CELEX: 51991PC0068
Language: en
Date: 1991-04-23
Title: PROPOSAL FOR A COUNCIL DIRECTIVE ON MONITORING AND CONTROLLING LARGE EXPOSURES OF CREDIT INSTITUTIONS

COMMISSION OF THE EUROPEAN COMMUNITIES
                                       C0M(91) 68 final - SYN 333
                                       Brussels, 23 Apr i I 1991
                      Proposal for a
                    COUNCIL DIRECTIVE
     on monitoring and controlling large exposures
                 of credit institutions
             (presented by the Commission)
 ---pagebreak---                                       - 2 -
                             EXPLANATORY MEMORANDUM
A.   General
Risk spreading    is a golden rule of financial activity in general.        It is
the prime responsibility of the supervisory authorities to ensure that this
rule   is closely observed by credit     institutions.   In the area of credit
risks,   too great    a concentration of   exposures   to any one   party   could
jeopardize the independence of the credit institution's management and, in
the event of that party failing, could cause it such a loss as to threaten
its stability.
This is therefore a key rule of supervision which should be harmonized at
Community   level.   Furthermore, specific mention of this was made       in the
Commission's White Paper on completing the internal market.      However, there
is a second reason for such harmonization, namely the need to prevent clear
distortion of competition.     As the rules governing the division of risks
are primarily intended to limit the assistance which a credit        institution
may grant    a given client, another    institution would have a competitive
advantage if it were subject to less stringent rules.
 ---pagebreak---                                             - 3 -
 In line with the objectives set out            in the White Paper, the Commission
adopted, in 1986, a Recommendation on large exposures 1 in order to prepare
credit institutions and Member States gradually for the adoption of binding
standards.      A recital   in that Recommendation specifically promised a later
proposal for a Directive.        The approaching internal market deadline and the
agreement      reached   by  the   national    supervisory    authorities     within    the
Banking Advisory Committee suggest that the time is ripe for a proposal for
a Directive to be adopted.
The  attached      proposal   for   a   Directive   submitted    for   the  Commission's
approval      contains    stricter     standards    than    those    set   out    in    the
Recommendation.      Mentioning    only    the key   rules,    the   absolute   limit    on
exposures to a single client has been set at 25% of the lending credit
institution's own funds (the corresponding percentage in the Recommendation
was 4 0 % ) , while the threshold at which an exposure is considered to be a
large exposure has been reduced to 10% of the lending                 institution's own
funds (from 15% in the Recommendation).
This reinforcement of standards is in response to the earnestly expressed
wishes of      the Banking    Advisory     Committee   and   is also    supported    in a
document on sound practices presented by the Basle Committee on banking
supervision at the recent world conference of bank inspectors in Frankfurt.
Stricter standards can only reinforce the solidity and stability of the
Community's banking system.          Furthermore, a limit of 25% of the           lending
institution's own       funds can     in no way be regarded        as excessively     low,
    Commission      Recommendation      of   22 December 1986      on   monitoring     and
    controlling       large   exposures     of   credit    institutions,     0J No L 33,
    4.2.1987, p. 10.
 ---pagebreak---                                          - 4 -
 since, if a client to which such a large exposure had been incurred were to
 fail, the credit    institution could lose a quarter of its own funds, which
 is a considerable amount and should,         ideally, be reduced still       further.
Moreover, this     is a ceiling, and credit         institutions should     discipline
 themselves to reach or near that ceiling only In the case of exposures of
 impeccable qua Iity.
Nevertheless, the significant reduction in the ceiling compared with that
 in  the   Recommendation    may   pose   adjustment    problems    for  some    credit
 institutions or, in a more structural manner, for certain banking systems
or parts of banking systems.         Furthermore, assistance already granted in
excess of 25% of own funds cannot           always be reduced quickly by credit
 institutions   which   are  contractually     bound   to  the   recipients   of   that
assistance.    Accordingly,    the    attached    proposal   contains    a   provision
authorizing    the   competent   authorities    to   grant   credit   institutions    a
maximum period of five years in which to bring existing exposures into line
with   the  limits   laid down;   in addition,      loans of    longer maturity with
contractually binding terms for the lending institution, may be held until
maturity.
B.   Comments on the Articles
Article 1; Definitions
The definitions     in this Article are drawn mainly           from other    Community
Directives or proposals for Directives           in the banking sphere and their
retention is justified in the interests of consistency.
However, two definitions are peculiar to this proposal and merit special
comment.
 ---pagebreak---                                         - 5 -
The first of these        is the definition of     "exposures" (letter   h) of the
definitions).     The    above-mentioned     Commission   Recommendation    defined
exposures as any facility granted, whether drawn or undrawn, by a credit
 institution to a client or group of connected clients, on or off balance
sheet, and     includes those commitments and contingent       items deemed to be
relevant    by   the   respective   competent    authorities  when  assessing   the
 identifiable risks of that institution.         A list of exposures was set out,
for guidance, in the Appendix to the Recommendation.
Since then, the solvency ratio Directive 1 has been adopted, which contains
a detailed nomenclature of risks.       By referring to this nomenclature, it is
possible to have both a more precise and a more binding definition of
exposures.     It should be emphasized, however, that this borrowing from the
solvency   ratio Directive covers only        the risk nomenclature and not     the
weightings attributed to the risks in the Directive according to the party
or   degree   of   risk   involved   in  the   transaction.  These  weightings   in
Directive 89/647/EEC were not designed to measure exposure to an individual
client but    instead to set up a general solvency requirement to cover the
credit risk of credit       institutions.   Given the fundamental aim underlying
the rules on risk spreading (to limit an institution's maximum risk of loss
with respect to a given client), a prudent approach must take account of
exposures at their nominal value, without any weighting or degree of risk.
    Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio
     for credit institutions, OJ No L 386, 30.12.1989, p. 14.
 ---pagebreak---                                             - 6 -
 It   will   be   noted    that     the   definition   of   exposures     also     includes
underwriting commitments for the            issue of securities.      The amount       taken
 into account is the institution's net commitment, subject to deduction of
the shares transferred to other credit or financial institutions.
