CELEX: 51988PC0194
Language: en
Date: 1988-04-28
Title: Proposal for a COUNCIL DIRECTIVE om credit institutions on a solvency ratio for crédit institutions (presented by the Commission)

ARCHIVES HISTORIQUES
DE LA COMMISSION
COLLECTION RELIEE DES
DOCUMENTS "COM"
COM (88) 194
Vol. 1988/0061
 ---pagebreak--- Disclaimer
Conformément au règlement (CEE, Euratom) n° 354/83 du Conseil du 1er février 1983 concernant
l'ouverture au public des archives historiques de la Communauté économique européenne et de
la Communauté européenne de l'énergie atomique (JO L 43 du 15.2.1983, p. 1) modifié en dernier
lieu par le règlement (UE) 2015/496 du Conseil du 17 mars 2015 (JO L79 du 25. 3.2015, p. 1), ce
dossier est ouvert au public. Le cas échéant, les documents classifiés présents dans ce dossier
ont été déclassifiés conformément à l'article 5 dudit règlement ou sont considérés déclassifiés
conformément aux articles 26(3) et 59(2) de la décision (UE, Euratom) 2015/444 de la
Commission du 13 mars 2015 concernant les règles de sécurité aux fins de la protection des
informations classifiées de l'Union européenne.
In accordance with Council Regulation (EEC, Euratom) No 354/83 of 1 February 1983 concerning
the opening to the public of the historical archives of the European Economic Community and the
European Atomic Energy Community (OJ L 43, 15.2.1983, p. 1), as last amended by Council
Regulation (EU) 2015/496 of 17 March 2015 (OJ L 79, 27.3.2015, p. 1), this file is open to the
public. Where necessary, classified documents in this file have been declassified in conformity
with Article 5 of the aforementioned regulation or are considered declassified in conformity with
Articles (26.3) and 59(2) of the Commission Decision (EU, Euratom) 2015/444 of 13 March 2015
on the security rules for protecting EU classified information.
In Übereinstimmung mit der Verordnung (EWG, Euratom) Nr. 354/83 des Rates vom 1. Februar
1983 über die Freigabe der historischen Archive der Europäischen Wirtschaftsgemeinschaft und
der Europäischen Atomgemeinschaft (ABI. L 43 vom 15.2.1983, S. 1), zuletzt geändert durch die
Verordnung (EU) Nr. 2015/496 vom 17. März 2015 (ABI. L 79 vom 25.3.2015, S. 1), ist dieser Akt
der Öffentlichkeit zugänglich. Soweit erforderlich, wurden die Verschlusssachen in diesem Akt in
Übereinstimmung mit Artikel 5 der genannten Verordnung freigegeben; beziehungsweise werden
sie auf Grundlage von Artikel 26(3) und 59(2) der Entscheidung der Kommission (EU, Euratom)
2015/444 vom      13.   März 2015     über die   Sicherheitsvorschriften für den Schutz von  EU-
Verschlusssachen als herabgestuft angesehen.
 ---pagebreak--- COMMISSION OF THE EUROPEAN COMMUNITIES
                                          COM(88 ) 194 final - SYN 133
                                          Brussels , 20 Apri l 1988
              , -v                  iA
             /-.r     SA A           v-A
            ir rii A
             А                         Ш
                \            4 M   /A '?/
                Æ 'X             ,<x x./
                X             .x<V
                        Proposai for a
                      COUNCIL DIRECTIVE
       on a solvency ratio for credit institutions
               ( presented by the Commission )
 ---pagebreak---                PROPOSAL FOR A COUNCIL' DIRECTIVE ON A SOLVENCY
                     RATIO FOR CREDIT INSTITUTIONS
                         EXPLANATORY MEMORANDUM
I. PRELIMINARY REMARKS
Main objectives of the proposai
1 . The proposal has two main objectives . The first is to achieve
      an important part of the harmonisation of prudential super ¬
      vision necessary for completion of the internal market in
      banking . The second is to strengthen average solvency
      standards among Community credit institutions in order further
      to protect both depositors and investors and the stability of
      the banking system .
2 . As part of the necessary harmonisation to be achieved before
      completion of the internal market , the proposed directive
      accompanies the proposal for a Directive on the definition of
      own  funds    of  credit   institutions   (1)   and  the  Commission
      Recommendations     on  large   exposures   and   deposit  guarantee
      schemes ( 2 ). It is particularly closely associated with the
      first mentioned proposal as own funds form the numerator of
      the proposed solvency ratio .
The principles of the ratio
3 . The proposed ratio expresses the own funds of each credit
      institution as a proportion of the risk-adjusted value of its
      assets and off-balance sheet business . This type of " risk ¬
      weighting " approach was developed over the course of several
      years in work carried out for the Banking Advisory Committee
      established by the First Banking Coordination Directive of
 ( 1 ) OJ No C 243 , 27.9.86 , p. 4
 ( 2 ) OJ No L 33 , 4.2.87 , pp . 10 and 16
 ---pagebreak---                                            2
     1977 ( 1 ). It is now widely recognised as the most appropriate
     and flexible measure of solvency as it distinguishes between
     the degrees of risk associated with particular assets and
     off-balance sheet items . Simpler ratios making no distinction
     between types of assets and off-balance sheet engagements and
     the associated risks embody the implicit assumption that
     capital requirements should be the same for all kinds of
     transactions .
