Qualitative Standards

2.                      
The credit
institution’s internal operational risk measurement system shall be closely
integrated into its day-to-day risk management processes.
3.                      
The credit institution
must have an independent risk management function for operational risk.
4.                      
There must be regular
reporting of operational risk exposures and loss experience. The credit
institution shall have procedures for taking appropriate corrective action.
5.                      
The credit
institution’s risk management system must be well documented. The credit
institution shall have routines in place for ensuring compliance and policies
for the treatment of non-compliance. 
6.                      
The operational risk
management processes and measurement systems shall be subject to regular
reviews performed by internal and/or external auditors.
7.                      
The validation of the
operational risk measurement system by the competent authorities shall include
the following elements:
(a)     Verifying
that the internal validation processes are operating in a satisfactory manner; 
(b)     Making sure
that data flows and processes associated with the risk measurement system are
transparent and accessible.

1.2.                
Quantitative Standards
1.2.1.          
Process

8.                      
Credit institutions
shall calculate their capital requirement as comprising both expected loss and
unexpected loss, unless they can demonstrate that expected loss is adequately
captured in their internal business practices. The operational risk measure
must capture potentially severe tail events, achieving a soundness standard
comparable to a 99.9% confidence interval over a one year period. 
9.                      
The operational risk
measurement system of a credit institution must have certain key elements to
meet the soundness standard set out above. These elements must include the use
of internal data, external data, scenario analysis and factors reflecting the
business environment and internal control systems as set out in paragraphs 13
to 24 below. A credit institution needs to have a well documented approach for
weighting the use of these four elements in its overall operational risk
measurement system.
10.                  
The risk measurement
system shall capture the major drivers of risk affecting the shape of the tail
of the loss estimates.
11.                  
Correlations in
operational risk losses across individual operational risk estimates may be
recognised only if credit institutions can demonstrate to the satisfaction of
the competent authorities that their systems for measuring correlations are
sound, implemented with integrity, and take into account the uncertainty
surrounding any such correlation estimates, particularly in periods of stress.
The credit institution must validate its correlation assumptions using
appropriate quantitative and qualitative techniques.
12.                  
The risk measurement
system shall be internally consistent and shall avoid the multiple counting of
qualitative assessments or risk mitigation techniques recognised in other areas
of the capital adequacy framework.

1.2.2.          
Internal data

13.                  
Internally generated
operational risk measures shall be based on a minimum historical observation
period of five years. When a credit institution first moves to an Advanced
Measurement Approach, a three-year historical observation period is acceptable.
14.                  
Credit institutions
must be able to map their historical internal loss data into the business lines
defined in Part 2 and into the event types defined in Part 5, and to provide
these data to competent authorities upon request. There must be documented,
objective criteria for allocating losses to the specified business lines and
event types. The operational risk losses that are related to credit risk and
have historically been included in the internal credit risk databases must be
recorded in the operational risk databases and be separately identified. Such
losses will not be subject to the operational risk charge, as long as they
continue to be treated as credit risk for the purposes of calculating minimum
capital requirements.
Operational risk losses that are related to market risks shall be included in the
scope of the capital requirement for operational risk.
15.                  
The credit
institution's internal loss data must be comprehensive in that it captures all
material activities and exposures from all appropriate sub-systems and
geographic locations. Credit institutions must be able to justify that any
excluded activities or exposures, both individually and in combination, would
not have a material impact on the overall risk estimates. An appropriate
minimum loss threshold for internal loss data collection must be defined.
16.                  
Aside from information
on gross loss amounts, credit institutions shall collect information about the
date of the event, any recoveries of gross loss amounts, as well as some
descriptive information about the drivers or causes of the loss event.
17.                  
There shall be
specific criteria for assigning loss data arising from an event in a
centralised function or an activity that spans more than one business line, as
well as from related events over time.
18.                  
Credit institutions
must have documented procedures for assessing the on-going relevance of
historical loss data, including those situations in which judgement overrides,
scaling, or other adjustments may be used, to what extent they may be used and
who is authorised to make such decisions.