The second definition peculiar           to this proposal     is that of a "group of
connected     clients"    (letter    m)   in Article 1 ) . This    definition      is very
similar    to   that   in   the    1986   Recommendation.    The   first    part    of   the
definition refers to the existence of a power of control as defined in the
eleventh     indent   in Article 1.       The  second   part   refers    to   a   de facto
 interconnection resulting from certain links, examples of which are set out
 in   the   proposal     for   guidance.     The   competent    authorities      will     be
responsible for examining the combinations of exposures incurred by credit
 Institutions on the basis of the rules transposing this definition                     into
national law and for assessing whether those combinations of exposures are
in fact consistent with the letter and spirit of the Community definition.
In order to give the competent authorities the necessary flexibility in an
area which depends more on economic appraisal than on legal criteria, the
proposal makes      it clear that the combined exposure presumptions                 in the
definition are relative presumptions which can be reversed                   if there is
proof to the contrary.
Article 2: Scope
The Directive will apply to credit            institutions which have obtained the
authorization      referred     to    In   Article 3   of    Directive 77/780/EEC         of
12 December 1977      (first   coordination     Directive), 1    i.e.  all    the    credit
institutions     in the Community.       However, Member States will not have to
apply the Directive to:
1    OJ No L 322, 17.12.1977, p. 30.
 ---pagebreak---                                           - 7 -
      institutions    permanently      excluded     from   the    scope    of    the   first
      coordination    Directive      (mainly    central    banks,     post    office    giro
      institutions      and     certain     particular        institutions        in    each
      Member State);
      credit   institutions permanently affiliated           to a central       body which
      supervises them and which is established in the same Member State, and
      provided    that    the    conditions     set    out     In   Article 2(4)(a)       of
      Directive 77/780/EEC are met.        In that case, without prejudice to the
      application     of     the    Directive       to    the     central      body,     the
     whole - constituted        by    the   central      body     and    its    affiliated
      institutions - m u s t be the subject of global supervision with regard
      to large exposures.
Article 3: Reporting of large exposures
Effective supervision of large exposures clearly calls for such exposures
to be notified regularly to the competent authorities.                Such is the aim of
Article 3.
Paragraph 1 of Article 3 stipulates that large exposures must be reported
to  the competent    authorities. At       their    discretion, Member        States will
provide   for  this reporting      to be carried out        by one of       the   following
methods:
     notification of all large exposures at least once a year, backed up by
     communication     during   the year     of   any modifications       to the     annual
     notification;
     notification of all large exposures at least four times a year.
 ---pagebreak---                                          - 8 -
 The first of these two methods, which did not appear in the Recommendation,
 was suggested to the Commission by the Banking Advisory Committee.
As to the second method, the minimum frequency of notification has been
 increased to four times a year from the single report provided for in the
Recommendation.     Effective monitoring of      large exposures presupposes that
sufficiently    frequent    information    reaches   the  supervisory   authorities.
Moreover, one of      the recitals    In the Recommendation suggested       that the
competent authorities should seek more frequent reporting.
Member States will have the choice of transposing into national           law either
one of these methods only or both methods. In the latter case, they will be
able to decide whether the choice of method should be left to the competent
authorities or to the credit institution itself.
Paragraph 2 of Article 3 stipulates that an exposure to a client or group
of connected clients is to be considered a large exposure where its value
 is equal to or exceeds 10% of the lending           institution's own funds.    The
corresponding percentage in the Recommendation was 15%.           The reduction in
this threshold     is Justified by the general        need to make the system of
supervising    large   exposures  more    stringent    in order  to   reinforce  the
stability of the Community's banking system.           More specifically, once the
ceiling on    individual   exposures    has   itself  been   cut (see Article 4(1)
below),   it is logical    to reduce the reporting threshold. Some countries
already employ a 10% threshold, and the Commission considers, in the light
of their experience, that such a threshold cannot be regarded as imposing
bureaucratic    obligations.    Since    the   proposal    also  provides    for  an
aggregate limit on large exposures of 800% of own funds (see Article 4(3)
below), the reporting exercise is limited to a theoretical maximum of 80
exposures.   Moreover, this reporting exercise can easily be computerized.
 ---pagebreak---                                         - 9 -
 The reduction in the threshold to 10% will ease administrative obligations
 in a further respect.     The Commission has not retained paragraphs 3 and 4
 of the corresponding Article in the Recommendation, which provided for a
 credit   Institution's ten largest exposures to be reported, whether or not
 these were "large exposures".      The Banking Advisory Committee agreed that
 such reporting would lose much of its value as a result of the widening of
 the concept of "large exposure".        As to the supervision of     institutions
which do not have exposures in excess of 10% of their own funds, this is,
by definition, not subject to legislation governing the spreading of large
exposures.
Article 4
Paragraph 1
This    key   provision   in  the   draft   Directive    stipulates  that   credit
 institutions may not incur an exposure to a client or group of connected
clients where     its value exceeds 25% of own        funds.   This represents an
appreciable reduction compared with the Recommendation, which provided for
a 40% ceiling.      Apart  from  the fact   that   the  introduction of   stricter
standards more than four years after the adoption of the Recommendation,
which was only an initial stage, is a logical step, this reinforcement of
the standard was specifically called for by a significant majority of the
Banking Advisory Committee, subject to a transitional period for existing
exposures (see Article 6 below).       Support   for a 25% ceiling can also be
found in a document presented by the Basle Committee on banking supervision
at   the    world  conference   of   bank   inspectors    held   in Frankfurt   in
October 1990.
 ---pagebreak---                                          - 10 -
A 25% ceiling should        not   be regarded    as excessively       low since, while
 complying with that      limit, a credit      institution could still, under         the
worst hypothesis, lose a quarter of its own funds.             This is a considerable
 amount and should, ideally, be reduced further.           The point is that this is
a   maximum   ceiling    for    exposures   of    impeccable     quality,   and    credit
 institutions should discipline themselves to reach or approach that limit
only In the case of exposures of such quality.
Paragraph 2
Bank supervisors know from experience that there is frequently an increased
risk where a credit       institution   lends to enterprises        linked to it.     The
Banking Advisory Committee specifically requested the Commission to provide
for   a   lower   limit    for   exposures    to   associated     enterprises    (parent
undertaking of the credit institution and other subsidiaries of that parent
undertaking).    It   had    initially    been   planned    to    incorporate    such   a
provision in the proposal for a Directive relating to the supervision of
credit   institutions on a consolidated basis. 1          But, as     indicated   in the
fourth recital of that proposal, it was considered preferable to settle
this question    in a more systematic manner within             the framework of      the
future Directive on large exposures.
