Abstract

Rules on Depositor Protection laid down for Banks in the Draft Guidelines of the Commission of the European Communities

In the co-ordination of the law relating to bank supervision in the EC countries, special importance attaches to the treatment of regulations for the protection of creditors. A draft guideline presented by the Commission of the European Community in July 1972 provides that, in assessing the liquidity and solvency of banks, the bank supervisory authorities of the Community countries should in future apply a net worth criterion, a participation criterion and three liquidity criteria. The present contribution attempts to judge whether tie net worth and liquidity criteria formulated in the draft guideline are appropriately geared to the objective of depositor protection. According to the net worth criterion of the draft guideline, the solvency of banks is considered adequate, if the risks of property losses connected with bank assets are covered by the banks’ own resources. Since it ıs intended that these risks should be measured solely by varying deductions from banks’ investments, which are divided into three categories, the draft does not take account of the fact that effective protection against insolvency is ensured only if the business policy of the banks is also oriented to obviation of heavy losses in the case of individual borrowers and of cumulation of similar risks in the case of borrowers in one and the same line of business. Apart from the lacking diversification requirement, a point that seems particularly disquieting in the draft guideline is that the risk of credit commitments is to be assessed on the basis of the security provided for credits. In the draft guideline, supervision of banks’ solvency and willingness to pay is to be effected on the principle of the theory of inactive deposits. Investments in assets of specific degrees of liquidity are limited by three ratios to certain proportions of the stocks of financing resources with specified maturities. Under the present, not entirely unambigous version of the draft, it is possible that on account of lacking provision for countability of surplus cover in the long-term criteria, banks might be induced in the case of the short-term criteria to resort to far-reaching exploitation of possibilities for extending maturities into the long-term brackets. The draft guideline should be reappraised, not only with respect to specific definitions and delimitations, but also in its basic conception with regard to the objective of protecting bank depositors.