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A. INTRODUCTIONProposals Examined1.The Joint Committee is reporting separately on a proposed Second Council Directive on the co-ordination 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 (“Second Banking Directive”). Two of the proposals dealt with in this report are closely related to the Second Banking Directive, namely:- -Commission’s proposal for a Council Directive on a solvency ratio for credit institutions submitted to the Council on 27th April, 1988 (“Solvency Ratio Directive”), and -Amended proposal for a Council Directive on the own funds of credit institutions submitted to the Council on 21st January, 1988 (“Own Funds Directive”). 2.The third proposal dealt with in this report is the Commission’s amended proposal for a Council Directive on the obligations of branches established in a Member State by credit institutions and financial institutions having their head office outside that Member State regarding the publication of annual accounting documents (“Accounts Directive”). This proposal is related to a proposed Eleventh Company Law Directive on which the Joint Committee will be reporting in the near future and which deals with the disclosure of documents and particulars relating to branches opened in a Member State by certain types of companies governed by the law of another Member State. Article 11 of that proposal refers to specific provisions to be laid down for banks and other institutions and these provisions are now set out in the Accounts Directive. This proposal applies to branches of credit institutions and financial institutions within the meaning of Article 2 of Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions which was adopted by the Council on 8th December, 1986. Member States are required to bring the latter Directive into force by 31st December, 1990 and to apply it from 1993 onwards. It has not yet been brought into force in Ireland. Consideration by Community Institutions3.The Joint Committee is informed that the Solvency Ratio Directive has yet to be examined by the European Parliament but has already been considered by the Economic and Social Committee. It is expected that the proposal will be examined by a Council Working Party early in 1989. The intention is to have the Directive implemented as from 1st January, 1993. 4.As regards the Own Funds and Accounts Directives the Council has already adopted a common position on a text under the procedure provided for in Article 149 of the EEC Treaty (inserted by Article 7 of the Single European Act). In the case of the Accounts Directive amendments have been requested by the European Parliament to the common position and in the case of the Own Funds Directive the reaction of the Parliament to the Council’s common position is awaited. Consideration by Joint Committee5.A detailed examination of all three proposals was carried out for the Joint Committee by a Sub-Committee under the Chairmanship of Deputy M.J. Nolan. The Joint Committee is deeply indebted to Deputy Nolan and his colleagues for their painstaking work. Acknowledgments6.The Joint Committee acknowledges with gratitude the assistance it received from the Department of Finance, the Central Bank and the Irish Bankers Federation who provided informative written material which greatly assisted the Joint Committee in its deliberations. The Committee wishes to express special thanks to Messrs Dermot McNally and Patrick A. Ring of the Department, Brian P. Halpin and Michael Deasy of the Central Bank and Jim Bardon and Frank Sexton of the Irish Bankers Federation all of whom attended a meeting of Deputy Nolan’s Sub-Committee and freely gave the Sub-Committee the benefit of their expertise. B. SOLVENCY RATIO AND OWN FUNDSSolvency Ratio Proposal7.As defined in the draft Directive a solvency ratio is the ratio which expresses the credit institution’s own funds as a proportion of its total risk-adjusted assets and off-balance sheet items. Own funds which are to form the denominator of the solvency ratio will be determined in accordance with the provisions of the proposed Own Funds Directive. The necessary adjustment to assets and other items is to be achieved through the application of specified risk weights to five categories. Thus for example a nil weight is to be applied to cash in hand and asset items representing claims on the domestic central governments, central banks, the European Communities and the European Investment Bank. A ten per cent. weight is to be applied to off-balance sheet items in the medium risk category which are incurred on behalf of domestic credit institutions or, having medium risk and an original maturity of up to and including one year, are incurred on behalf of foreign credit institutions. A 20 per cent. weight is to be applied to asset items such as those representing similar claims which are outside the medium risk category. A 50 per cent. weight will be applied to off sheet balance items having medium risk incurred on behalf of foreign governmental and public authorities and all non-bank sectors as well as those having medium risk and an original maturity of more than one year incurred on behalf of foreign credit institutions and to loans backed by mortgage security. A 100 per cent. weight is to be applied to asset items such as other claims on foreign central and regional governments, regional authorities and central banks and on domestic and foreign non-bank sectors. Ordinary loans to bank customers will come within the latter category. Off balance-sheet items include such instruments as guarantees, commitments, letters of credit, undrawn credit facilities, asset sale-and-repurchase agreements, and transactions without recourse. As far as interest rate and foreign exchange rate related off-balance sheet items are concerned (e.g. swaps, FRAs, futures and options) the proposed Directive will permit credit institutions being given a choice of methods of risk measurement. 