Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions

• Published date: 30 December 1989
• Official Gazette Publication: Official Journal of the European Communities, L 386, 30 December 1989

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Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions

Official Journal L 386 , 30/12/1989 P. 0014 - 0022
Finnish special edition: Chapter 6 Volume 3 P. 0039
Swedish special edition: Chapter 6 Volume 3 P. 0039

COUNCIL DIRECTIVE of 18 December 1989 on a solvency ratio for credit institutions (89/647/EEC)

THE COUNCIL OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Economie 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 the outcome of work carried out

by the Banking Advisory Committee, which, pursuant to Article 6 (4) of Council Directive 77/780/EEC of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (4), as last amended by Directive 89/646/EEC (5), is responsible for making suggestions to the Commission with a view to coordinating the coefficients applicable in the Member States;

Whereas the establishment of an appropriate solvency

ratio plays a central role in the supervision of credit institutions;

Whereas a ratio which weights assets and off-balance-sheet items according to the degree of credit risk is a particularly useful measure of solvency;

Whereas the development of common standards for own funds in relation to assets and off-balance-sheet items exposed to credit risk is, accordingly, an essential aspect of the harmonization necessary for the achievement of the mutual recognition of supervision techniques and thus the completion of the internal banking market;

Whereas, in that respect, this Directive must be considered

in conjunction with other specific instruments also harmonizing the fundamental techniques of the supervision of credit institutions;

Whereas this Directive must also be seen as complementary to Directive 89/646/EEC, which lays out the broader framework of which this Directive is an integral part;

Whereas, in a common banking market, institutions are required to enter into direct competition with one another and whereas the adoption of common solvency standards

in the form of a minimum ratio will prevent distortions

of competition and strengthen the Community banking system;

Whereas this Directive provides for different weightings to be given to guarantees issued by different financial institutions; whereas the Commission accordingly undertakes to examine whether the Directive taken as a whole significantly distorts competition between credit institutions and insurance companies and, in the light of that examination, to consider whether any remedial measures are justified;

Whereas the minimum ratio provided for in this Directive reinforces the capital of credit institutions in the Community; whereas a level of 8 % has been adopted following a statistical survey of capital requirements in force at the beginning of 1988;

Whereas measurement of and allowance for interest-rate, foreign-exchange and other market risks are also of great importance in the supervision of credit institutions; whereas the Commission will accordingly, in cooperation with the competent authorities of the Member States and all other bodies working towards similar ends, continue to study the techniques available; whereas it will then make appropriate proposals for the further harmonization of supervision rules relating to those risks; whereas in so doing it will keep a special watch on the possible interaction between the various banking risks and consequently pay particular attention to the consistency of the various proposals;

Whereas, in making proposals for rules for the supervision of investment services and the adequacy of the capital of entities operating in that area, the Commission will ensure that equivalent requirements are applied in respect of the level of own funds, if the same type of business is transacted and identical risks are assumed;

Whereas the specific accounting technique to be used for the calculation of solvency ratios must take account of the provisions of Council Directive 86/635/EEC of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (6), which incorporates certain adaptations of the provisions of Council Directive 83/349/EEC (7), as amended by the Act of Accession of Spain and Portugal; whereas, pending transposition of the provisions of those Directives into the national laws of the Member States, the use of a specific accounting technique for

the calculation of solvency ratios should be left to the discretion of the Member States;

Whereas the application of a 20 % weighting to credit institutions' holdings of mortgage bonds may unsettle a national financial market on which such instruments play a preponderant role; whereas, in this case, provisional measures are taken to apply a 10 % risk weighting;

Whereas technical modifications to the detailed rules laid down in this Directive may from time to time be necessary to take account of new developments in the banking sector; whereas the Commission will accordingly make such modifications as are necessary, after consulting the Banking Advisory Committee, within the limits of the implementing powers conferred on the Commission by the provisions of the Treaty; whereas that Committee will act as a ´Regulatory' Committee, according to the rules of procedure laid down in Article 2, procedure III, variant (b), of Council Decision 87/373/EEC of 13 July 1987 laying down the procedures for the exercise of implementing powers conferred on the Commission (8),

HAS ADOPTED THIS DIRECTIVE:

Scope and definitions

Article 1 1. This Directive shall apply to credit institutions

as defined the first indent of Article 1 of Directive 77/780/EEC.

2. Notwithstanding paragraph 1, the Member States need not apply this Directive to credit institutions listed in Article 2 (2) of Directive 77/780/EEC.

3. A credit institution which, as defined in Article 2 (4) (a) of Directive 77/780/EEC, is affiliated to a central body in the same Member State, may be exempted from the provisions of this Directive, provided that all such affiliated credit institutions and their central bodies are included in consolidated solvency ratios in accordance with this Directive.

4. Exceptionally, and pending further harmonization of the prudential rules relating to credit, interest-rate and market risks, the Member States may exclude from the scope of this Directive any credit institution specializing in the inter-bank and public-debt markets and fulfilling, together with the central bank, the institutional function of banking-system liquidity regulator, provided that:

- the sum of its asset and off-balance-sheet items included in the 50 % and 100 % weightings, calculated in accordance with Article 6, must not normally exceed

10 % of total assets and off-balance-sheet items and shall not in any event exceed 15 % before application of the weightings,

- its main activity consists of acting as intermediary between the central bank of its Member State and the banking system,

- the competent authority applies adequate systems of supervision and control of its credit, interest-rate and market risks.

The Member States shall inform the Commission of the exemptions granted, in order to ensure that they do not result in distortions of competititon. Within three years of the adoption of this Directive, the Commission shall submit to the...