This content is from: Local Insights

European Union

Commission proposes amendments to the Capital Adequacy Directive

The Commission has adopted a proposal modifying the Capital Adequacy Directive (93/6) to reflect the 1996 amendment to the Basle Capital Accord, which comes into force at the end of 1997.

The Commission proposes two main changes: firstly, national supervisory authorities would be able to allow banks and credit institutions to calculate the capital charges covering the risks involved in their trading positions in accordance with their internal models for risk measurement. The present capital adequacy requirements pre-date the adoption of models (designed to calculate the market risk in relation to a bank's particular exposure) by credit institutions. Until the proposal comes into force banks within the EU will continue to apply the current criteria, which put them at a competitive disadvantage to US and Japanese banks.

Secondly, the risk associated with trading positions in commodities, and commodity derivatives in particular, is now covered by the full credit charge under the Solvency Ratio Directive (89/647). This is considered inappropriate and it is proposed that instead such risk (mainly a market risk) be covered by the Capital Adequacy Directive.

According to the Commission, the amendments to the Capital Adequacy Directive would result in a global reduction in capital charges and would ultimately mean that EU credit institutions and investment firms would be able to improve their internal risk management systems. However, national authorities may authorize investment firms which primarily deal in commodities and commodity derivatives to apply alternative rates in the course of a transition period, during which they can acquire models, develop systems and adapt to the new requirements.

The proposal, which is due to be adopted under the co-decision procedure, is not expected to come into force before the end of the year at the earliest. Meanwhile, the Commission's proposal to amend the Capital Adequacy Directive to reflect, among other things, the 1994 amendment to the Basle Accord has still not been adopted.

Monetary union: Noordwijk ECOFIN Council

According to press reports, the finance ministers of the EU member states reached agreement on a number of measures to be taken by January 1 1999, the deadline for the third phase of European monetary union (Emu), during the course of the informal ECOFIN Council which took place in Noordwijk in the Netherlands on April 4 and 5.

Significantly, the ECOFIN Council gave final approval to the Stability and Growth Pact on which political agreement had been reached in principle during the course of the Dublin European Council (December 13-14 1996). The Pact now remains to be endorsed by the member states during the course of the Amsterdam European Council to be held on June 16 and 17.

The Pact includes a formal resolution and two regulations. The first regulation, on which the Council adopted a common position on April 15, concerns the strengthening of surveillance and coordination of member states' budgetary positions through the approval of mandatory 'stability programmes' for all countries participating in the Euro and 'convergence programmes' for member states failing to qualify to participate in the single currency.

The second regulation relates to the procedure to be followed in the event of excessive deficits. Notwithstanding the reported opposition of Italy, Spain, Greece, Austria and Sweden, the Council agreed that states which run an excessive deficit will be subject to an accumulation of fines. For the first two years of excessive deficit, the state will be requested to make a deposit (one during the course of the first year and one during the course of the second year), but, if the deficit is not corrected in the meantime, in the third year the initial deposit will be converted into a fine.

The ECOFIN Council also agreed on the structure of the new Exchange Rate Mechanism (ERM 2), to be implemented from the beginning of Phase 3 of Emu. Under the terms of the agreed draft Regulation (to be submitted to the Amsterdam Council in June for approval), the Euro will be the anchor of ERM 2 and the other currencies will be linked to it.

Agreement has also been reached on a timetable to select the countries which will be allowed to participate in Emu. The final decision should be reached at the end of April or beginning of May 1998.

Telecommunications: agreement reached on the Interconnection Directive

The European Parliament and the Council have reached agreement, under the co-decision procedure, on the text of the Directive on interconnection with regard to ensuring universal service and inter-operability through the application of the principles of open network provision (ONP). This Directive should be seen in the context of the complete liberalization of telecommunications in the EU, due to take place by January 1 1998, and of the two directives approved by the Telecommunications Council in March.

The Directive aims to secure that, whatever the network, all users will be able to communicate with each other. To achieve this, it requires member states, among other things, to lift all restrictions on operators wishing to negotiate interconnection agreements between themselves; to impose on operators with significant market power, an obligation to allow other operators who make a reasonable request to connect to their network and to ensure the provision of universal service and the availability of numbers for all telecommunications services.

The Parliament and the Council have six weeks to adopt the Directive, which must be implemented by member states by January 1 1998.

Michael Reynolds
Allen & Overy

© 2021 Euromoney Institutional Investor PLC. For help please see our FAQs.

Instant access to all of our content. Membership Options | 30 Day Trial