Circular D1/TB/332: Adaptation of the Regulation on Own Funds of Credit Institutions

BANKING AND FINANCIAL COMMISSION Prudential Supervision of Credit Institutions Avenue Louise 99, B-1050 Brussels telephone +32(2)535.22.11 - fax +32(2)535.24.96 Brussels, July 13, 2000

CIRCULAR LETTER D1/TB/332 TO CREDIT INSTITUTIONS Adaptation of the Regulation on Own Funds of Credit Institutions

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Madam, Sir,

By Order of July 4, 2000, the Commission modified the Regulations of December 5, 1995, concerning the own funds of credit institutions and stockbroking firms, in order to bring them into conformity with European regulation 1. The amending Order is currently submitted for approval by the competent Ministers and will be published in the Belgian Monitor. Its entry into force is scheduled for July 21, 2000.

Pending the aforementioned approval and publication, I am already transmitting to you, for informational purposes, the text of the amending Order, as well as the modifications made to the commentary on the aforementioned regulations. This information is intended to allow institutions to prepare in good time for the definitive entry into force of the new provisions of the regulation on solvency. Once the text of the approved Order is published, the Commission will send to institutions a coordinated, updated version of the Regulation of December 5, 1995, concerning own funds, as well as the related commentary.

The main adaptations made to the Regulation on own funds can be summarized as follows 2:

(a) regarding credit risk:

• application of a 50% weighting coefficient to "mortgage-backed securities" (Article 3, 1°);
• possibility of applying, under certain strict conditions, a weighting coefficient of 50% to loans granted after May 31, 2000, which are fully secured by mortgages on office or multi-purpose commercial premises (Article 3, 1°);
• obligation to calculate the replacement cost of derivative instruments according to the method based on market value, unless the institution benefits from the "de minimis" regime provided for in Article 7 of the Regulation on own funds (Article 3, 2°, first indent);

1 Directives 98/31/EC, 98/32/EC and 98/33/EC of June 22, 1998. 2 The articles referred to are those of the amending Order.

BANKING AND FINANCIAL COMMISSION D1/TB/332 2

• establishment of a specific regime for real estate bonds (Article 3, 5°);
• possibility of applying to claims held on regional or local public authorities of Zone A, the lower weighting in force in the country of origin of these public authorities (Article 3, 6°);
• extension to the calculation of potential future credit risk of the application of legally valid netting agreements covering derivative instruments (Article 4, 2°);

(b) regarding market risks:

• removal, from 2005, of the exemption threshold - set at 2% - for the calculation of requirements regarding the coverage of foreign exchange risk, and introduction of a "de minimis" regime (Article 5, § 5);
• introduction of capital requirements for the coverage of risks on base products, including precious metals other than gold (Article 6);
• definition of the procedures governing the use of internal mathematical models (Article 7 and commentary).

(c) regarding risk concentration: removal of limits on risk concentration in the case of linked enterprises, provided that they are included in consolidated supervision (Article 2, § 6).

I am having a copy of this letter sent to your/your auditors.

Please accept, Madam, Sir, the expression of my distinguished sentiments.

The President, J.-L. Duplat.

Annexes: 1. Modifications of the Orders 2. Adaptation of the commentary on the Orders