1.2.3.          
External data 

19.                  
The credit
institution’s operational risk measurement system shall use relevant external data,
especially when there is reason to believe that the credit institution is
exposed to infrequent, yet potentially severe, losses. A credit institution
must have a systematic process for determining the situations for which
external data must be used and the methodologies used to incorporate the data
in its measurement system. The conditions and practices for external data use
must be regularly reviewed, documented and subject to periodic independent
review.

1.2.4.          
Scenario analysis 

20.                  
The credit institution
shall use scenario analysis of expert opinion in conjunction with external data
to evaluate its exposure to high severity events. Over time, such assessments
need to be validated and re-assessed through comparison to actual loss
experience to ensure their reasonableness.

1.2.5.          
Business environment
and internal control factors

21.                  
The credit
institution's firm-wide risk assessment methodology must capture key business
environment and internal control factors that can change its operational risk
profile.
22.                  
The choice of each
factor needs to be justified as a meaningful driver of risk, based on
experience and involving the expert judgment of the affected business areas. 
23.                  
The sensitivity of
risk estimates to changes in the factors and the relative weighting of the
various factors need to be well reasoned. In addition to capturing changes in
risk due to improvements in risk controls, the framework must also capture
potential increases in risk due to greater complexity of activities or
increased business volume.
24.                  
This framework must be
documented and subject to independent review within the credit institution and
by competent authorities. Over time, the process and the outcomes need to be
validated and re-assessed through comparison to actual internal loss
experience, relevant external data.

2.                      
Impact of insurance

25.                  
Credit institutions
shall be able to recognise the impact of insurance subject to the conditions
set out in paragraphs 26 to 29.
26.                  
The provider is
authorised to provide insurance or re-insurance.
27.                  
The provider has a
minimum claims paying ability rating of A (or equivalent);
(a)     The
insurance policy must have an initial term of no less than one year. For
policies with a residual term of less than one year, the credit institution
must make appropriate haircuts reflecting the declining residual term of the
policy, up to a full 100% haircut for policies with a residual term of 90 days
or less; 
(b)     The
insurance policy has a minimum notice period for cancellation of the contract
of 90 days;
(c)     The
insurance policy has no exclusions or limitations triggered by supervisory
actions or, in the case of a failed credit institution, that preclude the
credit institution, receiver or liquidator from recovering for damages suffered
or expenses incurred by the credit institution, except in respect of events
occurring after the initiation of receivership or liquidation proceedings in
respect of the credit institution; provided that the insurance policy may
exclude any fine, penalty, or punitive damages resulting from actions by
the competent authorities; 
(d)     The risk
mitigation calculations must reflect the insurance coverage in a manner that is
transparent in its relationship to, and consistent with, the actual likelihood
and impact of loss used in the overall determination of operational risk
capital;
(e)     The
insurance is provided by a third party entity. In the case of insurance through
captives and affiliates, the exposure has to be laid off to an independent third
party entity, for example through re-insurance, that meets the eligibility
criteria;
(f)     The
framework for recognising insurance is well reasoned and documented;
28.                  
The methodology for
recognising insurance shall capture the following elements through discounts or
haircuts in the amount of insurance recognition: 
(a)     The residual
term of a policy, where less than one year, as noted above;
(b)     A policy’s
cancellation terms, where less than one year; 
(c)     The
uncertainty of payment as well as mismatches in coverage of insurance policies.

29.                  
The capital
alleviation arising from the recognition of insurance shall not exceed 20% of
the capital requirement for operational risk before the recognition of risk
mitigation techniques.

3.                      
Application to use an
Advanced Measurement Approach on a group-wide basis

30.                  
When an Advanced
Measurement Approach is intended to be used by the EU parent credit institution
and its subsidiaries, or by the subsidiaries of an EU parent financial holding
company, the application shall include a description of the methodology used
for allocating operational risk capital between the different entities of the
group.
31.                  
The application shall
indicate whether and how diversification effects are intended to be factored in
the risk measurement system.
Part 4 –
Combined use of different methodologies