4 . The     ratio     makes    full    allowance       for    the   risks     inherent     in
     off-balance sheet business , an area of banks' activities which
     has grown rapidly in the recent past . From a prudential
     perspective it is essential to allow for the potential risk of
     items which may move on to banks' balance sheets , especially
     as this is likely to happen at a time when the average quality
     of their traditional loan books is deteriorating .
5 . The ratio principally relates to the credit risks involved in
     the event of counterparty default . However , the recitals make
     reference to further work on the prudential treatment of
     interest rate and exchange rate risk , and other market risks . In particular ,
      the Commission has begun the necessary work required in order to propose in due course the
     necessary provisions to establish a framework for the control of market risks arising
     out of open positions taken on by credit institutions in respect of their operations
     on securities markets .
A minimum standard
6 . The proposal establishes common definitions and techniques for
     a solvency ratio . Beyond this it establishes a minimum level
     for that ratio , to be respected by all Community credit
     institutions from 1 January 1993 onwards . The proposal
     contains a provisional minimum figure of 8% selected after
     consideration of          the confidential statistics              collected since
     1981 for the Advisory Committee . The Commission considers it
     necessary to include this indicative figure so that the effect
     of the proposal can be judged as a whole . It is intended that
     the figure should be reviewed following a statistical survey
     of credit institutions' ratios based on the definitions in the
     proposal . This survey has been prepared by the Commission and
( 1 ) OJ No L 322 , 17.12.1977 , p. 30
 ---pagebreak---                                   3
    will be conducted in the first half of 1988 by the Contact
    Group of EC banking supervisors . The Commission will , if
    necessary , in the light of the results of that survey , propose
    an amendment to the figure before the Directive is finally
    adopted .
7 . To ensure the continuous strengthening of capital standards ,
    the proposal stipulates that between the coming into force of
    the directive on 1 January 1990 and the date from which the
    minimum ratio must be respected , 1 January 1993 , no credit
    institution with a ratio below that minimum may allow it to
    fall except temporarily in the period immediately after the
    issuing new capital .
Equality     of   treatment  for  Community  borrowers ;  treatment    of
country risk
8 . For the purposes of assigning risk weights to various assets
    and off-balance sheet items , borrowers are grouped in a number
    of broad categories : central banks , central governments ,
    credit institutions , and so on . Beyond this distinction drawn
    on the basis of the type of borrower , there is a distinction
    between " domestic ", meaning EC , borrowers and " foreign ",
    meaning all other borrowers . In the case of most inter-bank
    business , reflecting the homogeneity of the short-term inter ¬
    bank market , loans to " domestic " and " foreign " banks are given
    the same weight . This is also true of loans to , and off -
    balance sheet items incurred on behalf of , " domestic " and
    " foreign " non-banks . But in the case of other types of
    borrower , central banks and central governments and so on , and
    in   the    case  of  long-term  inter-bank   business , " domestic "
    borrowers receive lower weights than their " foreign " counter ¬
    parts . The distinction goes much of the way towards making
    allowance for the element of country risk in banks' lending ,
    but   it    is   nonetheless  true  that  the   residual   " foreign "
    category contains a mixture of       (a smaller number of ) highly
 ---pagebreak---                                  4
     creditworthy countries and (a larger number of ) those with
     external financing problems . For this reason , and in the case
     of inter-bank business for the additional reason that several
     non-EC G-10 members seem likely in the near future to re ¬
     inforce the solvency of their banks by the adoption of
     standards similar to those contained in this proposal , Article
     8 allows for the possibility of extending " domestic " weights
     to " foreign " borrowers , where the risks are considered
     equivalent .
Adaptation of the ratio : Committee procedure
9 . It is important that , once the Directive is in force , it
     should be possible to adapt the ratio as quickly as possible
     to changes in banks' business and in the nature of risks run .
     This is particularly true of the new off-balance sheet trans ¬
     actions which are captured by the ratio . Accordingly , a
     flexible adaptation procedure is proposed .        The use of
     Regulatory Committee version ( a ) is preferred in view of the
     sensitivity of the banking sector and the central role of
     national banking supervisory authorities in the operation of
     the proposed Directive .
II . COMMENT ON THE ARTICLES
Scope ( Articles 1 and 3(2 ))
1 . Article 1 stipulates that the proposal applies to all credit
     institutions as defined    in  the first indent of Article  1 of
     the   First   Coordination    Directive  allowing  for   certain
     exemptions made in that Directive and in 86 / 524 ( 1 ). This
     definition explicitly excludes branches of third country banks
     located in Member States from the scope of the proposal . The
     question of who is responsible for the supervision of the
( 1 ) OJ No L 309 , 4.11.86 , p. 15
 ---pagebreak---                                   5
      solvency of these branches will continue to be decided by the
      competent authorities of the host Member States . Prevailing
      standard practice is for supervision to be carried out by
      relevant third country authorities where supervisory standards
      are recognised as equivalent .