The Commission has set this lower limit at 20% (compared with the normal
25% limit laid down in paragraph 1 ) .
Provision is made for exceptions to this rule in paragraphs 5 and 6 (see
below).
                                                                          J A. »
1    C0M(90) 451, OJ No C 315, 14.12:1990, p. 15.
 ---pagebreak---                                        - 11 -
 Paragraph 3
 The Commission has retained the aggregate limit on large exposures provided
 for in the Recommendation, i.e. 800% of own funds.      However, as the concept
 of "large exposure" has been broadened (see Article 3(2) above), this limit
 has now become, indirectly, more strict.
An aggregate limit is a valuable complement to the limitation of individual
 risks  in legislation governing    large exposures.    While the  limitation of
 individual risks ensures that no exposure exceeds the ceiling laid down, it
does not affect the spread of risks throughout the portfolio.       An aggregate
 limit of 800%, however, will mean that a credit        institution can at most
have 80 large exposures and a maximum of 32 exposures which            reach  the
 individual ceiling of 25% of own funds.
Paragraph 4
This paragraph provides that Member States may impose more stringent limits
than those laid down in paragraphs 1, 2 and 3.
Paragraph 5
This paragraph requires the limits laid down in the first three paragraphs
to be observed at all times.     If those limits were to be exceeded - which
could   happen  accidentally - the    proposal   stipulates  that  they   may  be
exceeded   only  in exceptional   and   temporary  circumstances and,    in such
cases, the competent authorities would have to fix a deadline within which
the credit institution would be obliged to regularize its situation.
Paragraph 6
This paragraph permits Member States to exempt fully or partially from the
need to observe the special 20% limit       laid down  in paragraph 2 exposures
incurred by the credit institution to a financial holding company which is
 ---pagebreak---                                            - 12 -
 its parent undertaking and to other subsidiaries of that financial holding
company     which    are     credit    institutions,     financial     institutions     or
undertakings providing ancillary banking services.
The   presumption     of    increased    risk  underlying      the  special   20%    limit
applicable    to exposures       to  associated    undertakings     is not   necessarily
relevant in the case of exposures to banking and financial entities in the
group.    In that event, however, the group should structure itself in such a
way that those entities can be the subject of supervision on a consolidated
basis exercised in accordance with the future Directive in this field (see
the  reference     above   to the proposal       for a Directive presented        by   the
Commission).
Paragraph 7
This paragraph permits Member States to exempt fully or partially from all
the limits laid down in paragraphs 1, 2 and 3 (but not from the reporting
obligations     set   out    in   Article 3)   exposures     incurred   by   the   credit
institution to:
      its parent undertaking, provided that that undertaking                is itself a
     credit    institution.      It does not seem Justified to limit the flow of
      funds   which     a   subsidiary     can    provide    for   its   parent    credit
      institution.     Of course, the proviso here          is again that    the parent
     undertaking     Is subject either to supervision on a consolidated basis
     exercised     in accordance with the Community Directive in question or,
      if it is located in a third country, to equivalent supervision;
     subsidiaries,        provided     that    those      subsidiaries     are    credit
      institutions,      financial     institutions     or    undertakings     providing
     ancillary     banking    services.    Since   these   are   activities   which    the
 ---pagebreak---                                           - 13 -
       credit   institution could carry out directly, there          is no reason to
       limit the funding which It provides for its subsidiaries.            Once again,
       the exemption      is subject    to the proviso     that  the subsidiaries      in
       question are Included       In the consolidated supervision of the parent
       undertaking.
 Paragraph 8
This paragraph authorizes Member           States to exempt     a number of specific
 exposures fully or partially from the application of the limits laid down
 in paragraphs 1, 2 and 3.
The first six indents (letters a) to f)) cover exposures incurred directly
or   indirectly to Zone A central governments and central banks and to the
European Communities.        No Member State imposes or seems prepared to impose
 limits on exposures incurred by its credit           institutions to itself.      Given
the    rule   of   non-discrimination      within    the  Community,   this     lack  of
 limitation    should    in   any  case   apply   to   exposures  incurred    to   other
Member States.      But, for reasons similar to those given in connection with
the above-mentioned Directive 89/647/EEC or the proposal for a Directive on
capital   adequacy of      investment   firms and credit     institutions,1    it seems
pertinent to refer to a wider geographical area, namely Zone A as defined
 in Directive 89/647/EEC.
Letters g) and h) cover cases where the risk can be considered to be small
or even nil, i.e. where it is covered by a guarantee in the form of cash
deposits or certificates of deposit lodged with the lending institution.
Letter i) covers claims with a maturity of up to one year on other credit
institutions.     The   aim   here   is to cover     transactions on    the   interbank
market.    This   is a market which operates between professionals who know
each   other   and   which    requires   some   flexibility   in order    to   function
harmoniously.     The Commission does not therefore consider          it appropriate,
1    COM(90) 141; OJ No C 152, 21.6.1990, p. 6.
 ---pagebreak---                                       - 14 -
at this stage, to establish a single harmonized        limit at Community  level
 for exposures incurred on this market.
The same reasoning applies to letter j ) , which concerns commercial       paper
meeting    certain  conditions,   and   to   letter  k ) , which  concerns   the
obligations defined    in article 22 paragraph 4 of directive 85/611/EEC on
UCITS 1 .
Letter I) covers cooperative banks or savings banks belonging to a network
and for which there is a centralized cash clearing operation.
Paragraph 9
Paragraph 9 refers to exposures incurred directly or indirectly to regional
and local authorities in the Member States.       In view of the fact that the
degree of risk involved here is normally lower, the proposal permits a 20%
weighting to be applied.     This rate may be reduced to 0% subject to the
conditions laid down in Article 7 of Directive 89/647/EEC.       Given the wide
differences which may exist between the rules governing regional and local
authorities outside    the Community,   the Commission    does not consider   it
appropriate to extend this arrangement to the whole of Zone A.