1.                      
Use of an Advanced
Measurement Approach in combination with other approaches

1.                      
A credit institution
may use an Advanced Measurement Approach in combination with either the Basic
Indicator Approach or the Standardised Approach, subject to the following
conditions:
(a)     All
operational risks of the credit institution are captured. The competent
authority shall be satisfied with the methodology used to cover different
activities, geographical locations, legal structures or other relevant
divisions determined on an internal basis.
(b)     The
qualifying criteria set out in Parts 2 and 3 are fulfilled for the part of
activities covered by the Standardised Approach and Advanced Measurement
Approaches respectively.
2.                      
On a case-by case
basis, the competent authority may impose the following additional conditions: 
(a)     On the date
of implementation of an Advanced Measurement Approach, a significant part of
the credit institution’s operational risks are captured by the Advanced Measurement
Approach;
(b)     The credit
institution takes a commitment to roll out the Advanced Measurement Approach
across a material part of its operations within a time schedule agreed with its
competent authorities.

2.                      
Combined use of the
Basic Indicator Approach and of the Standardised Approach

3.                      
A credit institution
may use a combination of the Basic Indicator Approach and the Standardised
Approach only in exceptional circumstances such as the recent acquisition of
new business which may require a transition period for the roll out of the
Standardised Approach.
4.                      
The combined use of
the Basic Indicator Approach and the Standardised Approach shall be conditional
upon a commitment by the credit institution to roll out the Standardised
Approach within a time schedule agreed with the competent authorities.
Part 5 -
Loss event type classification
Table 3
 Event-Type Category || Definition || 
 Internal fraud || Losses due to acts of a type intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal party. ||
 External fraud || Losses due to acts of a type intended to defraud, misappropriate property or circumvent the law, by a third party ||
 Employment Practices and Workplace Safety || Losses arising from acts inconsistent with employment, health or safety laws or agreements, from payment of personal injury claims, or from diversity / discrimination events ||
 Clients, Products & Business Practices || Losses arising from an unintentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product. || 
 Damage to Physical Assets || Losses arising from loss or damage to physical assets from natural disaster or other events. || 
 Business disruption and system failures || Losses arising from disruption of business or system failures || 
 Execution, Delivery & Process Management || Losses from failed transaction processing or process management, from relations with trade counterparties and vendors || 
Annex XI
Technical criteria on the review and evaluation by the competent authorities
1.                      
In
addition to credit, market and operational risk, the review and evaluation
performed by competent authorities pursuant to Article 124 shall include
the following:
(a)     the results of the stress test carried out by the credit
institutions applying an IRB approach;
(b)     the exposure to and management of liquidity risk and
concentration risk by the credit institutions, including their compliance with the requirements
laid down in Articles 108 to 118;
(c)     the
robustness, suitability and manner of application of the policies and
procedures implemented by credit
institutions for the management of the residual risk associated with the
use of recognized credit risk mitigation techniques;
(d)     the extent to which the own funds held by a credit institution in
respect of assets which it has securitised are adequate having regard to the
economic substance of the transaction, including the degree of risk transfer
achieved.
2.                      
Competent
authorities shall monitor whether a credit institution has provided implicit
support to a securitisation.
If a credit institution is found to have provided implicit support on more than
one occasion the competent authority shall take appropriate measures reflective
of the increased expectation that it will provide future support to its
securitisations thus failing to achieve a significant transfer of risk.
Annex XII
Technical criteria on
disclosure
Part
1 - General Criteria
1.                      
Information shall be
regarded as material in disclosures if its omission or misstatement could
change or influence the assessment or decision of a user relying on that
information for the purpose of making economic decisions.