2 . Article      3(2 )  offers   further    precision   concerning      the
      institutional basis on which the ratios are      to be calculated
      and  respected .  The first    requirement  is  that   consolidated
      ratios , in conformity with Directives 83 / 350 ( 1 ) and 86 / 635(2 )
      must be calculated and respected . In addition , unconsolidated
      ratios for all credit institutions are prescribed . Discretion
      is offered to national supervisory authorities to require
      sub-consolidated    rather    than   unconsolidated    ratios     for
      subsidiary credit institutions .
Definitions ( Article 2 )
3 . A routine list of definitions , partly drawn from earlier
      Directives in the banking field , is proposed in order to
      simplify and standardise the text .
General principles ( Article 3 )
4 . This article establishes a number of basic principles relating
      to the proposal :
      - Article 3(1 ) provides a simple description of the proposed
        solvency ratio . This is subsequently elaborated in Articles
        4-6 and the Annexes , but Article 3(1 ) offers the only
        complete description of method ;
      - Article 3(2 ) is discussed at 11(2 ) above ;
 ( 1 ) OJ No L 193 , 13.6.83 , p. 18
 ( 2 ) OJ No L 372 , 8.12.86 , p. 1
 ---pagebreak---                                  6
    - Article   3(3 )   stipulates   that   there  shall   be   formal
      verification    and control  of  the  ratios at  least  twice  a
      year ;
    - Article 3(4 )   establishes that   the balance and off-balance
      sheet items referred to in the proposal shall be valued
      according to the harmonised standards of the Annual Accounts
      Directive .
The numerator of the ratio ( Article 4 )
5 . The proposed numerator      is own   funds  as  they  are  finally
    defined in the directive on the definition of own funds .
The denominator of the ratio ( Articles 5 and 6 and Annexes 1-4 )
6 . Article 5 provides a description of the method used to arrive
    at risk-adjusted values for balance and off-balance sheet
    items . Fuller descriptions of method and lists of instruments
    are given in annex form in the case of off-balance sheet
    items , whose treatment in the ratio is more complex than that
    of balance sheet items .
7 . Article 6 lists the asset and off-balance sheet items falling
    under each risk weight ( 0% , 10% , 20% , 50% and 100% ). The
    proposed treatment of interest and exchange rate related
    off-balance sheet items cannot be presented in this manner and
    is instead covered in Annex 3 .
8 . Article 7 explains the risks applicable in the case of claims
    on , and off-balance sheet business undertaken on behalf of ,
    local authorities and regional governments . The proposed
    system is one of mutual recognition of the weights deemed
    appropriate to their own local authorities by individual
    supervisory authorities .
 ---pagebreak---                                  7
 Implementation powers of the Commission ; modification procedures
 ( Article 8 )
 9 . In view of the pace of change and innovation in the banking
     sector it is proposed that most of the technical features of
     the directive should be subject to modification , as appro ¬
     priate , on the initiative of the Commission , after consult ¬
     ation with the Banking Advisory Committee . It is proposed that
     the latter should act in the capacity of a regulatory
     committee . The extension of " domestic " weights to third
     countries , referred to in section I paragraph 8 , is one of the
     specific features which it is proposed may be undertaken in
     accordance with the modification procedures of the Article .
 Implementation of the directive ( Article 9 )
10 . Following the timetable of the Second Banking Coordination
     Directive , it is proposed that the appropriate compliance
     measures should be adopted by 1 January 1990 .
11 . Article 9    stipulates that a minimum solvency ratio must be
     continuously respected by credit institutions after 1 January
     1993 . It provides that , in the euent of ratios falling below
     the minimum , competent authorities must ensure that corrective
     action is taken .
12 . It also states that those credit institutions whose solvency
     ratios are below the stipulated minimum at the time of the
     coming into force of the directive must not , except in the
     particular case of an issue of capital , allow their ratios to
     fall between   that date and  the end of  1992 . The intention as
     explained earlier is to promote the continuous strengthening
     of capital standards before the minimum level established in
     the proposal becomes binding with effect from 1 January 1993 .
 ---pagebreak---                               8
13 . The article additionally makes it clear that the figure in
     paragraph 3 is   a minimum and that national supervisory
     authorities may  require higher ratios according to their
     judgment .
