Directive 2006/48 - Taking up and pursuit of the business of credit institutions (recast) - Main contents

The taking-up and pursuit of the business of credit institutions

This Directive identifies the risks run by credit institutions as a result of their activities. It lays down the requirements for taking up and pursuing the business of credit institutions and contains provisions on freedom of establishment and freedom to provide services, relations with third countries and the principles of and technical instruments for prudential supervision.

ACT

Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions (recast) [See amending acts].

SUMMARY

Like Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions *, this Directive deals with the risks run by credit institutions as a result of their activities. Directives 2006/48/EC and 2006/49/EC have transposed into Community law the Basel II rules on measuring own funds and capital requirements agreed by the G-10.

Directive 2006/48/EC lays down the rules on the taking-up and pursuit of the business of credit institutions and on the prudential supervision of such institutions. It constitutes an important instrument for achieving the single market from the point of view of both the freedom of establishment and the freedom to provide services in the field of credit institutions. The central banks of the Member States, post office giro institutions and other bodies specific to certain Member States are excluded from the scope of the Directive.

Requirements for access to the taking up and pursuit of the business of credit institutions

The essential requirements for authorisation to take up and pursue the business of credit institutions are:

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  existence of separate own funds;
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  existence of initial capital of at least 5 million euros;
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  presence of at least two persons who effectively direct the business of the credit institution (and who are of sufficiently good repute and have sufficient experience to perform such duties);
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  notification to the competent authorities of the identities of the shareholders or members, whether direct or indirect, natural or legal persons, that have qualifying holdings, and of the amounts of those holdings.

Member States can adopt additional conditions, which must the Commission must be informed of.

All authorisations must be notified to the European Banking Authority (EBA) which is responsible for drawing up a register of authorised credit institutions and making it accessible on its website. Applicants must be notified whenever an authorisation is refused and the reasons for refusal must be given. The competent authorities may withdraw an authorisation subject to the conditions set out in the Directive, in particular when the above conditions are no longer fulfilled. The parties concerned, the Commission and the EBA must be notified when authorisation is withdrawn and the reasons for withdrawal must be given.

Credit institutions exercising their activities in a Member State other than the one in which their head office is situated may use their original name on condition that it does not give rise to any doubt as to the national law to which the parent undertaking is subject. However, the host Member State may, for the purposes of clarification, require that the name be accompanied by certain explanatory particulars. The division of responsibilities must be clearly defined.

The competent authorities must also collect information relating to the number of persons per credit firm in the income bracket of at least one million euros, comprising:

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  the main salary elements;
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  premiums;
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  long-term allowances;
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  pension premiums.

Prudential assessment of the acquisition of qualifying holdings

The Directive establishes detailed criteria for the prudential assessment of shareholders and management in the event of the planned acquisition of a qualifying holding and also a clear procedure for applying them. Competent authorities are to work together to assess the potential acquirers. The assessment applies in particular to:

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  credit institutions, insurance companies, reinsurance companies and investment firms;
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  parent undertakings of credit institutions, insurance companies, reinsurance companies and investment firms;
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  natural or legal persons in charge of credit institutions, insurance companies or reinsurance companies.

The competent authorities are to make a judgment as to the character of the proposed acquirer and the financial soundness of the proposed acquisition, on the basis of various criteria:

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  the reputation of the proposed acquirer;
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  the reputation and experience of any person who will direct the business of the credit institution as a result of the proposed acquisition;
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  the financial soundness of the proposed acquirer;
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  whether the credit institution will be able to comply, and continue to comply, with the prudential requirements;
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  whether there are reasonable grounds to suspect that attempted or actual money laundering or terrorism financing are taking place.

Freedom of establishment and freedom to provide services

A credit institution wishing to establish a branch in another Member State must notify the authorities of its home Member State, indicating the Member State in which it plans to establish a branch, a programme of operations, the address in the host Member State from which documents may be obtained and the names of those responsible for the management of the branch. The home Member State must provide this information to the host Member State within three months except if there is a reason to doubt the capacity of the administrative structure or the financial situation of the credit institution. If they refuse to provide the required information, the home Member State must justify their decision within three months of receiving all the information. That refusal shall be subject to a right to apply to the courts in the home Member State.

A credit institution wishing to exercise the freedom to provide services on the territory of another Member State must notify the authorities of its home Member State. Such notification must be forwarded to the host Member State.

Relations with third countries

The competent authorities shall notify the Commission and the EBA of all authorisations for branches granted to credit institutions having their head office outside the European Union (EU). The EU may, through agreements concluded with one or more third countries, agree to apply provisions which accord to branches of a credit institution having its head office outside the Community identical treatment throughout the territory of the EU.

Member States may not apply to branches of credit institutions which have their head office outside the EU provisions resulting in more favourable treatment than that accorded to branches of credit institutions which have their head office in the EU.

Principles of prudential supervision

In principle, supervision is carried out by the home Member State with limited exceptions (such as supervisions of liquidity). The competent authorities of the Member States concerned are to cooperate closely. In particular, they are to supply each other with any information necessary for effective supervision. Such exchanges are protected by professional secrecy. When the competent authorities encounter refusals of requests for cooperation and information, they shall notify the EBA.