2.                      
Information shall be
regarded as proprietary to a credit institution if sharing that information
with the public would undermine its competitive position. It may include
information on products or systems which, if shared with competitors, would
render a credit institution's investments therein less valuable.
3.                      
Information shall be
regarded as confidential if there are obligations to customers or other
counterparty relationships binding a credit institution to confidentiality. 
4.                      
Competent authorities
shall require credit institution to assess the need to publish some or all
disclosures more frequently than annually in the light of the relevant
characteristics of their business such as scale of operations, range of
activities, presence in different countries, involvement in different financial
sectors, and participation in international financial markets and payment,
settlement and clearing systems. That assessment shall pay particular attention
to the possible need for more frequent disclosure of items of information laid
down in Part 2, paragraphs 3(b) and 3(e), and 4(b) to 4(f), and information on
risk exposure and other items prone to rapid change. 
5.                      
The disclosure
requirement in Part 2, paragraph 4, letter (f) shall be provided pursuant to
Article 72 (1) and (2).
Part 2
- General requirements
1.                      
The risk management
objectives and policies of the credit institution shall be disclosed for each
separate category of risk, including the risks referred to under paragraphs 1
to 13. These disclosures shall include:
(a)     the strategies
and processes to manage those risks;
(b)     the
structure and organisation of the relevant risk management function or other
appropriate arrangements;
(c)     the scope
and nature of risk reporting and measurement systems;
(d)     the policies
for hedging and mitigating risk, and the strategies and processes for
monitoring the continuing effectiveness of hedges and mitigants.
2.                      
The following
information shall be disclosed regarding the scope of application of the
requirements of this Directive:
(a)     the name of
the credit institution to which the requirements of this Directive apply;
(b)     an outline
of the differences in the basis of consolidation for accounting and prudential
purposes, with a brief description of the entities that are:
(i)      fully
consolidated,
(ii)     proportionally
consolidated,
(iii)    deducted from
own funds, 
(iv)    neither
consolidated nor deducted;
(c)     any current
or foreseen material or legal impediments to the prompt transfer of own funds
or repayment of liabilities among the parent undertaking and its subsidiaries;
(d)     the aggregate amount by which the actual own funds are less than
the required minimum in all subsidiaries not included in the consolidation, and
the name or names of such subsidiaries;
(e)     if
applicable, the circumstance of making use
of the provisions laid down in Articles 69 and 70.
3.                      
The following
information shall be disclosed by the credit institutions regarding their own
funds:
(a)     summary
information on the terms and conditions of the main features of all own funds
items and components thereof;
(b)     the amount
of the original own funds, with separate disclosure of all positive items and
deductions;
(c)     the total
amount of additional own funds, and own funds as defined in [Annex V of
Directive 93/6/EEC];
(d)     deductions
from original and additional own funds pursuant to Article 66(1) point (c),
with separate disclosure of items referred to in Article 57, point (q);
(e)     total
eligible own funds, net of deductions and limits laid down in Article 66.
4.                      
The following
information shall be disclosed regarding the compliance by the credit
institution with the requirements laid down in Articles 75 and 123:
(a)     a summary of the
credit institution’s approach to assessing the adequacy of its internal capital
to support current and future activities;
(b)     for credit
institutions calculating the risk-weighted exposure amounts in accordance with
Articles 78 to 83, 8 per cent of the risk-weighted exposure amounts for each of
the exposure classes specified in Article 79; 
(c)     for credit
institutions calculating risk-weighted exposure amounts in accordance with
Articles 84 to 89, 8 per cent of the risk-weighted exposure amounts for each of
the exposure classes specified in Article 86. For the retail exposure class,
this requirement applies to each of the categories of exposures to which the
different correlations in Annex VII, Part 1, paragraphs 9 to 11 correspond to.
For the equity exposure class, this requirement applies to:
(i)      each of the
approaches provided in Annex VII, Part 1, paragraphs 15 to 25;