 ---pagebreak---                     PROPOSAL FOR A      COUNCIL DIRECTIVE. ON A
               SOLVENCY RATIO FOR CREDIT INSTITUTIONS
THE COUNCIL OF THE EUROPEAN COMMUNITIES ,
Having regard to the Treaty establishing the European Economic
Community , and in particular Article 57(2 ), third sentence
thereof ,
Having regard to the proposal from the Commission ,,
In cooperation with the European Parliament ,
Having      regard   to  the    opinion     of   the    Economic    and     Social
Committee ,
Whereas the Directive is a development from the work undertaken
by the Banking Advisory Committee which has ,. under Article 6(4 )
of Council Directive 77 / 780 / EEC of         12 December 1977 on the co ¬
ordination of laws , regulations and administrative provisions
relating to the taking up and pursuit of the business of credit
institutions ( 1 ), as amended by Directive 86 / 524 / EEC ( 2 ), responsibility
for making " suggestions to the Commission with a view to coordinating the
coefficients applicable in the Member States ";
Whereas appropriate solvency ratios play a central role in tne
Prudential supervision of crédit institutions ;
Whereas ratios which weight assets and off-balance sheet 1:*
actions according to the degree of credit risk are particular j.y
useful measures of solvency ;
Whereas the development of common standards of                capital    ufluji.1..;,
in     relation  to  assets  and   off-balance     sheet    items  at   J IHK
accordingly ,      one of     the   essential      areas     or   iianiiuiu <    ;.. i ,
necessary for the achievement of mutual recognition and t.nus tn.e
completion of the internal market in banking services ;
 ( 1 ) OJ No L 322 , 17.12.1977 , p. 30
( 2 ) OJ No L 309 , 4.11.1986 , p. 15 .
 ---pagebreak---                                                                                          JLO
                                     2
Whereas in this respect the Directive is connected with other
specific legislation also harmonizing the fundamental techniques
of prudential supervision : Council Directive / / EEC on own funds ( 1 ),
the Commission Recommendations 87 / 62 / EEC ( 2 ) and 87 / 63 / EEC ( 3 ) on large ex ¬
posures and deposit protection schemes ;
Whereas the Directive should also be seen as directly
complementary to the Second Coordination Directive                         which lays
out the broader framework of which this Directive is an integral
part ;
Whereas      the   minimum     ratio   contained      in    this     Directive      is
provisional in nature ; whereas it will be reviewed following a
statistical survey ; whereas the Commission will , if necessary ,
duly propose an amendment to the figure before the final adoption
of the Directive ;
Whereas measurement of , and allowance for , interest and exchange
rate risk , and other market risks , are also of great importance
in prudential supervision ; whereas ,                 the Commission shall ,
accordingly , in cooperation with the competent authorities of
Member States and others working toward similar ends , further
study the available techniques ; whereas it shall then make
appropriate proposals for the further harmonisation of prudential
rules relating to these risks ;
Whereas technical modification to the detailed rules contained in
this Directive may from time to time be necessary to respond to
new developments in the banking sector ; whereas the Commission
shall accordingly make such modifications as are necessary , after
consulting the Banking Advisory Committee , within the limits of
the implementing powers delegated to the Commission by the
provisions of the Treaty ; whereas that Committee shall act as a
" Regulatory " Committee , according to the rules of procedure laid
down in Article 2 , procedure III variant a ) of Council Decision
87 / 373 / EEC of 13 July 1987 laying down procedures for the
exercise of implementing powers confered to the Commission ( 4 ) .
HAS ADOPTED THIS DIRECTIVE :
 (1)   OJ No L
( 2 ) OJ No L 33 , 4.2.87 , p. 10
 ( 3 ) OJ No L 33 , 4.2.1987 , p. 16
 ( 4 ) OJ No L 197 , 18.7.1987 , p. 33
 ---pagebreak---                                    3
                         Scope and definitions
                               Article 1
1. This Directive shall apply to credit institutions within the
   meaning      of   the first     indent  of    Article   1 of  Directive
   77 / 780 / EEC .
2. Notwithstanding indent 1 above , the Member States need not
   apply      this     Directive   to  credit     institutions  listed  in
   Article       2(2 )    of  Directive   77 / 780 / EEC .
3. Credit institutions which , as defined in Article 2(4 ) ( a ) of
   Directive 77 / 780 / EEC are affiliated to a central body in the
   same Member State , may be exempted from the provisions of
   this Directive , provided that the totality of                    those
   affiliated credit institutions and the central body are
   included in consolidated solvency ratios in accordance with
   this Directive .
 ---pagebreak---                                                                                 I
                                     - 4 -
                                   Article 2
For the purposes of this Directive :
- " competent authorities " shall be defined in accordance       with the fifth
    indent of Article 1 of Council Directive 83 / 350 / EEC of 13 June
    1983 on the supervision of credit institutions on a con ¬
    solidated basis ( 1 );
- " domestic credit institutions " shall comprise                   all  credit
    institutions authorized in the Member States,
    in accordance with Article 3 of Directive
    77 / 780 / EEC ,  and  branches      of  those   institutions   established
    outside the EC ;
- " foreign credit institutions " in this Directive shall comprise
    all private and public undertakings licensed outside the Member
    States which satisfy the definition in the first indent of
    Article 1 of Directive 77 / 780 / EEC , and their branches ;
- in the case of central governments and central banks , regional
    governments and local authorities , and the non-bank sector as
    defined below , " domestic " shall mean of the Member States ;
     " foreign " shall mean of other countries ;
- " non-bank sector "       shall be defined as all borrowers other than credit
    institutions as defined in the second and third indents above ,
    central governments and central banks , regional governments and
    local authorities , the European Communities and the European
     Investment Bank ( EIB ) , and the Bank for International
    Settlements ( BIS ), the International Bank for Reconstruction
    and Development ( IBRD ) , and the International Monetary Fund
     ( IMF ) ;
 ( 1 ) OJ No L 193 , 18.7.83 , p. 18
 ---pagebreak--- 3
                                   - 5   -
  - " full risk ", " medium risk ",       " medium / low risk " and  " low risk "
    off-balance sheet items are described in Annex              1 and listed  in
    Annex 2 ;
  - " participation " shall be defined in accordance     with the third indent
    of Article 1 of Directive 83 / 350 / EEC .