A competent authority has the option to communicate the information required for accomplishing its mission to the following authorities:

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  central banks;
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  public authorities responsible for monitoring payment systems;
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  the European Systemic Risk Board (ESRB).

The competent authorities are authorised to impose or implement penalties and other financial or non-financial measures.

Should a branch breach a Member State’s prudential rules, the host Member State shall request the home Member State to take the necessary measures. If the measures taken are insufficient then the host Member State has the power to take appropriate measures to prevent or punish the breach committed by the branch. The home Member State must be informed before such measures are taken. In urgent cases, the competent authorities of the host Member State may take any precautionary measures necessary to protect interests. In these cases, they must inform the Commission, the EBA and the competent authorities of the other Member States.

Technical instruments of prudential supervision

Own funds

The Directive puts forward a definition of own funds comprising two elements (original own funds and additional own funds). The amount of additional own funds added to own funds must not exceed the original own funds. In addition, the commitments of members of credit institutions (cooperative societies) and subordinated loans may not exceed one half of the original own funds. The Directive also lists the elements to be deducted from own funds and indicates the formula for calculating own funds on a consolidated basis.

Solvency ratio

The own funds of each credit institution are defined as a proportion of the weighted risks of its assets and off-balance-sheet activities. The minimum prescribed ratio is 8 %. This mainly concerns credit risk incurred by possible non-payment by a borrower and establishes a distinction between the levels of risk associated with specific assets and off-balance-sheet elements, and with certain specific categories of borrowers.

Large exposures

A credit institution’s exposure is deemed large where its value exceeds 10 % of its own funds. Credit institutions must report every large exposure to the competent authorities and the EBA in the manner provided for in the Directive. Limits are set on the exposures that a credit institution may incur.

Supervision on a consolidated basis of credit institutions

Every credit institution which has a credit institution or a financial institution as a subsidiary, or which holds a participation in such institutions, and all credit institutions the parent undertaking of which is a financial holding company, are subject to supervision on a consolidated basis. The arrangements attempt to identify clearly elements whereby the competent authorities responsible for exercising supervision on a consolidated basis can be determined in the various possible scenarios.

The competent authorities can take measures against establishments which do not meet the requirements of this Directive, in particular to:

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  require credit institutions to apply a specific policy of assets in terms of own funds;
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  limit the activities of the establishment;
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  require credit institutions to limit variable income where this income is not compatible with maintaining a sound financial basis;
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  require credit institutions to use the gains achieved to strengthen their financial basis.

If the establishment does not cooperate in a satisfactory manner, the competent authorities shall refer it to the EBA.

Emergency situations

In emergencies or adverse market situations which threaten market liquidity and the stability of the financial system, the supervisor shall alert the EBA, the ESRB and the competent authorities.

European Banking Authority

The EBA assists the Commission in ensuring the proper implementation of this Directive under Regulation (EU) 1093/2010.

Key terms of the Act

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  Credit institution: an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account.

References

The successive amendments and corrigenda to the current guidelines by the ECB have been incorporated into the original text. This consolidated version is of documentary value only.

RELATED ACTS

Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management (Text with EEA relevance).

This Directive concerns the revision of rules applicable to capital in the banking sector with regard to:

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  the role of hybrid products (securities that contain features of both equity and debt). The challenge is to be able to classify these products as capital in order to be able to better assess the amount of loans a bank can grant;
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  liquidity risk management principles, which are a determining element concerning the soundness of banks. Supervision of liquidity risk should be facilitated by a College of supervisory authorities;
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  cross-border banking groups, which should also be supervised by Colleges of Supervisors;
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  a limit on interbank exposures in order to reduce risk;
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  improving risk management of securitised products.

Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006 on the capital adequacy of investment firms and credit institutions (recast) [Official Journal L 177 of 30.6.2006].

By laying down new capital requirements for banks and investment companies, this Directive aims to ensure the coherent application of the new international framework on capital requirements adopted by the Basel Committee on Banking Supervision (Basel II). The new framework lays down lower capital requirements for SME financing and provides for preferential treatment of specific types of risk capital. In addition, it introduces reduced capital requirements for retail loans to individuals who are less risk than the latter.

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council.

This Directive states the rules which aim to organise the supplementary supervision of regulated bodies belonging to a financial conglomerate. A group is categorised as a financial conglomerate if the ratio between the balance sheet total of the financial sector entities and the balance sheet total of the group as a whole exceeds 40 %, and when the average of the ratio between the balance sheet total of that financial sector and the balance sheet total of the group and the ratio of the solvency requirements of the same financial sector and the total solvency requirements of the financial sector entities exceeds 10 %.

Where a financial conglomerate has been identified, decisions shall be taken on the basis of a proposal made by the coordinator of that financial conglomerate.

Directive 2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions [Official Journal L 125 of 5.5.2001].

This Directive relates to the reorganisation and winding-up of credit institutions and forms part of the Community legislative framework relating to the taking-up and pursuit of the business of credit institutions. It ensures that, where a credit institution with branches in other Member States fails, a single winding-up procedure is applied to all creditors and investors.

Last updated: 22.03.2011

This summary has been adopted from EUR-Lex.