(ii)     exchange
traded exposures, private equity exposures in sufficiently diversified
portfolios, and other exposures;
(iii)    exposures
subject to supervisory transition regarding capital requirements;
(iv)    exposures
subject to grandfathering provisions regarding capital requirements;
(d)     minimum
capital requirements calculated in accordance with Article 75, points (b) and
(c);
(e)     minimum
capital requirements calculated in accordance with Articles 103 to 105, and disclosed
separately;
(f)     the solvency
ratios calculated on the basis of total own funds and original own funds.
5.                      
The following
information shall be disclosed regarding the credit institution’s exposure to
credit risk and dilution risk:
(a)     the
definitions for accounting purposes of past due and impaired;
(b)     a
description of the approaches and methods adopted for determining value adjustments and provisions;
(c)     the total
amount of exposures after accounting offsets and without taking into account
the effects of credit risk mitigation, and the average amount of the exposures
over the period broken down by different types of exposure classes;
(d)     the
geographic distribution of the exposures, broken down in significant areas by
material exposure classes, and further detailed if appropriate;
(e)     the distribution
of the exposures by industry or counterparty type, broken down by exposure
classes, and further detailed if appropriate;
(f)     the residual
maturity breakdown of all the exposures, broken down by exposure classes, and
further detailed if appropriate;
(g)     by
significant industry or counterparty type, the amount of:
(i)      impaired
exposures and past due exposures, provided separately,
(ii)     value
adjustments and provisions,
(iii)    charges for
value adjustments during the period;
(h)     the amount
of the impaired exposures and past due exposures, provided separately, broken
down by the significant geographical areas including, if practical, the amounts
of value adjustments and provisions related to each geographical
area;
(i)      the
reconciliation of changes in the value adjustments and provisions
for impaired exposures, shown separately. The information shall comprise:
(i)      a
description of the type of value
adjustments and provisions,
(ii)     the opening
balances,
(iii)    the amounts
taken against the provisions during the period,
(iv)    the amounts
set aside or reversed for estimated probable losses on exposures during the
period, any other adjustments including those determined by exchange rate
differences, business combinations, acquisitions and disposals of subsidiaries,
and transfers between provisions,
(v)     the closing
balances. 
Value adjustments and recoveries recorded directly to the income
statement shall be disclosed separately.
6.                      
For credit
institutions calculating the risk-weighted exposure amounts in accordance with Articles
78 to 83, the following information shall be disclosed for each of the exposure
classes specified in Article 79:
(a)     the names of
the nominated ECAIs and ECAs and the reasons for any changes;
(b)     the exposure
classes for which each ECAI or ECA is used;
(c)     a
description of the process used to transfer the issues and issue credit
assessments onto items not included in the trading book;
(d)     the
association of the external rating of each nominated ECAI or ECA with the credit
quality steps prescribed in Annex VI, taking into account that this information needs not be disclosed if the
credit institution complies with the standard association published by the
competent authority;
(e)     the exposure
values and the exposure values after credit risk mitigation associated with
each credit quality step prescribed in Annex VI, as well as those deducted from
own funds.
7.                      
The credit
institutions calculating the risk-weighted exposure amounts in accordance with
Annex VII, Part 1, paragraphs 5 or 17 to 19 shall disclose the exposures
assigned to each category of the table in the paragraph 5 referred to above, or
to each risk weight mentioned in the paragraphs 17 to 19 referred to above.
8.                      
The credit
institutions calculating their capital requirements in accordance with Article
75, points (b) and (c) shall disclose those requirements separately for each risk referred to in
those provisions.
9.                      
The following
information shall be disclosed by each credit institution which calculates its
capital requirements in accordance with [Annex VIII of Directive 93/6/EEC]:
(a)     for each
sub-portfolio covered:
(i)      the
characteristics of the models used,
(ii)     a
description of stress testing applied to the sub-portfolio,
(iii)    a
description of the approach used for backtesting and validating the accuracy