 ---pagebreak---                                         6
                                   Artide      3
General principles
1.      For the purposes of measuring the solvency of credit
        institutions as defined in Article 1 , the competent autho ¬
        rities      of   Member    States     shall       ensure    that    ratios   are
        calculated for each credit institution which express its own
        funds , as defined in Article 4 , as a proportion of its total
        risk adjusted assets and off-balance sheet items , as defined
        in Article 5 .
2 .     Ratios      shall   be   calculated       on    a    consolidated     basis   in
        accordance with        Directive     83 / 350 / EEC    and  Council   Directive
        86 / 635 / EEC of    8 December    1986     on     the   annual   accounts   and
        consolidated        accounts      of      banks       and    other    financial
        institutions ( 1 ). Notwithstanding the above requirement , un ¬
        consolidated ratios shall          also be calculated for all credit
        institutions . However ,       the competent authorities shall have
        the discretion        to  require     subconsolidated         rather   than  un ¬
        consolidated ratios for credit institution subsidiaries .
3.      Without prejudice to the compliance obligations of credit
        institutions established in Articles 9(2 ), ( 3 ) and ( 4 ), the
        competent authorities shall ensure that the ratios are
        controlled not less than twice each year .
4.      Valuation      of  assets    and   off-balance         sheet   items   shall  be
        undertaken in accordance with Directive 86 / 635 / EEC .
 ( 1 ) OJ No L 372 , 31.12.86 , p. 1
 ---pagebreak---                                7
                           Artide 4
Own funds :  the numerator
Own  funds ,   as  defined in           Directive  . ../.  ./ EEC 1_ of
       / 19 .. on the own funds of credit institutions 7^,      shall
form the numerator of the solvency ratio .
 ---pagebreak---                               Artide 5
Risk-adjusted   assets   and    off-balance  sheet   transactions :  the
denominator
1.   Degrees of credit risk ,       expressed as percentage weights ,
     shall be assigned to the asset items in accordance with the
     provisions of Article 6 . The balance sheet value of each
     asset shall then be multiplied by the relevant weight to
     arrive at a risk-adjusted value .
2.   In  the  case   of  the    off-balance  sheet  items   included  in
     categories ( a ) to ( e ) of Article 6 , a two-stage calculation ,
     in accordance with rules presented in Annex 1 , shall be used
     to arrive at risk weights . Risk-adjusted values shall be
     obtained by multiplying the value of each off-balance sheet
     item by the relevant risk weight .
3.   In the case of the interest rate and foreign exchange rate
     related off-balance sheet items in Article 6(2 ),               the
     potential costs of replacing cash flows in the event of
     counterparty default shall be assessed by the application of
     either of the two methods presented in Annex 3 . These costs
     shall be multiplied by the relevant counterparty weights in
     Article 6(1 ) to give risk-adjusted values .
4.   The total of    the  risk-adjusted    values  of  assets  and  off -
     balance sheet items described above shall be the denominator
     of the solvency ratio .
 ---pagebreak---                                    9
                              Artide 6
Risk weights
1.   The following weights shall be applied to the asset and
     off-balance sheet items shown below , although the competent
     authorities may establish higher weights as they see fit :
     ( a ) Nil weight
            cash in hand and équivalent items ;
            asset items representing claims on " domestic " central
            governments and central banks ;
            asset items representing claims carrying the explicit
            guarantee of " domestic " central governments and central
            banks ;
            asset items      representing   claims   on   the    European
            Communities and the EIB ;
            asset items carrying the explicit guarantee of the
            European Communities and the EIB ;
            asset items representing claims on the BIS , IBRD and
            IMF ;
            asset items carrying the explicit guarantee of the BIS ,
            IBRD and IMF ;
            all   off-balance    sheet items   incurred  on    behalf  of
            " domestic " central governments and central banks ;
            all off-balance sheet items carrying the explicit
            guarantee of " domestic " central governments and central
            banks ;
            all off-balance sheet items    incurred   on behalf    of the
            European Communities and the EIB ;
            all off-balance sheet items carrying           the explicit
            guarantee of the European Communities and the EIB ;
            all off-balance sheet items incurred      on behalf    of the
            BIS , IBRD and IMF ;
            all off-balance sheet items carrying           the   explicit
            guarantee of the BIS , IBRD and IMF ;
 ---pagebreak---                             10
       loans and off-balance sheet items , fully and completely
       secured to the satisfaction of the relevant competent
       authorities , by any of the asset items shown above and
       by deposits and certificates of deposit with the
       lending institutions ;
       all off-balance sheet items having low risk , regardless
       of counterparty .