Paragraph 10
This paragraph states, as a general principle, that where an exposure to a
client is guaranteed, to the satisfaction of the competent authorities, by
a third party, the competent authorities may deem the exposure to have been
incurred   to that  third party and not     to the client.    Thus, where, for
example, a credit institution incurs an exposure of 50 to client A and one
of 20 to client B, but with client B guaranteeing 10 of A's debt to the
credit institution, the exposure to A and B may be deemed to be as follows:
      - A: 40
      - B: 30.
1    0J No L 375, 31.12.1985, p. 3.
 ---pagebreak---                                         - 15 -
 Article 5:    Supervision on a consolidated or non-consolidated basis
 This   Article      includes    provisions    already     adopted    as    part    of
 Directive 89/647/EEC on a solvency ratio, and in particular Article 3(2) to
 (6) of that Directive.
 Paragraph   1 covers the case of a credit         institution which    is neither a
 parent undertaking nor a subsidiary.
Paragraph    2 establishes the principle of applying         the rules set out      in
Articles 3 and 4 on a consolidated basis.
Paragraph 3 lays down the arrangements for the non-consolidated supervision
of a parent credit institution and its subsidiaries established in the same
Member State.
Paragraph 4    concerns    the  supervision,   on   a  non-consolidated    basis, of
subsidiaries established in other Member States.
Paragraph   5 provides     for possible bilateral      agreements under    which  the
competent authorities in the Member State in which a subsidiary is situated
could   delegate    their   responsibility   for    supervision   to  the   competent
authorities in the Member State in which the parent credit undertaking is
established.
Article 6:    Transitional provisions relating to exposures in excess of the
limits
Article   6   concerns    exposures  existing    at   the  time   the  Directive   is
published in the Official Journal of the European Communities which exceed
the limits laid down by the Directive.           It would seem Justified to make
transitional    arrangements   for  this type of exposure,       in order   to allow
credit   Institutions the time to find a solution which would not overturn
their  commercial    relationship with    their    clients.  In any event,     credit
 ---pagebreak---                                           - 16 -
  institutions may     be   bound - with    regard   to  the parties       to whom     those
 exposures have been        incurred - by contractual     arrangements which do not
 necessarily permit them to reduce such exposures quickly.
 Paragraph 1 specifies that        risks entered     into force before the date of
 publication   of   the    directive   in the Official      Journal     of   the   European
 Community shall be eligible for the grandfathering provisions. The choice
of   this cut-off point        is Justified by the consideration           that   from   the
moment when the directive is published, credit institutions should not be
able to take exposures exceeding the limits that will apply subsequently.
This paragraph also stipulates that the competent authorities must require
 the credit institution in question to take the steps necessary to have the
excess exposure or exposures brought          into line with the provisions of the
Direct ive.
Paragraph 2 provides for the process of reducing the excess exposures to be
 implemented   and    completed    within   the   period   deemed     by   the   competent
authorities to be consistent with the principle of sound administration and
fair competition.       The competent     authorities are required         to  inform the
Commission   and   the Banking Advisory        Committee   of    the schedule      for   the
general process adopted.
 In accordance with paragraph 4, however, the period               in question may not
exceed    five years      from   the   date    stipulated     in    Article 8(1),       i.e.
1 January 1993.      However     loans   with   a   longer    maturity      with    binding
contractual terms for the credit institution may be held until maturity.
Paragraph 3 stipulates that, credit institution may only take advantage of
the period specified in paragraph 2 to the extent that it does not take any
measure which would cause the exposures to exceed the level existing at the
date of publication of the directive in the Official Journal. The emphasis
is therefore on the deliberate action of the credit institution.
 ---pagebreak---                                           - 17 -
Finally, paragraph 5 contains a specific provision which Member States may
apply to the particular categories of credit              institution referred to in
Article 4(2) of Directive 89/646/EEC.           This provision     is justified by the
fact that, as the own funds of such            institutions are      limited,   immediate
application    of   the   25%  rule    would   reduce   their   lending     activity   too
abruptly.    The arrangements set out         in paragraph 5 can be summarized as
fol lows:
      from 1 January 1993 to 31 December 1997, the institutions in question
      may be subjected to a limit of 40% instead of the 25% limit laid down
       in Article 4(1);     in that event, all new exposures           incurred by such
       institutions are to be subject to that 40% limit;
      exposures existing on       the date     the Directive     is published      in the
      Official    Journal   may   be   maintained,    whatever    their     level,  until
      31 December 1997, subject       to the sole proviso that they may not be
      increased beyond the level reached on the date of publication;
      as from 1 January 1998, the 25% limit will come into force and will
      apply to all new exposures;
      however, exposures between 25% and 40% of own funds existing at the
      end   of  the    maximum   period    of   five years    (i.e. in     principle    on
      31 December 1997)      may   be    maintained    for    a   maximum     period   of
      three years     (i.e. until     31 December 2000),      subject     to   the   same
      condition that they may not be increased;
     as from 1 January 1998, therefore, no exposure in excess of 40% of own
      funds may be maintained, and, as from 1 January 2001, no exposure in
     excess of 25% of own funds may be maintained;
     paragraph 4 provides, however, that loans with a longer maturity than
     the dates referred to above and with binding contractual terms for the
      lending   credit    institution    may   in all    cases  be    maintained    until
     maturity.
 ---pagebreak---                                        - 18 -
Article 7:    Subsequent amendments
Paragraph 1    specifies   the   fields   in  which   the  procedure   for   making
 technical   amendments  to   the  Directive   are   to apply.  The   first   three
 indents concern the adaptation of definitions or terminology.          The fourth
relates to the frequency of large exposure reporting ((Article 3(1)).           The
fifth   indent concerns the clarification or extension of          the exemptions
provided for in Article 4(5) to (9). The sixth indent, finally, refers to
the maximum period for reducing the excess exposures outstanding at the
time of the publication of the Directive in the Official Journal of the
European Communities.     This maximum period      laid down  in Article 6(4) is
five years.
The procedure    laid down in paragraph 2 is Procedure III, Variant (a), in
Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for
the exercise of implementing powers conferred on the Commission.
Article 8:    Final provisions
The first subparagraph of paragraph 1 requires Member States to comply with
the Directive by 1 January 1993.
The   second  subparagraph   stipulates    that, when   Member States   adopt   the
necessary provisions of national       law, these must contain a reference to
this Directive or must      be accompanied    by such reference when they are
official I y pub Iished.