and consistency of the internal models and modelling processes;
(b)     the scope of
acceptance by the competent authority;
(c)     for the
sub-portfolios under the model:
(i)      the high,
mean and low value-at-risk measures over the reporting period and at
period-end,
(ii)     a
comparison of the value-at-risk measures with actual gains and losses
experienced by the credit institution, with analysis of important outliers in
backtesting results .
10.                  
The following
information shall be disclosed by the credit institutions on operational risk:
(a)     the
approaches for the assessment of own funds requirements for operational risk
that the credit institution qualifies for;
(b)     a
description of the methodology set out in Article 105, if used by the credit
institution, including a discussion of relevant internal and external factors
considered in the credit institution’s measurement approach. In the case of
partial use, the scope and coverage of the different methodologies used.
11.                  
The following
information shall be disclosed regarding the exposures in equities not included
in the trading book:
(a)     the
differentiation between exposures based on their objectives, including for
capital gains relationship and strategic reasons, and an overview of the
accounting techniques and valuation methodologies used, including key
assumptions and practices affecting valuation and any significant changes in
these practices;
(b)     the balance
sheet value, the fair value and, for those exchange-traded, a comparison to the
market price where it is materially different from the fair value;
(c)     the types,
nature and amounts of exchange-traded exposures, private equity exposures in
sufficiently diversified portfolios, and other exposures;
(d)     the
cumulative realised gains or losses arising from sales and liquidations in the
period;
(e)     the total
unrealised gains or losses, the total latent revaluation gains or losses, and
any of these amounts included in the original or additional own funds.
12.                  
The following
information shall be disclosed by credit institutions on their exposure to
interest rate risk on positions not included in the trading book:
(a)     the nature
of the interest rate risk and the key assumptions (including assumptions
regarding loan prepayments and behaviour of non-maturity deposits), and frequency
measurement of the interest rate risk;
(b)     the
variation in earnings, economic value or other relevant measure used by the
management for upward and downward rate shocks according to management’s method
for measuring the interest rate risk, broken down by currency.
13.                  
The credit
institutions calculating risk weighted exposure amounts in accordance with
Articles 94 to 101 shall disclose the following information:
(a)     a discussion
of the credit institution's objectives in relation to securitisation activity;
(b)     the roles
played by the credit institution in the securitisation process;
(c)     an
indication of the extent of the credit institution’s involvement in each of
them;
(d)     the
approaches to calculating risk weighted exposure amounts that the credit
institution follows for its securitisation activities;
(e)     a summary of
the credit institution’s accounting policies for securitisation activities,
including:
(i)      whether the
transactions are treated as sales or financings,
(ii)     the
recognition of gains on sales,
(iii)    the key
assumptions for valuing retained interests,
(iv)    the
treatment of synthetic securitisations if this is not covered by other
accounting policies;
(f)     the names of
the ECAIs used for securitisations and the types of exposure for which each agency
is used;
(g)     the total
outstanding amount of exposures securitised by the credit institution and
subject to the securitisation framework (broken down into traditional and
synthetic), by exposure type;
(h)     for
exposures securitised by the credit institution and subject to the
securitisation framework, a breakdown by exposure type of the amount of
impaired and past due exposures securitised, and the losses recognised by the
credit institution during the period;
(i)      the
aggregate amount of securitisation positions retained or purchased, broken down
by exposure type;
(j)      the
aggregate amount of securitisation positions retained or purchased, broken down
into a meaningful number of risk weight bands. Positions that have been risk
weighted at 1250% or deducted shall be disclosed separately;
(k)     the
aggregate outstanding amount of securitised revolving exposures segregated by
the originator’s interest and the investors’ interest;
(l)      a summary
of the securitisation activity in the period, including the amount of exposures
securitised (by exposure type), and recognised gain or loss on sale by exposure
type.