( b ) 10% weight
       off-balance sheet items , having medium risk , incurred
       on behalf of " domestic " credit institutions ;
       off-balance sheet items , having medium risk carrying
       the    explicit     guarantee   of      " domestic "  credit
       institutions ;
       off-balance sheet items , having medium risk and an
       original maturity of up to and including one year ,
       incurred on behalf of " foreign credit institutions ;
       off-balance sheet items , having medium risk and an
       original maturity of up to and including one year ,
       carrying the explicit guarantee of " foreign " credit
       institutions .
( c ) 20% weight
       asset items representing daims on " domestic " crédit
       institutions ;
       asset items representing claims , with an original
       maturity of up to and including one year , on " foreign "
       credit institutions ;
       asset    items   carrying   the    explicit    guarantee  of
       " domestic " credit institutions ;
       asset items representing claims , with an original
       maturity of up to and including one year , carrying the
       explicit guarantee of " foreign " credit institutions ;
       off-balance sheet items , having full risk , incurred on
       behalf of " domestic " credit institutions ;
       off-balance sheet items , having full risk , carrying the
       explicit guarantee of " domestic " credit institutions ;
 ---pagebreak---                              11
       off-balance    sheet   items ,  having  full    risk  and an
       original maturity of up to and including one year ,
       incurred on behalf of "foreign " credit institutions ;
       off-balance sheet items , having full risk and an
       original maturity of up to and including one year ,
       carrying the explicit guarantee of " foreign " credit
       institutions ;
       loans and full and medium risk off-balance sheet items ,
       fully and completely secured to the satisfaction of the
       relevant competent authorities , by any of the asset
       items shown above in the 20 % weight category ;
       off-balance sheet items having medium / low risk incurred
       on behalf of the " domestic " and " foreign " non-bank
       sectors ;
       asset    items  representing    local  currency    claims of
       " foreign "  branches of domestic credit   institutions   on
       " foreign " central governments , funded by local currency
       deposits ;
       cash items in process of collection , where the corres ¬
       ponding . prior payments have already been made .
( d ) 50 /6 weight
       off-balance sheet items , having medium risk , incurred
       on behalf of " foreign " central and regional govern ¬
       ments , local authorities and central banks and the
       " domestic " and " foreign " non-bank sectors ;
       off-balance sheet items , having medium risk and an
       original maturity of more than one year , incurred on
       behalf of " foreign " credit institutions ;
-      off-balance sheet items , having medium risk and an
       original maturity of more than one year , carrying the
       explicit guarantee of " foreign " credit institutions ;
       loans to individuals for the purchase of residential
       property in the                  Community for their own
       occupation , fully and completely secured to the
       satisfaction of the relevant competent authorities , by
       mortgages on the property in question .
 ---pagebreak---                                    12
       ( e ) 100 /6 weight
              asset items representing claims on " foreign " central
              and regional governments , local authorities and central
              banks ;
              asset items representing claims , with an original
              maturity of more than one year , on " foreign " credit
              institutions ;
              asset items representing claims on the " domestic " and
              " foreign " non-bank sectors ;
              off-balance sheet items , having full risk , incurred on
              behalf of " foreign " central and regional governments ,
              local authorities and central banks and the      " domestic "
              and " foreign " non-bank sectors ;
              off-balance sheet items , having      full    risk   and  an
              original maturity of more than one year , incurred on
              behalf of " foreign " credit institutions ;
              tangible assets in accordance with assets heading C.II
              of Article 9 of Council Directive 78 / 660 / EEC of 25 July
              1978 on the annual accounts of certain types of
              companies ( 1 ) ;
              participations where not deducted from own funds ;
              all other assets except where deducted from own funds .
2.     The methods laid out in Annex 3 shall be applied to interest
       rate and foreign exchange rate related off-balance sheet
       instruments .
( 1 ) OJ No L 222 , 14.8.1978 , p. 11
 ---pagebreak---                         Artide 7
Member States shall fix weights of either 0% , 20% or 50% in
the case of asset      items   representing claims    on   their own
regional governments and local authorities , and full risk
off-balance   sheet   items    incurred    on behalf  of  their   own
regional   governments     and   local  authorities .   Medium   risk
off-balance   sheet   items    incurred    on behalf  of  their   own
regional governments and local authorities shall corres ¬
pondingly be weighted at 0% , 10% or 20% . Loans and off-
balance sheet items carrying the explicit guarantee of              a
regional or local authority shall have the same weight as
loans to , or off-balance sheet items incurred on behalf of ,
the same regional government or local authority .
     Member   States    shall   notify  the   Commission    of  their
weights , the Commission shall disseminate that information
and Member States shall mutually respect the weights chosen
by each other . They shall have the discretion to apply
weights of either 0% , 20% or 50% in the case of those
foreign countries determined in accordance with Article 8(2 ),
with medium risk off-balance sheet items.,
weighted correspondingly at 0% , 10% or 20% .