8.The draft Directive proposes that as from 1st January, 1993 credit institutions will be required to maintain a minimum solvency ratio of 8 per cent., though this figure is liable to be varied in the light of further statistical examination before the Directive is adopted. Member States will however be allowed to fix a higher ratio if they consider it appropriate. Until the end of 1992 credit institutions whose ratios are below 8 per cent. are to be prohibited from allowing their ratios to fall unless the fall is associated with the issue of new capital and occurs in the period immediately following such issuance. In the case of banking groups consolidated ratios are to be calculated as well as unconsolidated ratios for each individual credit institution in the group but in this case Member States will have the discretion to allow subconsolidated rather than unconsolidated ratios for the subsidiaries. Own Funds Proposal9.The Own Funds Directive will define the elements of a credit institution’s capital upon which the solvency ratio will be determined in accordance with the Solvency Ratio Directive. The items which can be counted in calculating own funds are amounts represented by: (i)Share Capital (ii)Reserves (incl. current year’s profits) (iii)Revaluation Reserves (iv)Funds for general banking risk (a type of reserve allowed in the Directive on the Annual Accounting Standards of Banks 86/630 (EC) but not yet established in any Member States) (v)Hidden Reserves (vi)Perpetual debt instruments (vii)Commitments by members of Co-op banks (viii)Subordinated loans. Less Amounts in respect of: (a)Own shares (b)Intangible assets (c)Current year losses (d)The value of shareholdings in other credit institutions. 10.The components of own funds set out above are divided in Tier I (or “Core” capital) and Tier II elements. Tier I consists of share capital and reserves. The total value represented by the elements in Tier II cannot exceed 100 per cent. of Tier I. Within Tier II, the total value represente by items (vii) and (viii) cannot exceed 50 per cent. of the total value of Tier II. The rationale is to rank elements of capital in terms of their ready availability to meet losses, and to place overall limits on the amounts of lower ranking elements which can be included in the calculation. Basle Committeee11.The Commission’s proposals are to be seen against a background of moves by Central Banks worldwide to apply common standards internationally. The Basle (or Cook) Committee consists of the representatives of the Central Banks of the G-10 countries (Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, United Kingdom, United States and Luxembourg). Earlier this year it produced a report on “International convergence of capital measurement and capital standards”. The Joint Committee is informed that the system proposed by the Commission is broadly in line with the Basle agreement though apparently complete convergence has not been found possible. Implications for Ireland12.The proposed Directives will apply in Ireland to banks and building societies but not to credit unions and friendly societies. Under Section 23 of the Central Bank Act, 1971 the Central Bank may require a licensed bank “to maintain - (a) a specific ratio, (b) a ratio which does not exceed a specified ratio, or (c) a ratio which is not less than a specified ratio between [ ] assets and [ ] liabilities”. The Joint Committee is informed that in implementing this power the Central Fund employs a concept of “own funds” albeit the components of own funds used here are different from the proposals in the Directive, but not radically so. The limits used in the existing Central Bank standards are stricter than the Directive and consequently in the case of banks the Directive would mean for most institutions that they will have a higher level of own funds. Insofar as building societies are concerned the definitions used in the directive should not, in the opinion of the Department of Finance, present a problem. Details of the supervision requirements and standards of the Central Bank for licensed banks are set out in a booklet published by the Bank and entitled “Licensing and Supervision Requirements and Standards for Banks”. These requirements are summarised as follows:- “A licence holder shall maintain a level of own funds which the Bank considers adequate in relation to its business, ownership and standing. In this respect the Associated Bank groups, and the Associated Bank parents of the groups, shall maintain a minimum ratio of own funds to gross assets of 6.5 per cent. A ratio of own funds to risk assets of between 7 and 15 per cent. and an own funds to gross assets ratio of not less than 4 per cent. shall be maintained in the case of non-Associated banks both on a parent bank and group basis. In the application of the own funds to risk assets ratio requirement the Bank will exercise discretion in determining the specific levels appropriate to different categories of non-Associated banks and in deciding the membership of those categories.”. 