Paragraph 2 deals with      the transmission    to the Commission of      the main
provisions of national law adopted by the Member States.
Article 9
This Article contains the usual wording to the effect that the Directive^ is
addressed to all Member States.
 ---pagebreak---                                       - 19 -
                                  Proposal for a
                                COUNCIL DIRECTIVE
                 on monitoring and controlling large exposures
                             of credit institutions
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic Community,
and in particular the first and third sentences of Article 57(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 Economic and Social Committee 3 ,
Whereas    this Directive   is consistent    with  the  aims  set  out   in the
                                                              4
Commission's White Paper on completing the internal market ;
Whereas the suitable approach       is to achieve harmonization of essential
supervisory rules; whereas Member States should have the option of adopting
more stringent provisions than those provided for by this Directive;
Whereas   this Directive   has been    the subject  of  consultation   with the
Banking Advisory Committee, which       is responsible, under Article 6(4) of
Council   Directive 77/780/EEC of    12 December 1977 on   the coordination of
1
2
3
4    C0M(85)310.
 ---pagebreak---                                         - 20 -
 laws, regulations and administrative provisions relating to the taking-up
 and pursuit of the business of credit         institutions1, as last amended by
 Directive 89/646/EEC 2 ,    for making   suggestions to the Commission        with a
 view to coordinating the coefficients applicable in the Member States;
Whereas monitoring and controlling the exposures of a credit institution is
 an integral part of prudential supervision; whereas excessive concentration
of exposures to a single client or group of connected clients may result in
an   unacceptable    risk;   whereas  such   a  situation   may  be   deemed    to  be
prejudicial to the solvency of a credit institution;
Whereas   common    guidelines   for  monitoring   and   controlling   exposures    of
credit institutions were introduced initially by Commission Recommendation
87/62/EEC 3 ; whereas that instrument was chosen since it permitted existing
systems to be adjusted gradually and new systems to be established without
causing dislocation to the banking system of the Community; whereas, with
that first phase now over, it is necessary for a binding instrument to be
adopted, applicable to all Community credit institutions;
Whereas credit     institutions in a unified banking market engage         in direct
competition   with each other and       the prudential    supervision   requirements
throughout the Community should, therefore, be equivalent; whereas, to that
end, the criteria applied for determining the concentration of exposures
should   be the subject     of  legally binding    rules at Community      level   and
cannot be left entirely to the discretion of the Member States; whereas the
adoption of common rules will therefore best serve the            interests of the
Community,   since    it will prevent    differences   in competitive conditions,
while at the same time strengthening the Community's banking system;
1    OJ No L 322, 17.12.1977, p. 30.
2    OJ No L 386, 30.12.1989, p. 1.
3    OJ No L   33,   4. 2.1987, p. 10.
 ---pagebreak---                                            - 21 -
 Whereas   as   regards   the   precise     accounting      technique    to    be    used   for
 assessing    exposures,    reference     is made     to    the   provisions      of   Council
 Directive 86/635/EEC      of   8 December 1986       on     the    annual    accounts      and
                                                                                1
 consolidated accounts of banks and other financial              institutions ;
 Whereas Council Directive 89/647/EEC of             18 December      1989 on a solvency
 ratio for credit    institutions2 contains a list of credit risks which may
 be incurred by credit      institutions; whereas it is therefore justified to
 refer to that list in the definition of exposure for the purpose of this
Directive;     whereas   it   is not,      however,    appropriate      to   refer     to   the
weightings or degrees of risk set out              by Directive 89/647/EEC; whereas
 these weightings and degrees of risk have been devised in order to set up a
general    solvency    requirement       to   cover     the    credit    risk     of    credit
 institutions; whereas in the framework of regulating large exposures, the
purpose is to limit the maximum potential              loss that a credit         institution
may incur through a single client or a group of related clients; whereas it
 is therefore appropriate to adopt a prudent approach consisting of taking
account   of   the nominal    value of exposures, without             application      of  any
weightings or degree of risk;
Whereas   when   a credit     institution     has   an   exposure     to   its own      parent
undertaking, or to other subsidiaries of its parent undertaking, particular
prudence    is Justified; whereas the management              of exposures      incurred by
credit institutions must be carried out in a fully autonomous manner, with
respect to the principles of sound banking management, without regard to
any other considerations beyond these principles; whereas the provisions of
the   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      and
amending Directive 77/780/EEC, require that where the influence exercised
by  persons    holding  a qualifying participation             in a credit        institution
directly    or   indirectly     is    likely   to    operate      to   the   detriment      of
1    OJ No L 372, 31.12.1986, p. 1.
2    OJ No L 386, 30.12.1989, p. 14.
 ---pagebreak---                                          - 22 -
 the   prudent   and   sound   management    of   the   institution,    the   competent
authorities     shall   take   appropriate    measures    to   put  an   end   to  that
situation; whereas in the large exposures field, it is justified to insert
specific rules with respect to an exposure held by a credit institution on
 its own group, and in such cases more stringent           limitations are justified
for such exposures than for other exposures; whereas this more stringent
 limitation must however not be applied when the parent undertaking                is a
financial    holding    company    or   a   credit    institution,    and   the   other
subsidiaries     which   are   either    credit   or   financial    institutions,    or
undertaking offering ancillary banking services, to the extent                that all
these undertakings are included in the supervision on a consolidated basis
of   the credit    institution; whereas      in that case, the supervision on a
consolidated basis of the group allows sufficiently efficient supervision,
without the imposition of more stringent          limits on exposure being needed;
whereas under     this approach, banking groups will          also be encouraged     to
organize their structure in such a way as to make consolidated supervision
possible, which is a desirable result because it allows more comprehensive
supervision to be carried out;
Whereas it is necessary to provide for a two-stage application of the limit
of 25% of own funds       in the case of the particular categories of credit
institution referred to in Article 4(2) of Directive 89/646/EEC; whereas,
the   own   funds    of   such   institutions     being    limited,   a   single-stage
application    of   the  25% rule     would   reduce   their   lending   activity   too
abruptly;
Whereas implementing powers of the same nature as those which the Council
reserved for     itself  in Directive 89/299/EEC of 17 April 1989 on the own
funds of credit     institutions1 were granted to the Commission          in Directive
89/646/EEC;