 ---pagebreak---                          Artide 8
1. Technical modifications in the areas of this Directive shown
   below may be made in accordance with the procedure set out
   in paragraph 3 :
   - the minimum ratio established in Article 9 ;
   - the weights and asset items in Article 6 ;
   - the list and classification of off-balance sheet items in
      Annexes 2 and 4 and their treatment in the calculation of
      the ratio as described in Article 5 and Annexes 1 and 3 .
2. The Commission may also , according to the procedure set out
   in paragraph 3 , extend to foreign countries the same weights
   applied to domestic central governments/ central banks and credit
   institutions , where the risks are considered equivalent ,
   notably in the case of credit institutions , because of
   arrangements made in an international context and similarly
   to extend the 50% weight for mortgage-backed loans for the
   purchase of property in foreign countries .
3. The Commission shall be assisted by a Committee composed of
   representatives from the Member States          and chaired by  a
   representative of the Commission .
   The representative of the Commission shall submit to the
   Committee a plan of measures to take . The Committee shall
   give its opinion on the plan within a time limit to be fixed
   by the Chairman in accordance with the urgency of the
   matter . The opinion shall be given on a qualified majority
   basis according to Article 148(2 ) of the Treaty in the case
   of   decisions which   the   Council   is   called  upon  to take
   following a proposal of the Commission . In the Committee the
   votes of the representatives shall be weighted according to
   the above-mentioned article . The Chairman shall not vote .
 ---pagebreak---                          15
The Commission shall implement the envisaged measures when
they are in conformity with the opinion of the Committee .
When the envisaged measures do not conform with the opinion
of the Committee , or in the absence of an opinion , the
Commission shall without delay submit to the Council a
proposal relating to the measures to take . The Council shall
act according to qualified majority voting .
If at the end of the period which will be set in the case of
each decision to be taken by the Council as a result of this
paragraph , a period which must not exceed three months from
the day on which the Council was informed , the Council has
not acted , the Commission shall implement the proposed
measures .
 ---pagebreak---                            Artide 9
1.   Member States shall adopt the measures necessary to comply
     with the provisions of this Directive by 1 January 1990 .
2.    Until    3i December 1992 , credit institutions whose ratios
     are below 8% *  shall not allow   their   ratios  to fall unless
     such falls are associated with the issue of new capital and
     occur in the period immediately following such issuance . The
     competent authorities shall ensure that corrective measures
     are taken if falls occur for any reason other than that
     referred to above .
3.   With effect from 1 January 1993 , credit institutions shall
     not allow their ratios , as defined in Articles 3(1 ) and
     3(2 ), to fall below 8 % * . In the event of such an
     occurrence , the competent authorities shall ensure that
     appropriate measures to restore the ratio to the agreed
     minimum are taken as quickly as possible by the credit
     institution in question .
4.   Notwithstanding paragraph 3 , the competent autho¬
     rities may    establish ratios   above   8% *  as  they  consider
     appropriate .
5.   Member States shall communicate to the Commission the texts
     of the main laws , regulations and administrative provisions
     which they adopt in the field covered by this Directive .
* This figure is provisional . A definitive figure will be pro ¬
posed after study of the results of a statistical exercise to be
undertaken in the first half of 1988 .
 ---pagebreak---                          Artide 10
This Directive is addressed to the Member States .
 Done at                            For the Counci L
 ---pagebreak---        ANNEX 1  : The treatment of off-balance sheet items
                       in the solvency ratio
The items shall first be grouped according to the perceived
credit risk attaching to the instrument in question ( see Annex
2 ). " Full risk " off-balance sheet items shall be deemed to carry
a credit risk equal to balance sheet items , and thus their full
value taken into account ; " medium risk " items shall be considered
to carry less risk and only one-half of their value taken into
account ; medium / low risk items shall be deemed to carry lower
risk than the medium category and one-fifth of their value taken
into account ; " low risk " items shall be considered to carry
negligible risk and their value accordingly set at zero . The
second stage shall be to multiply the off-balance sheet values ,
adjusted as described above , by the weights attributable to the
relevant counterparties ,      in accordance with the treatment
afforded to asset items . In the case of asset sale and repurchase
agreements and outright forward purchases , the weights shall be
those attaching to the assets in question and not to the counter ¬
parties to the transactions . Article 6 combines the two-stage
process used for off-balance sheet items into a single percentage
weight .
Where off-balance sheet items       carry  explicit  guarantees , they
shall be weighted as if they were incurred on behalf of the
guarantor rather than the counterparty . Where potential exposure
arising from off-balance sheet business is fully and completely
secured ,    to the satisfaction of         the   relevant   competent
authorities , by any assets having a 0% or 20% weight , the weight
applicable to the collateral and net to the counterparty shall be
used .
 ---pagebreak---      ANNEX 2 : classification of off-balance sheet items
Full risk
- Guarantees having the character of credit substitutes ;
- Acceptances ;
- Endorsements on bills not carrying          the name  of  other credit
  institutions ;
- Transactions with recourse ;
- Irrevocable standby letters of credit having the character of
  credit substitutes ;
- Asset sale and repurchase agreements as defined in Articles
  12(1 ) and ( 2 ) of Directive 86 / 635 / EEC , if these agreements are
  treated as off-balance sheet items pending full compliance with
  Directive 86 / 635 / EEC ;
- Assets purchased under outright forward purchase agreements ;
- The unpaid portion of partly-paid shares and securities ;
- Other items also carrying full risk .