13.The Joint Committee is informed that a Community-wide study has recently been carried out by banking supervisors, in conjunction with the EC Commission, with a view to ascertaining the extent to which EC credit institutions would be in a position to comply with the provisional minimum solvency ratio of 8 per cent. as referred to in the proposed Directive. The study, as far as Ireland was concerned, covered all incorporated licensed banks, building societies, the trustee savings banks, the Agricultural Credit Corporation and the Industrial Credit Corporation. The aggregate result for all these institutions was comfortably in excess of the figure of 8 per cent. and while the results for a number of individual institutions were below 8 per cent. this is not expected to constitute a significant problem in view of the transition period allowed. Neither the Central Bank nor the Department of Finance anticipate that Irish banks will have undue difficulty in complying with the requirements of the Directive. Details of the minimum solvency ratios applied in the twelve Member States are set out in the Appendix to this report. 14.The Irish Bankers Federation has expressed fears that the Directives could be implemented in a way that may distort competition and that in the process Irish banks may find themselves at a competitive disadvantage. Member States will be obliged merely to fix a minimum solvency ratio and will be free to fix a higher standard. The Federation would prefer to see all banks in the Community observing a Community norm which would be aligned as closely as possible to the Basle recommendations. C. ACCOUNTS DIRECTIVE15.The Accounts Directive is to apply to branches of credit institutions operating in a Member State when the head office of the institution is located in another Member State or in a non-member country. It will oblige a Member State in which such a branch operates to require the branch to publish the accounting documents (annual accounts, consolidated accounts, annual report, consolidated annual report, opinions of the person responsible for auditing the annual accounts and consolidated accounts) of its parent institution. The publication of branch accounts will not be required but in the case of a branch of a third country institution a Member State will be entitled to require branch accounts to be published if the accounting documents of the parent institutions are not in conformity with or equivalent to documents drawn up in accordance with Council Directive 86/635/EEC of 8th December, 1986. 16.Member States will also be empowered to require branches of institutions whose head office are situated in another Member State to furnish an analysis of branch income and costs, average staff numbers, total assets and liabilities of the branch and an analysis of certain specified assets, liabilities and off-balance sheet items attributable to the branch. Branches of third country institutions may also be required to furnish similar information whether oroff not branch accounts are also required. The provision for implementing the Directive is similar to that governing Council Directive 86/635/EEC. Implications for Ireland17.The Joint Committee is informed that the Accounts Directive should be seen as a company law measure and not as an instrument concerned with the supervision of banks by the Central Bank. Under sections 127 and 128 of the Companies Act, 1963 companies are required to make an annual return to the Registrar of Companies. Under the 1963 Act public companies were required to annex to their annual returns certified copies of their balance sheets together with directors’ and auditors’ reports thereon but were not obliged to divulge their profit and loss accounts. Private companies were exempt from divulging anything about their trading or financial position. 18.This position was altered by the Companies (Amendment) Act, 1986 which was enacted to implement the Fourth EEC Company Law Directive. Section 7 of the 1986 Act obliges both public and private companies to file copies of balance sheets and profit and loss accounts, drawn up in accordance with the requirements of the 1986 Act, together with copies of the directors’ and auditors’ reports. There are, however, some exemptions from these requirements. A small private limited company is permitted to publish a modified balance sheet and not to publish its profit and loss account or directors’ report. Medium-sized private companies are permitted to file abridged balance sheets and abridged profit and loss accounts. 19.The Fourth Company Law Directive does not apply to banking companies but section 7 of the 1986 Act does. Under that section the balance sheets and profit and loss accounts to be annexed to the annual return of banking companies are to be drawn up in accordance with the 1963 Act. An effect therefore of the 1986 Act was to require private banking companies to publish their accounts for the first time. When Council Directive 86/635/EEC is implemented banking companies will be required to draw up their accounts not in accordance with the 1963 Act but in accordance with the legislation implementing that Directive. There is no statutory provision at present requiring the publication of the accounts of branches of companies, banking or otherwise. However branches of foreign banks operating in Ireland are requested by the Central Bank to display at their offices a summarised balance sheet of their operations in Ireland. When the Accounts Directive and the Eleventh Company Law Directive are implemented branches of foreign banking and other companies operating in Ireland will