Dublin seeks compromise on loan directive

Date: 21/11/1996

By Tim Jones

MEMBER states' negotiators are keenly awaiting suggestions from the Irish presidency which might help them to bridge political divisions on a key piece of banking legislation.

A proposal from the European Commission on how banks registered in the EU should insure themselves against excessive exposure to losses from mortgage lending has been stuck in the Council of Ministers for more than a year.

Intended as a review of the 1989 Solvency Ratio Directive, which established the minimum amount of capital financial institutions should hold to back up different types of loans, the issue has turned into a skirmish between member states.

When Ireland took over the presidency in July, the finance ministry was hopeful that it could clinch the deal which had eluded its Italian and Spanish counterparts.

So far this has proved impossible, but Dublin is expected to come forward with a compromise plan in time for a series of Council working group meetings at the end of this month.

At issue is the Commission's approach to reviewing the 1989 directive in line with recommendations made last year by the Basle-based multilateral committee on banking regulations and supervisory practices - known as the Basle committee.

The directive defines the minimum amount of capital which an institution should hold against a particular type of risk, taking account of the fact that, for example, a loan by a major bank to its government is less risky than that to an individual businessman.

For instance, risk weightings of zero are assigned to loans in cash or to top central banks and 50&percent; on loans secured on residential property.

Member states were also told to assign 100&percent; weightings to mortgages on commercial properties, but Germany, Denmark and Greece were allowed to keep their 50&percent; weighting until 1 January 1996. Austria was allowed an identical deal when it joined the EU.

The Commission has decided that the three should be allowed another five-year derogation until 2001. But this has been opposed, in particular, by the UK and Italy, partly out of fear that it poses an excessive financial risk and also because it gives competitive advantage to banks in the three countries concerned. By having to assign less capital to cover these loans, they have more available to lend elsewhere.

The British and the Italians, who are supported by most other member states, also fear that the Commission's proposal to open the derogation up to all-comers would be contrary to the recommendations of the Basle committee.

To support its argument, the Commission asked a consultant accountancy group to scrutinise the evidence that the derogations posed a prudential and competitive risk. It suggested that private mortgage loans could be allowed a 50&percent; weighting, but commercial lending would need 100&percent;.

Since the summer, the European Parliament and the Economic and Social Committee have swung their support behind the Commission, but still no qualified majority can be found.

“To be honest, I do not believe that the presidency would try and take something like this to a majority vote anyway if four or five countries were still against it,” said a diplomat. “They would only do that if they had their backs to the wall.”

Dublin is keener to try to find a compromise, which might include promises of regular studies on the prudential impact of extended derogations, and may be tempted to take the issue to the next meeting of EU finance ministers on 2 December for a political steer.

“They will be reluctant to do that obviously since it is a highly-technical issue and the Ecofin has a lot of other more 'macro' issues on its plate, like the stability pact and so on. But political guidance might be something that we will need to get this thing moving,” said one diplomat.

Negotiators remain optimistic that an agreement can be struck which will avoid such a controversial issue being pushed to a vote.