Committee Reports > List of Committees > Joint > 1975 > Committee on the Secondary Legislation of the European Communities > Report No. 13 - Credit Institutions

REPORT

1. Introduction

The Joint Committee has completed its examination of a proposal for a Council Directive on the harmonisation of laws regarding the commencement and carrying on of the business of credit institutions (R/3592/74). It has also considered a related proposal for a Council Decision to set up a Contact Committee between the authorities of Member States responsible for the supervision of Credit Institutions (R/3544/74).

Council Directive 73/183/EEC of 28 June, 1973 provided for the abolition of restrictions on the freedom of banks and other financial institutions to establish themselves and pursue their activities in the Member States. This was regarded as a first step towards the creation of a common market in banking. The proposal for a new Council Directive on the co-ordination of national laws governing these institutions is another step in that direction. The proposal for a Council Decision is seen as an interim measure pending the adoption of the proposed Directive and it is understood that it will not be pressed by the Commission if progress towards the adoption of the Directive is made.

2. Acknowledgments

The Joint Committee has had the opportunity of discussing the proposals with representatives of the Irish Bankers’ Federation, Irish Building Societies’ Association, the Irish League of Credit Unions and the Central Bank. It has pleasure in recording the invaluable assistance it received from these bodies and in expressing its thanks to them.

3. Credit Institutions

A credit institution is to be defined as “an undertaking whose usual business is to receive, directly or indirectly, deposits or other repayable monies from the public and to grant credits for its own account.” Accordingly as the proposals now stand the projected Directive will apply not only to banks but also to trustee saving-banks, building societies and credit unions as well as to the Agricultural Credit Corporation and the Industrial Credit Company. Provision is to be made, however, for the exclusion from the terms of the Directive of central banks, Post Office Giro Institutions and Institutions to promote regional development.

4. Proposed Directive

The provisions of the proposed Directive include:

(a) Prior authorisation by competent national authorities.

Institutions commencing business including branches of institutions operating in other Member States will require authorisation. Authorisation may not be granted unless the institution (i) has adequate funds and (ii) is managed by reputable persons adequately qualified and other requirements may be specified. Provided they satisfy these conditions institutions already carrying on business shall be deemed to be authorised;

(b) supervision by the competent authorities of Member States of the maintenance of critical ratios between

(i) own funds and deposits; total assets and non-liquid assets; and

(ii) current liabilities and liquid assets;

(c) withdrawal of authorisations in circumstances prescribed;

(d) application of the Directive to branches of institutions having their Head Offices outside the Community;

(e) appeal to the Courts by institutions (e.g. in respect of non-authorisation);

(f) the establishment of a Contact Committee composed of representatives of the national supervisory authorities; to facilitate the application of uniform standards throughout the Community; and

(g) implementation within 24 months.

5. Proposed Decision

The proposed Decision envisages the establishment of a Contact Committee of representatives of national authorities responsible for supervising credit institutions. As indicated it is intended to be anticipatory of a decision on the proposed Directive and may not be pursued.

6. General Attitude of Joint Committee

The Joint Committee considers that the draft Directive is a reasonable proposal in light of the Treaty provisions. It notes that the Commission originally intended to produce a draft Directive covering all the major aspects of banking legislation. From its own discussions with interested parties the Joint Committee believes that the decision to proceed with the harmonisation in stages is a wise one. It welcomes in principle the draft Directive now under review as one stage but it has some reservations to express in regard to its application to some institutions in this country.

7. Banks

In Ireland there is already a statutory system of licensing and supervision of banks administered by the Central Bank. No difficulty in adopting this system to comply with the draft Directive is foreseen. The Irish Bankers' Federation are in favour of the proposal but have made a number of points in regard to it on which the Joint Committee wishes to comment.

The Federation strongly favours the setting up at Community level of a Committee of commercial bankers with functions co-extensive with those proposed for the Contact Committee. It believes that such a committee would facilitate the achievement of the objects of the draft Directive because commercial banks have a vested interest in securing effective harmonisation. The Joint Committee trusts that this suggestion will receive sympathetic consideration.

Article 6 of the draft Directive would empower the Commission after consultation with the Contact Committee to alter the list of banking ratios which are to be kept under review. The Federation thinks that this proposal gives too much power to the Commission and suggests that the agreement of the Contact Committee and indeed of a bankers’ committee, if such were established, should be required before the Commission could act. This suggestion seems a reasonable one and the Joint Committee supports it.

In the interests of securing not merely free competition but competition on equal terms the Federation favours the application of the draft Directive without the exceptions specified therein and it would also welcome the extension of its provisions to any institution which either takes deposits or grants loans. While it was impressed by the manner in which the Federation argued its case the Joint Committee is unable to support this suggestion.

8. Building Societies

It seems to the Joint Committee that the draft Directive envisages a uniform system of authorisation and supervision applicable to all credit institutions which come within its terms. Provision is to be made, however, for a two year deferment of the application of the Directive to institutions under different control to that exercised over banks: this is intended to enable technical problems to be overcome.

In Ireland building societies are subject to their own code of legislation under which registration with the Registrar of Friendly Societies is required. Most of their capital is withdrawable at the instance of depositors; and their accrued profits, which presumably might represent their “own funds” for the purpose of the Directive, represent only a minute proportion of total capital. Obviously it would be inappropriate to apply to them standards which would be applicable to banks. There may well, therefore, be considerable difficulty in bringing them within the framework of the Directive. At the same time the Joint Committee understands from the Irish Building Societies’ Association that its members are interested in seeking funds outside the country and consequently have an interest in seeing progress made on the harmonising of national laws.

The Joint Committee understands that the draft Directive is still being considered by a working party and it would urge that every effort be made to accommodate the special needs of building societies. It may well be, when the Directive is in force, that deferment for a period should be allowed to ensure that building societies can readily be fitted into the new system.

9. Credit Unions

Credit Unions are co-operative societies whose members share one of the common bonds specified in the Credit Union Act, 1966. Their purpose is to promote thrift among their members, to provide them with sources of credit, to use and control their savings for their mutual benefit and to educate their members in financial matters. They do not appear to have any counterpart on the European Continent where credit co-operatives operate what is virtually a banking business.

The activities of credit unions are tightly controlled by domestic legislation. All their capital is withdrawable. They may grant loans up to 100% of their capital or even borrow for the purpose. Members accept a return on their savings from 5% downwards. They deal only with their own members.

The Irish League of Credit Unions has represented to the Joint Committee that credit unions in Ireland should be specifically exempt from the proposed Directive. They have no intention of seeking to exercise a right of establishment in any other country.

It seems to the Joint Committee that the draft Directive is designed to deal with institutions which, in the words of the Commission, “act as a link between saving and investment”. It seems impossible to accept that Irish credit unions perform any such function. They are in no sense banks or depositories and it would not be compatible with existing legislation to extend their functions into that sphere. None of the considerations which affect solvency and liquidity ratios in banking can apply to them. It seems to the Joint Committee, therefore, that it would be wholly inappropriate to subject credit unions and banks to precisely the same type of control. Accordingly it wishes strongly to support the claim of credit unions to be exempt specifically from the provisions of the proposed Directive.

(Signed) CHARLES J. HAUGHEY,

Chairman of the Joint Committee.

2nd July, 1975.