be obliged to file the accounts of the company as a whole with the Registrar of Companies. D. VIEWS OF THE JOINT COMMITTEESolvency Ratio and Own Funds Directive20.The Joint Committee welcomes these proposals. When the Second Banking Directive is implemented a bank licensed in one Member State will be free to carry on business in any other Member State without the need for obtaining a further authorisation from the supervisory authority of that Member State. The Joint Committee’s primary concern is that any bank transacting business in Ireland should remain financially in a position to meet obligations incurred in this country. Solvency ratios obviously play a central role in the prudential supervision of credit institutions and it would probably be accepted generally that ratios which weigh assets and off-balance sheet transactions according to the degree of credit risk are useful measures of solvency. In the Joint Committee’s view it should be an essential pre-condition of the new freedom to be enjoyed by the banks that minimum standards in this respect are observed throughout the Community. 21.While the primary objective must be the protection of bank customers the Joint Committee considers that due regard must be paid to the consequences for the Irish banks of their exposure to greater competition under the regime of the Second Banking Directive. The Irish Bankers Federation points out that their members generally operate to higher standards than are required by the Directives but that banks in other countries will be required to raise their standards when these Directives are implemented. The Federation’s representatives informed Deputy Nolan’s Sub-Committee that its members would be content to work to the existing standards and that what they really fear is that the Central Bank will impose stricter requirements when the Directives are implemented so as to maintain the divergence from requirements in other countries. The Joint Committee considers that in this area there must be reliance on the Central Bank to ensure that the national interest is protected but it would urge that the Central Bank should give due weight to ensuring as far as it can the competitive viability of Irish Banks. The Federation should be free when the Directives are implemented to pursue this matter if dissatisfied with developments. The Federation has suggested some technical amendments to the Solvency Ratio Directive and the Joint Committee asks the Department of Finance to ensure that these are given careful consideration. Accounts Directive22.The Joint Committee notes that this proposal seeks to treat branches of credit institutions having their head offices in other Member States in the same way as branches of such institutions having their head offices in the same Member States by requiring only the accounts of the institution as a whole to be published though, of course, in the former case publication in several Member States may be required. The Joint Committee does not find this proposal unreasonable. It was pointed out by the Irish Bankers Federation that banks operating internationally will find themselves obliged to publish their accounts in several languages but the Joint Committee does not see how this can be avoided. Unless accounts are readily understood publication would be of little value. Implementation23.The Department of Finance appears inclined to the view that legislation may not be necessary to implement the Solvency Ratio and Own Funds Directives having regard to the powers already conferred on the Central Bank by section 23 of the Central Bank Act, 1971. The Joint Committee points out that these Directives when adopted will bind the State as a matter of Community law but relations between the Central Bank and Irish commercial banks will be regulated by Irish legislation. In exercising its discretionary powers under section 23 of the Central Bank Act, 1971 the Central Bank could of course observe the requirements of the Directives but having regard to the detailed nature of these requirements it does not seem appropriate that Irish legislation should confer on the Central Bank discretionary power in the wide terms of section 23 and omit to impose any legal obligation on the Bank to observe the requirements of the Directives. In the Joint Committee’s view section 23 should be amended to reflect the requirements of the Directives and this could be done in the legislation implementing the Second Banking Directive. 24.The Joint Committee considers that the Accounts Directive should be implemented by company law legislation preferably that implementing the Eleventh Company Law Directive when it is adopted. Both the Department of Finance and the Central Bank have suggested that the requirements of the Directive could be met by availing of the powers conferred on the Central Bank by section 19 of the Central Bank Act, 1971 to require “a holder of a licence” to “publish statements in respect of the business to which the licence relates in such form and manner and at such times as may be specified by the Bank from time to time for the purpose of the performance of its statutory functions.”. The Joint Committee does not think that this is correct. In its view the “licence” referred to in section 19 is a licence issued by the Central Bank and so the section will not apply to branches of credit institutions licensed in other Member States which can do business in Ireland when the Second Banking Directive is implemented.
26 January, 1989. |
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