1    OJ No L 124, 5.5.1989, p. 16.
 ---pagebreak---                                      - 23 -
Whereas, taking account of the specific characteristics of the sector in
question, it is appropriate to give the committee provided for in Article
 22 of Directive 89/646/EEC the role of assisting the Commission in carrying
out the responsibilities granted to it 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  the procedures for  the
                                                             1
exercise of implementing powers conferred on the Commission ,
HAS ADOPTED THIS DIRECTIVE:
1    OJ NO L 197, 18.7.1987, p. 33.
 ---pagebreak---                                         - 24 -
                                      Artlçlo 1
                                    Definitions
For the purpose of this Directive:
 (a)   "credit   institution" means a credit       institution as defined      in the
       first   indent   of  Article 1    of   Directive 77/780/EEC     and   includes
      branches of such institutions in third countries and all private or
      public undertakings,      including    their  branches, which     satisfy   the
      definition      given    in   the     first     indent    of    Article 1    of
      Directive 77/780/EEC     and  which    have   been   authorized    in a   third
      country;
(b)   "competent authorities" means the competent authorities as defined in
      the ninth     indent of Article 1 of Directive         ... (supervision on a
      consolidated basis);
(c)   "parent   undertaking"    means   a   parent   undertaking    as   defined   in
      Articles 1 and 2 of Council Directive 83/349/EEC1;
(d)   "subsidiary undertaking" means a subsidiary undertaking as defined in
      Articles 1 and 2 of Directive 83/349/EEC; any subsidiary undertaking
      of a subsidiary undertaking shall be deemed to be a subsidiary of the
      parent undertaking which is at the head of those undertakings;
(e)   "financial    holding  company" means a financial         holding company as
      defined in the third indent of Article 1 of Directive ... (supervision
      on a consolidated basis);
1    OJ No L 193, 18.7.1983, p. 1.
 ---pagebreak---                                     - 25 -
(f)  "financial  institution" means a financial   institution as defined in
     the sixth indent of Article 1 of Directive 89/646/EEC;
(g)  "ancillary banking services undertaking": an undertaking as defined in
    Article 1, fifth     indent, of Directive             (supervision on a
    consolidated basis);
(h)  "exposures" means: the assets and off-balance-sheet items listed in
    Article 6 of Directive 89/647/EEC and in Annexes I and III thereto,
    without application of the weightings or degrees of risk set out in
    those provisions; the risks mentioned in Annex III must be calculated
     in accordance with the method set out in Annex II to that Directive,
    without   application of    the weightings for counterparty   risk;   the
    underwriting commitments for the issue of securities are        included,
    subject to deduction of the shares transferred to other credit or
    financial institutions;
(i) "Zone A" means the zone defined in the second indent of Article 2 of
    Directive 89/647/EEC;
(J) "Zone B" means the zone defined in the third indent of Article 2 of
    Directive 89/647/EEC;
(k) "own funds" means the own funds of a credit      institution within the
    meaning of Directive 89/299/EEC;
 ---pagebreak---                                       - 26 -
(I) "power of control" means the relationship between a parent undertaking
    and  a  subsidiary,     as   defined  in Articles 1     and   2  of   Directive
    83/349/EEC, or a similar relationship between any natural or              legal
    person and an undertaking;
(m) "group  of   connected    clients" means    two or    more  persons, whether
    natural or    legal, who, until proven otherwise, constitute a single
    risk because:
    (i)  either   one   of   them  holds, directly    or   indirectly,    power   of
         control over the other or others, or
    (II) they   are   so   interconnected    that,  if   one   of   them   were   to
         experience financial problems, the other or all of them would be
         likely       to      encounter      repayment       difficulties.      Such
         interconnections      to  be  taken   into  consideration      include   in
         particular:
               common ownership;
               common directors;
               cross guarantees;
               direct     commercial     interdependence     which     cannot     be
               substituted in the short term.
 ---pagebreak---                                      - 27 -
                                   Artie»* Z
                                     Scope
Subject to paragraph 2, this Directive shall apply to credit institutions
which   have  obtained   the  authorization   referred  to   in  Article 3 of
Directive 77/780/EEC.
However, Member States need not apply this Directive to:
(a) credit institutions listed in Article 2(2) of Directive 77/780/EEC;
(b)   institutions   in   the  same   Member State   which,   as   defined in
     Article 2(4)(a) of Directive 77/780/EEC, are affiliated to a central
     body   in that Member State.   In that case, without prejudice to the
     application of    this Directive   to the central    body, the whole -
     constituted by the central body and its affiliated institutions - must
     be the subject of global supervision with regard to large exposures.
 ---pagebreak---                                  - 28 -
                               Article ?
                      Reporting of large exposures
1. A report of every large exposure within the meaning of paragraph 2
   shall be made by the credit institution to the competent authorities.
   Member States shall provide that this reporting     is carried out at
   their discretion, in accordance with one of the following two methods:
        notification of all large exposures at least once a year, backed
        up by communication during the year of any modifications to the
        annual notification;
        notification of all large exposures at least four times a year.
2. An exposure of a credit institution to a client or group of connected
   clients Is considered to be a "large exposure" where its value is
   equal to or exceeds 10% of own funds.
 ---pagebreak---                                       - 29 -
                                    Article 4
                           Limits on large exposures
 1. Credit institutions may not incur an exposure to a client or group of
    connected clients where its value exceeds 25% of own funds.
2.  Where   that  client   or   group   of  connected     clients   is  the   parent
    undertaking of the credit institution and/or one or more subsidiaries
    of that parent undertaking, the percentage provided for in paragraph 1
    shall be reduced to 20%.
3.  Credit   institutions   may   not  incur    large   exposures   which,   in   the
    aggregate, exceed 800% of own funds.
4.  Member States may impose more stringent rules than those laid down in
    paragraphs 1, 2 and 3.
5.  The limits referred to in paragraphs 1, 2 and 3 shall be observed at
    all times by the credit       institution.     They may be exceeded only in
    exceptional    circumstances     and,    in    such    cases,   the   competent
    authorities shall fix a deadline within which the credit            institution
    must regularize its situation.
