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A proposal for  a Directive aimed primarily  at introducing refined  and more
realistic  capital requirements  in particular for  credit risks  inherent in
over-the-counter derivatives (i.e.  traded outside recognised  exchanges) has
been put  forward by the European Commission,  on the initiative of Financial
Services Commissioner  Mario MONTI. The amendments  proposed would also allow
certain assets exposed to credit risk  to be granted more favourable  capital
treatment and give Member States  the possibility to conclude  agreements for
exchanging  information with  non-banking  supervisory authorities  of non-EC
countries.    The  proposal  would  therefore fine  tune  existing  Community
banking  supervisory rules in line with experience gained in applying them in
practice  and  take   account  of  recent  supervisory  developments  at  the
international level.   The text  has been drafted  in close  cooperation with
the  Member  States,  notably  in  the  framework  of  the  Banking  Advisory

The EC's  banking supervisory  rules harmonise regulatory  safeguards to  the
extent  necessary to  allow  credit institutions  to  operate EC-wide  on the
basis of  a single  licence ('home  country control'),  while protecting  the
integrity of the  banking system and safeguarding the interests of customers.
These EC  rules include  the Directives which  would be  amended by this  new
proposal, namely the  First Banking Coordination Directive  (77/780/EEC), the
Solvency  Ratio Directive  (89/647/EEC) and  the  Capital Adequacy  Directive
(93/6 - which also applies to investment firms).

The  new proposal  would take  account of  changes to international  rules on
bank  supervision, namely  the Basle  Capital Accord  of 1988  (agreed by the
Committee on Banking Supervision of  the Bank of International  Settlements -
BIS).   In particular, the new  proposal relates  to a 1994 amendment  to the
Basle Accord,  which came  into effect  at the end  of 1995,  with regard  to
credit risks of OTC derivative instruments.   For the totality of banks'  and
investment firms' OTC  derivatives activities the new proposal would ensure a
more accurate calculation of capital  charges which, on an  aggregated basis,
are likely  to be lower.   The  proposal just put  forward by  the Commission
would mean that EC  banks (subject  to EC supervisory  rules) would not  find
themselves at a  competitive disadvantage in  relation to  banks from  non-EC
countries subject to the amended Basle Capital Accord.

Concerning  credit risks  of OTC derivative  instruments, the  proposal would
complement the  "contractual netting" Directive  (see IP/96/172), which  came
into force in April 1996, in three ways:

* firstly,  by  extending  the  scope  of  the  Solvency  Ratio  Directive's
  compulsory  capital  coverage  for  credit  risks  to  all  types  of  OTC
  derivatives (including notably commodity and equity-related derivatives as
  well as interest-rate- and foreign exchange-related derivatives)

* secondly, by requiring  calculation of capital charges for  current credit
  exposure of OTC  derivatives on the basis of more  realistic market-values
  for most of banks' and investment firms' derivatives business and

* thirdly  by  enabling  supervisory authorities  to  allow  for  a  refined
  calculation of capital  charges appropriately reflecting the risk reducing
  effects  of close-out netting  on the potential future  exposure of netted
  OTC derivatives  (the existing  rules allow current exposure  to be  taken
  into account).

Together,  these  amendments  would  ensure  a   comprehensive  and  balanced
regulation  for  capital  requirements  for  credit  risks  inherent  in  OTC

The proposal is  due to be adopted by  the EC's Council of Ministers  and the
European Parliament under the co-decision procedure.


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