Select Committee on European Communities Eleventh Report


A. GENERAL POLICY QUESTIONS

13. EC FINANCIAL REGULATION AMENDMENTS TO SOLVENCY AND CAPITAL ADEQUACY DIRECTIVES

Letter from Lord Tordoff, Chairman of the Committee, to Helen Liddell MP, Economic Secretary to the Treasury

  On 22 July Sub-Committee A and the Select Committee scrutinised your Explanatory Memorandum of July on the above proposal.

  We noted that the Government does not share the Commission's view of the way ahead, particularly in relation to the continued use by investment firms operating in the commodities sector of the expanded maturity ladder approach". We should be grateful to be kept informed of significant developments in the negotiations on the proposal which may take place during the Luxembourg and United Kingdom Presidencies.

  This letter does not lift the scrutiny reserve.

23 July 1997

Letter from Helen Liddell MP, Economic Secretary to the Treasury, to Lord Tordoff, Chairman of the Committee

  At ECOFIN on 17 November we expect the Luxembourg Presidency to seek political agreement to three amending directives covering the capital requirements for credit institutions and investment firms. For ease of reference I have attached the directives' scrutiny history and the full titles.

  These technical directives set out how regulators and institutions should calculate capital requirements. The directives are based on work undertaken by banking supervisors at Basle which form the agreed capital standards for international banks. The proposed EC legislation has been adapted to meet the specific needs of European Union, reflecting the diverse nature of business and the size of institutions.

  The three directives have been brought together as a package by the Luxembourg Presidency to facilitate discussion in Council where differences between member states on amendments to the solvency ratios directive risked delaying progress on amendment to the capital adequacy directive.

  As it is a package it contains elements that we could do without, but, importantly for us, does cover our concerns on commodities which Parliament has highlighted. The text will include an option for competent authorities to apply capital requirements which reflect differences in volatilities between different classes of commodities. This outcome will enable our regulators to adopt a regime tailored to the specific nature of the business undertaken by UK commodity firms, covered by EC legislation.

  In addition, once adopted, EC legislation will permit the use of VaR models and the netting of potential future exposures - both of which are very important for large banks and investment houses and, so, for London as a financial centre.

  The package means that member states will have more freedom in some areas. For example, with commercial mortgages, institutions in those member states which adopt the lower weighting would be able to make loans at that level in their own territories, but not in those (like the UK) which retain the 100 per cent weighting. Similarly, on commodities, those with specialised firms (ie the UK) can use the expanded maturity ladder and associated credit risk add-ons, while those without will adopt the more general approach based on Basle.

  Assuming the package that emerges at ECOFIN meets our concerns, particularly on commodities, the Government is likely to support the political agreement.

  The Council will not formally reach common position on these directives unil early next year. We are still waiting for the European Parliament to give its first reading to the amendment to the Capital Adequacy Directive (CAD2). This is expected in December. We shall use our forthcoming Presidency to work with the European Parliament to seek to bring all three dossiers to a conclusion.

  Once an unofficial text is available I shall ask my officials to send a copy to the Clerk of your Committee.

10 November 1997

Annex

PARLIAMENTARY SCRUTINY HISTORY

  CAD2

  9406/97 COM(97)71

  Proposal for a European Parliament and Council directive amending directive 93/6/EEC on the capital adequacy of investment firms and credit institutions.

  Explanatory memorandum submitted by HM Treasury on 9 July 1997.

  Proposal was cleared by the Commons Committee at its meeting on 22 July 1997.

  The Lords committee considered proposal at its meeting on 22 July. It noted the Government's unease on the proposals for commodities and asked to be kept informed of significant developments.

EXPANDED MATRIX" DIRECTIVE

  7441/96 COM(96)183

  Proposal for a directive amending directive 77/80 on credit institutions, 89/647 on solvency ration for credit institutions, 93/6 on capital adequacy of investment firms and credit institutions.

  Explanatory memorandum submitted by HM Treasury on 14 June 1996.

  Commons Report 26 June 1996 - Politically important but not for debate at this stage. Committee requested further information on implications for UK commodities sector.

  Lords Report 17 June 1996 - Category B subcommittee A.

  9578/97 COM(97)285

  Amended proposal for a European Parliament and Council directive amending directives 77/780/EEC, 89/647/EEC and 93/6/EEC on the regulation of credit institutions and investment firms.

  Explanatory memorandum submitted by HM Treasury on 30 July 1997.

  Amended proposal cleared by Lords on 24 September 1977. On agenda for Commons Committee on 5 November.

COMMERCIAL MORTGAGES" DIRECTIVE

  5743/96 COM(96)709

  Proposal for a directive of the European Parliament and the Council amending Council Directive 89/647 on a solvency ratio for credit institutions.

  Explanatory memorandum submitted by HM Treasury on 11 April 1996.

  Proposal has been cleared by Commons on 17 April 1996 as politically important but not for debate, and by Lords Committee on 15 April 1996.

Letter from Lord Tordoff, Chairman of the Committee, to Helen Liddell MP, Economic Secretary to the Treasury

  Thank you for your letter of 10 November and for the letter from Mr Gary Roberts of your office, of 13 November with which were enclosed texts of the three Directives under consideration. [not printed]

  Your letter explained the background to your expectation that the Luxembourg Presidency would at ECOFIN on 17 November seek political agreement to the three amending Directives covering the capital requirements for credit institutions and investment firms. You will recall that in my letter of 23 July we noted the Government's unease on the proposals for commodities and asked to be kept informed of significant developments. In your letter of 10 November you said that, assuming the package that emerges at ECOFIN meets your concerns, particularly on commodities, the Government is likely to support the political agreement. I understand that at ECOFIN on 17 November political agreement was reached, with the support of the Government.

  I am grateful that you have kept us informed of the developments as we asked. This letter raises the scrutiny reserve.

25 November 1997


 
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