6.  Member States may fully or partially exempt from the application of
    paragraph 2   exposures    incurred    by    the   credit   institution    to   a
    financial holding company which is its parent undertaking and to other
    subsidiaries of that financial holding company, provided that:
    a)   the financial holding company is included in the supervision on a
         consolidated    basis   of   the   credit     institution   exercised     in
         accordance   with   Directive ....     (supervision    on a consolidated
         basis);
 ---pagebreak---                                     - 30 -
   b)    those   other   subsidiaries    are  credit   institutions,   financial
         institutions or undertakings providing ancillary banking services
         and are included     in the consolidated supervision of the credit
         institution    exercised    in   accordance   with   Directive
         (supervision on a consolidated basis).
7. Member States may fully or partially exempt from the application of
   paragraphs 1, 2 and 3 exposures incurred by the credit institution to:
   a)    its parent undertaking, provided that the parent undertaking is a
        credit institution subject to supervision on a consolidated basis
        exercised    in accordance with Directive ....       (supervision on a
        consolidated basis) or      to equivalent    standards   in force   in a
         third country;
   b)   subsidiaries,     provided    that   those   subsidiaries   are   credit
         institutions, financial     institutions or undertakings providing
        ancillary banking services and are included in the consolidated
        supervision of     the credit    institution exercised    in accordance
        with Directive .... (supervision on a consolidated basis).
8. Member States may fully or partially exempt the following exposures
   from the application of paragraphs 1, 2 and 3:
   a)   asset items constituting claims on Zone A central governments and
        central banks;
   b)   asset items constituting claims on the European Communities;
   c)   asset items constituting claims carrying the explicit guarantees
        of   Zone A   central   governments   and  central   banks  or  of   the
        European Commun 11 i es ;
 ---pagebreak---                                     - 31 -
    d)  other exposures attributable to, or guaranteed by, Zone A central
        governments and central banks or the European Communities;
   e)   asset items which constitute claims on Zone B central governments
        and central banks, and which are denominated and funded                in the
        national currencies of the borrowers-,
    f)  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 Commun i t i es ;
   g)   asset    items secured,    to   the   satisfaction      of    the   competent
        authorities, by collateral      in the form of cash deposits placed
        with the lending institution or with a credit            institution which
         is the parent undertaking of the lending institution-,
   h)   asset    items secured,    to   the   satisfaction      of    the   competent
        authorities,   by  collateral     in    the   form   of    certificates    of
        deposits Issued by and lodged with the lending institution;
    i)  asset   items constituting    claims and other exposures on credit
        institutions, with     a maturity     of   one  year   or    less, but    not
        constituting   such     institutions'     own    funds     as    defined   in
        Directive 89/299/EEC;
   J)   bills of trade and other bills, with a maturity of one year or
        less, bearing   the signature of another         credit     institution and
        accepted for refinancing by a central bank-,
   k)   bonds defined in Article 22(4) of Council Directive 85/611/EEC 1 ;
1 OJ No L 375, 31.12.1985, p. 3.
 ---pagebreak---                                     - 32 -
     I)   asset   items constituting claims on regional or central credit
           institutions with which the lending institution is associated as
          part of a network by virtue of legal or statutory provisions and
          which are responsible, in accordance with those provisions, for
          cash clearing operations within the network.
9.  Member States may, for the purposes of paragraphs 1, 2 and 3, apply a
    weighting of 20% to asset items constituting claims on regional and
     local authorities in the Member States and to other exposures to such
    authorities or guaranteed by them; however, subject to the conditions
    laid down    in Article 7 of Directive 89/647/EEC, Member   States may
    reduce this rate to 0% .
10. Where an exposure to a client is guaranteed, to the satisfaction of
    the competent authorities, by a third party, Member States may deem
    the exposure to have been incurred to that third party and not to the
    cllent.
 ---pagebreak---                                    - 33 -
                                 Article g
          Supervision on a consolidated or unconsolidated basis
1.  If the credit    institution  is neither a parent undertaking nor a
   subsidiary, compliance with the obligations set out in Articles 3 and
   4 shall be supervised on an unconsolidated basis.
2.  If the credit institution is a parent undertaking, compliance with the
   obligations set out in Articles 3 and 4 shall be supervised on a
   consolidated basis in accordance with Directive         (supervision on
   a consolidated basis).
3. The competent authorities responsible for authorizing and supervising
   a credit institution which is a parent undertaking may also require
   the credit institution, together with any of its subsidiaries subject
   to authorization and supervision by them, to comply with the
   obligations set out in Articles 3 and 4 on a subconsol idated or
   unconsolidated basis. Where such monitoring of the satisfactory
   allocation of risks within a banking group is not carried out, other
   measures shall be taken to that end.
4. Where the subsidiary of a parent undertaking which         is a credit
   institution has been authorized in another Member State, the competent
   authorities which granted that authorization shall require compliance
   with the obligations set out in Articles 3 and 4 on an unconsolidated
   basis or, if appropriate, subconsolidated.
 ---pagebreak---                                  - 34 -
5. Notwithstanding paragraph 4, the competent authorities responsible for
   authorizing the subsidiary of a parent undertaking situated in another
   Member State  may,   by  way   of  a  bilateral   agreement,    delegate
   responsibility for supervising compliance with the obi I gat ions set out
   In Articles 3 and 4 to the competent authorities which have authorized
   and which supervise the parent undertaking.    The Commission and the
   Banking Advisory Committee shall be kept informed of the content of
   such agreements.
 ---pagebreak---                                       - 35 -
                                    Article S
                Transitional provisions relating to exposures
                             in excess of the limits
 1. Where, at     the time of     the publication of    this Directive     in the
    Official Journal of the European Communities, a credit institution has
    already incurred an exposure or exposures exceeding either the large
    exposure limit or the aggregate large exposure limits, as referred to
     In Article 4, the competent       authorities shall    require   the credit
     institution to take steps to have the exposure or exposures of the
    credit institutions concerned brought into line with the provisions of
    this Directive.
2.  The process of having the exposure or exposures brought            into line
    shall be devised, adopted, implemented and completed within the period
    deemed   by   the  competent    authorities  to  be   consistent    with  the
    principle of sound administration and fair competition.        The competent
    authorities shall     inform the Commission     and  the Banking Advisory
    Committee of the schedule for the general process adopted.
