Banking and investment services: Council common position on credit institutions, capital adequacy and solvency ratio

Following political agreement last November, the Council has formally adopted its common position on a number of outstanding proposals to amend EU financial services legislation:

• The "Cad II" Directive (amending Directive 93/6/EEC on the capital adequacy of investment firms and credit institutions)
• The "Expanded matrix" Directive (amending Directives 77/780/EEC, 89/647/EEC and 93/6/EEC)
• The "Mortgage Credit" Directive (amending Directive 89/647/EEC on a solvency ratio for credit institutions)

The common positions will be forwarded to the European Parliament in accordance with the co-decision procedure.

Cad II Directive

The common position updates the 1993 Directive on capital adequacy, which set common standards for the own funds of investment firms and banks engaged in investment business and established a common framework for monitoring the risk incurred by such firms.

The proposals authorise the use of internal risk-management models for calculating capital requirements of market risks and the introduction of measures which ensure that appropriate capital is available to cover the market risks inherent in commodities and commodity derivatives business. The common position makes a number of other adjustments to the 1993 Directive to take account of recent developments on the financial markets and of developments in international banking supervision, such as the entering into force on 1 January 1998 of certain proposals agreed by the Basle Committee on Banking Supervision.

The "Expanded Matrix" Directive

The draft directive makes a number of amendments to the EU Directive on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions. The changes would allow Member States to conclude agreements for the exchange of information with non-banking supervisory authorities in third countries. The draft directive also amends the Directive on a solvency ratio for credit institutions. This includes changes to the risk weighting for certain asset items, and changes to refine and harmonise supervisory treatment of credit risks associated with over-the-counter derivatives instruments. The "Expanded matrix" directive also amends the Directive on the capital adequacy of investment funds and credit institutions, so that capital requirements for over-the- counter derivatives will be adjusted to bring EU rules in line with international rules, including the recognition of the risk-reducing effect of contractual netting agreements on future credit risks.

The "Mortgage Credit" Directive

The common position amends some provisions of the EU Directive on a solvency ratio for credit institutions with regard to risk weighting on certain categories of assets when calculating the solvency ratio of a credit institution. It also allows mortgage-backed securities to be treated as the underlying loans, if the competent authorities consider that they are equivalent in the light of the credit risk. Furthermore it introduces some optional provisions which, in 31st December 2006:

• extend to all Member States the possibility of weighting mortgages on commercial property at 50%, subject to certain conditions, (until 1996 this possibility was granted only to Austria, Denmark, Germany and Greece)
• allow the competent authorities of the Member States to authorise their credit institutions to apply a 50% risk weighting to the portion of loans to commercial properties secured by shares in Finnish housing companies,
• allow Member States to continue the derogation permitting a 50% weighting on certain property leasing transactions.