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 Articles
  12(3 ) and ( 5 ) of Directive 86 / 635 / EEC ;
- Irrevocable standby letters of credit not having the character
  of credit substitutes ;
- Undrawn    credit     facilities    ( agreements   to   lend   purchase
  securities , provide guarantees , acceptance facilities ) with an
  original maturity of more than one year ;
- Other items also carrying medium risk .
 ---pagebreak---                                2
Medium / low risk
- Documentary credits in which underlying shipment         acts  as
  collateral and other self - liquidating transactions .
- Other items also carrying medium / low risk .
Low risk
- Undrawn credit facilities       ( agreements to lend ,   purchase
  securities , provide guarantees , acceptance facilities ) with an
  original maturity of up to and including one year .
- Other items also carrying low risk .
 ---pagebreak---       ANNEX 3 : The treatment of interest rate and foreign
          exchange rate related off-balance sheet items
Subject to the consent of their supervisory authorities , credit
institutions shall choose one of the methods presented below to
measure     the   risks  associated  with   the  transactions   listed  in
Annex    4.     Interest   and  exchange    rate   contracts   traded   on
recognised exchanges , and exchange rate contracts               with   an
original maturity of 7 days or less shall be excluded .
Method 1 : the " marking to market " approach
Step ( a ) : on the basis of attaching current market values to
contracts ( marking to market ) the current replacement cost of all
contracts with a positive value shall be obtained .
Step ( b ) : to obtain a figure for potential future credit exposure
the notional principal amounts or values underlying the insti ¬
tutions' aggregate books shall be multiplied by the following
percentages ( 1 ):
residual maturity                   interest rate         exchange rate
                                      contracts             contracts
less than one year                       nil                   1%
one year and over                         0.5 %                5%
Step ( c ) : the sum of current replacement cost and potential
future credit exposure shall be multiplied by the risk weight
attached to the relevant counterparties in Article 6 .
( 1 ) These percentages are provisional and subject to revision .
 ---pagebreak--- Method 2 : the " original exposure " approach
Step ( a ): the notional principal amounts of each instrument shall
be multiplied by the percentages given below ( 1 ) :
original maturity                interest rate         exchange rate
                                   contracts             contracts
less than one year                    0 . 5%                2%
one year and less than
2 years                             . 1%                    6%
additional allowance for
each subsequent year                  1%                    4%
Step ( b ) : the original exposures          thus obtained shall     be
multiplied by the counterparty weights given in Article 6 .
 ( 1 ) These percentages are provisional and subject to revision .
 ---pagebreak---       ANNEX 4 : Types of interest and foreign exchange rate
                   related off-balance sheet items
Interest rate contracts
- Single-currency interest rate swaps
- Basis swaps
- Forward rate agreements
- Interest rate futures
- Interest rate options purchased
- Other contracts of similar nature
Exchange rate contracts
- Cross-currency interest rate swaps
- Forward foreign exchange contracts
- Currency futures
- Currency options purchased
- Other contracts of similar nature
A - 123 - XV/69ER87
 ---pagebreak---        EFFECT OF THE PROPOSAL OF DIRECTIVE ON SMALL AND
     MEDIUM SIZED ENTERPRISES AND THE LEVEL OF EMPLOYMENT
1 . New administrative requirements for the enterprises arising
    from the application of the legislation :
    None
2 . Advantages for the enterprises :
    The directive is one of the pre-requisite pieces of harmo ¬
    nisation involved in the establishment of a truly unified
    internal market in banking . The achievement of such a market
    should bring about a process of intensified competition and
    enhanced   innovation which will   increase customer  choice and
    reduce the cost of banking services . The small and medium
    sized enterprises will accordingly benefit from wider choice ,
    more favourable terms and financial products better suited to
    their needs . At the same time , the harmonisation proposed will
    strengthen the financial base of credit institutions and
    promote the stability of the banking system . This will have
    beneficial effects for overall economic performance .
3 . Disadvantages for the enterprise ( additional costs ):
    As a proposal aims to raise average solvency standards in
    order to protect the financial soundness of individual credit
    institutions and the overall stability of the European banking
    system , there may , in the short-term , be some increase in the
    cost of certain banking services in some Member States . Any
    such increases should in the longer-term be offset by the
    effects of greater competition between providers of banking
    services .
4 . Effects on the level of employment :
    The envisaged reduction in the cost of financial services , and
    the improvement in the quality of those services , should have
    favourable implications for the profitability of enterprises
    in other sectors , and thus on employment therein .
 ---pagebreak---                                2
5 . Will there be prior consultations with social partners ?
    Y es
    Opinion of social partners :
    Favourable
6 . Might there be a less stringent alternative approach ?
    No . The proposed directive aims to establish a comprehensive
    system of measuring solvency requirements . The minimum level
    of solvency set is necessary to ensure adequate prudential
    standards .