3.  Credit institutions may only take advantage of the period specified in
    paragraph 2 to the extent that it does not take any measure which
    would cause the exposures to exceed the level existing at the date of
    the publication of      the Directive    in the Official    Journal   of the
    European Communities.
4.  The period applicable under paragraph 2 may not exceed five years as
    from 1 January 1993. However, loans with a longer maturity for which
    the lending credit     institution is bound to respect the contractual
    terms, may be continued until their maturity.
 ---pagebreak---                                   - 36 -
5. For a period not exceeding five years starting from 1 January 1993,
   Member States may increase the limit laid down in Article 4(1) to 40%
   in   the  case  of credit   institutions  belonging to   the   particular
   categories referred   to in Article 4(2) of Directive 89/646/EEC.      In
   such cases, the period referred to in paragraph 4 shall be reduced to
   three years and shall commence on expiry of the period referred to in
   this    paragraph. The   Member States   concerned  shall    notify   the
   Commission and the Banking Advisory Committee of the reasons which
   have led them to make use of this option and of the steps they have
   taken to bring the excess exposures into line with the limits laid
   down.
 ---pagebreak---                                    - 37 -
                                 Article 7
                           Subsequent amendments
 1. Technical   amendments to the following points shall be adopted      in
    accordance with the procedure set out in paragraph 2:
         adaptation of definitions to take account of developments on
          financial markets;
         clarification of definitions to ensure uniform application of
         this Directive;
         alignment of the terminology and of the wording of the
         definitions on those contained        in subsequent    instruments
         concerning credit institutions and related matters;
         the frequency referred to in Article 3(1);
         clarification or extension of the exemptions provided for in
         Article 4(5) to (9);
         the period referred to in Article 6(4).
2.  The Commission shall be assisted by the committee provided for in the
    first subparagraph of Article 22(2) of Directive 89/646/EEC.
 ---pagebreak---                                     - 38 -
The representative of the Commission shall submit to the committee a draft
of the measures to be taken.     The committee shall deliver its opinion on
the draft within a time limit which the chairman may lay down according to
the urgency of the matter.    The opinion shall be delivered by the majority
 laid down in Article 148(2) of the Treaty in the case of decisions which
the Council   is required to adopt on a proposal from the Commission.    The
votes of the representatives of the Member States within the committee
shall be weighted In the mannner set out in that Article.       The chairman
shalI not vote.
The Commission shall adopt the measures envisaged if they are in accordance
with the opinion of the committee.
If the measures envisaged are not in accordance with the opinion of the
committee, or if no opinion is delivered, the Commission shall, without
delay, submit to the Council a proposal relating to the measures to be
taken.   The Council shall act by a qualified majority.
If, on the expiry of three months from the date of referral to the Council,
the Council has not acted, the proposed measures sha11 be adopted by the
Commission.
 ---pagebreak---                                   - 39 -
                                Article 9
                            Final provisions
1. Member States  shall  bring   into  force the   laws, regulations  and
   administrative provisions necessary to comply with the provisions of
   this Directive on 1 January 1993. They shall forthwith      inform the
   Commission thereof.
   When Member States adopt    these provisions, these shall   contain a
   reference to this Directive or shall be accompanied by such reference
   at the time of their official publication.     The procedure for such
   reference shall be adopted by Member States.
2. Member States shall communicate to the Commission the texts of the
   main provisions of national law which they adopt in the field governed
   by this Directive.
 ---pagebreak---                                    - 40 -
                                 Article 9
This Directive is addressed to the Member States
Done at Brussels,                                For the Council
                                                  The President
 ---pagebreak---                                 - 41 -
                         FINANCIAL STATEMENT
The proposal will not entail  any costs for the European Communities'
budget.
 ---pagebreak---                                        - 42 -
                COMPETITIVENESS AND EMPLOYMENT IMPACT STATEMENT
 I.  What is the main reason for Introducing the measure?
The main reason for introducing the measure is to improve and reinforce the
supervision   of   credit   institutions    in the Community     as   regards  risk
concentration.
 II. Features of the businesses In Question
The proposal concerns credit       institutions, i.e. a regulated category of
enterprises.
Given the minimum     initial capital     and own funds amounts       laid down in
Articles 4 and 10 of Directive 89/646/EEC, it is doubtful whether there are
many SMEs among the credit institutions concerned.
There is no regional concentration.
III. What direct obligations does this measure impose on businesses?
The   proposal    imposes   on   the   enterprises    concerned,    namely   credit
institutions,    the obligation    to   report   their   large exposures    to the
competent   authorities and    to   limit   those   large exposures    to a given
proportion of their own funds (25% for an individual exposure, 800% for
their aggregate large exposures).
IV. What indirect obligations are local authorities likely to Impose on
     businesses?
No obligations are      likely  to be    imposed by    local  authorities on the
businesses concerned.
 ---pagebreak---                                        - 43 -
V.    Are there any special measures in respect of SMEs?
The proposal seeks to improve the supervision of a regulated category of
enterprise (credit     institutions);   it does not therefore     involve SMEs in
any way.     Furthermore, as the proposal      is designed   to  limit   the   large
exposures of credit      institutions,  it is unlikely that     it will have the
effect of limiting the exposures incurred by credit institutions to SMEs.
VI.   What Is the likely effect on:
      (a)   the competitiveness of businesses?
      (b)   employment?
(a)   As the proposal     is designed to introduce fuller supervision of the
      activities of credit     institutions, the danger of such        institutions
      failing should be reduced, which can have only a beneficial impact on
      their   performance   and on   the stability of economic      and   financial
      activity in general.
(b)   No effect on employment is anticipated.
VII. Have employers' and employees' representatives been consulted?             What
      are their views?
Employees' representatives were informed of the Commission's          intention to
draw up this proposal, which will have no impact on their situation.
As far as the business sector       is concerned,    informal consultations have
been   held with    the Banking   Federation  of   the  European   Community,    the
Savings Banks Group of the European Economic Community, the Association of
Cooperative Banks of the EC and the European Community Mortgage Federation.
These   trade associations generally     accept   the principle of      legislation
governing large exposures.
 ---pagebreak---  ---pagebreak---  ---pagebreak---  ---pagebreak---                                                                                 ISSN 0254-1475
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