3.                      
Part 3 - Qualifying requirements for the use of particular
instruments or methodologies

14.                  
The credit
institutions calculating the risk-weighted exposure amounts in accordance with Articles
84 to 89 shall disclose the following information:
(a)     the
competent authority’s acceptance of approach or approved transition;
(b)     an
explanation and review of: 
(i)      the
structure of internal rating systems and relation between internal and external
ratings,
(ii)     the use of
internal estimates other than for calculating risk-weighted exposure amounts in
accordance with Articles 84 to 89,
(iii)    the process
for managing and recognising credit risk mitigation,
(iv)    the control
mechanisms for rating systems including a description of independence,
accountability, and rating systems review;
(c)     a
description of the internal ratings process, provided separately for the
following exposure classes:
(i)      central
governments and central banks,
(ii)     institutions,
(iii)    corporate,
including SMEs, specialised lending and purchased corporate receivables,
(iv)    retail, for
each of the categories of exposures to which the different correlations in
Annex VII, Part 1, paragraphs 9 to 11 correspond to,
(v)     equities;
(d)     the exposure
values for each of the exposure classes specified in Article 86. Exposures to
central governments and central banks, credit institutions and corporates where
credit institutions use own estimates of LGDs or conversion factors for the
calculation of risk-weighted exposure amounts shall be disclosed separately
from exposures for which the credit institutions do not use such estimates; 
(e)     for each of
the exposure classes central governments and central banks, institutions, corporate
and equity, and across a sufficient number of obligor grades (including
default) to allow for a meaningful differentiation of credit risk, credit
institutions shall disclose: 
(i)      the total
exposures (for the exposure classes central governments and central banks,
institutions and corporate, the sum of outstanding loans and exposure values
for undrawn commitments; for equities, the outstanding amount),
(ii)     for the
credit institutions using own LGD estimates for the calculation of
risk-weighted exposure amounts, the exposure-weighted average LGD in
percentage,
(iii)    the
exposure-weighted average risk weight,
(iv)    for the
credit institutions using own estimates of conversion factors for the
calculation of risk-weighted exposure amounts, the amount of undrawn
commitments and exposure-weighted average exposure values for each exposure
class; 
(f)     for the
retail exposure class and for each of the categories as defined under (c)
above, either the disclosures outlined under (e) above (if applicable, on a pooled
basis), or an analysis of exposures (outstanding loans and exposure values for
undrawn commitments) against a sufficient number of EL grades to allow for a
meaningful differentiation of credit risk (if applicable, on a pooled basis);
(g)     the actual
value adjustments in the preceding period for each exposure class (for retail,
for each of the categories as defined under (c) above) and how this differs
from past experience; 
(h)     a
description of the factors that impacted on the loss experience in the preceding
period (for example, has the credit institution experienced higher than average
default rates, or higher than average LGDs and conversion factors);
(i)      the credit
institution’s estimates against actual outcomes over a longer period. At a
minimum, this shall include information on estimates of losses against actual
losses in each exposure class (for retail, for each of the categories as
defined under (c) above) over a period sufficient to allow for a meaningful
assessment of the performance of the internal rating processes for each
exposure class (for retail for each of the categories as defined under (c)
above). Where appropriate, the credit institutions shall further decompose this
to provide analysis of PD and, for the credit institutions using own estimates
of LGDs and/or conversion factors, LGD and conversion factor outcomes against
estimates provided in the quantitative risk assessment disclosures above.
For the purposes of
(c) above, the description shall include the types of exposure
included in the exposure class, the definitions, methods and data for
estimation and validation of PD and, if applicable, LGD and conversion
factors, including assumptions employed in the derivation of these variables,
and the descriptions of material deviations from the definition of default as
set out in Annex VII, Part 4, paragraphs 44 to 48, including the broad segments
affected by such deviations.
15.                  
The credit
institutions applying credit risk mitigation techniques shall disclose the
following information:
(a)     the policies and
processes for, and an indication of the extent to which the entity makes use
of, on- and off-balance sheet netting;
(b)     the policies and processes for collateral valuation and
management;
(c)     a
description of the main types of collateral taken by the credit institution;
(d)     the main
types of guarantor and credit derivative counterparty and their
creditworthiness;
(e)     information
about market or credit risk concentrations within the credit mitigation taken;
(f)     for credit
institutions calculating risk-weighted exposure amounts in accordance with
Articles 78 to 83 or 84 to 89, but not providing own estimates of LGDs or
conversion factors in respect of the exposure class, separately for each
exposure class, the total exposure value (after, where applicable, on- or
off-balance sheet netting) that is covered – after the application of
volatility adjustments – by eligible financial collateral, and other eligible
collateral;
(g)     for credit
institutions calculating risk-weighted exposure amounts in accordance with
Articles 78 to 83 or 84 to 89, separately for each exposure class, the total
exposure (after, where applicable, on- or off-balance sheet netting) that is covered
by guarantees or credit derivatives.
For the equity exposure class, this requirement applies to each of the
approaches provided in Annex VII, Part 1, paragraphs 15 to 24.
16.                  
The credit
institutions using the approach set out in Article 105 for the calculation of their
own funds requirements for operational risk shall disclose a description of the
use of insurance for the purpose of mitigating the risk.
[1]               OJ C […],
[…], p. […].
[2]               OJ C […],
[…], p. […].
[3]               OJ C […],
[…], p. […].
[4]               OJ C […],
[…], p. […].