07 December 2007
The Committee of European Banking Supervisors (CEBS) today starts a public consultation on a number of aspects of the large exposures regime as part of developing its response to the European Commission's Second Call for Advice. The consultation is open to all interested parties, including supervised institutions and other market participants.
This consultation paper sets out CEBS' preliminary views on the issues included in Part 2 of the European Commission's Call for Advice. It also includes a summary of CEBS' key findings from Part 1 of its Advice to allow respondents to have a complete understanding of the overall review of the large exposures rules. Respondents are advised to read the consultation paper together with CEBS' Part 1 Advice.
Recently the international prudential framework has been substantially reviewed by the new Basel Accord, which has been adopted in EU through Directives 2006/48/EC and 2006/49/EC. Given the far reaching character of this change it was deemed necessary to check to what extent the large exposures regime is still justified, and whether it needs some adjustment in order to exist in harmony with the revised rules on capital.
In the context of the European Commission's better regulation agenda, the consultation paper includes some discussion of a high level market failure/regulatory failure analysis for the issues under consideration. In addition, Annex 1 outlines CEBS' high level impact assessment of the policy options set out in its Part 1 Advice to the European Commission.
CEBS considers a key issue to clarify is the concept of connected clients and it proposes a clear distinction between 'connected clients' (ordinary customers/ counterparties that are connected to each other and as a result should be regarded as a single risk) and 'connected parties' (a natural person who is involved with the management of the institution at a senior level or a legal person or partnership which is closely related to the institution).
CEBS provides its views on the treatment of credit risk mitigation techniques. CEBS believes that prudential considerations justify in certain cases a more conservative approach for large exposures purposes than in the solvency regime. After discussing a number of options and considering prudential concerns and the cost/benefit arguments, CEBS' proposal is to accept the same treatment in the large exposures regime as the solvency regime but only for those credit risk mitigation instruments considered sufficiently liquid.
CEBS discusses the merits of different options for the treatment of intra-group exposures under the large exposures regime considering in its analysis the potential costs of imposing intra-group exposure limits (an undue restriction on group liquidity management, competitive disadvantages between Member States of the EU, competitive disadvantages against third party jurisdictions and frustration of progress towards a truly single European financial services market) as well as the benefits (reduce unforeseen event risk, prevention of European banking groups failure due to an idiosyncratic event affecting one of their subsidiaries that does not form part of their core group).
CEBS discusses alternative proposals for the treatment of interbank exposures based on a differentiated impact analysis of applying the proposed regime to all unsecured interbank exposures. CEBS' view is that large interbank exposures may give rise to systemic risk and are associated with moral hazard problems, although the balance between the benefits and cost of imposing limits may vary among Member States
CEBS also discusses other issues like the scope of application of the large exposure rules; possible recognition of good credit risk management; the feasibility of a 'one size fits all' approach; the appropriateness of the existing rules for the trading book; the extent to which supervisory reporting could be more closely aligned to that of the institutions; possible supervisory reactions to the breach of limits; and possible exemptions from the large exposures regime.
CEBS submits its initial views for a public consultation which starts today and runs until 22 February 2008. Comments received will be published on CEBS' website unless respondents request otherwise. Please send your comments to the following e-mail address: email@example.com .
The standard consultation period has been slightly shortened as a result of the tight deadline set up by the European Commission. The European Commission expects CEBS to report back on the second part of the Call for Advice by the end of March 2008. Due to the short period of time that CEBS has available for developing its Advice after the end of the consultation period, early responses will be greatly appreciated and late responses will not be considered.
When elaborating its views, CEBS has benefited from the input already gathered in the context of its survey of industry practices published here (LE industry report) and its public consultation on the CP14 published here.
A public hearing is being organised on 15 January 2008 at CEBS premises from 9.00 a.m. to 4.00 p.m. in order to allow all interested parties to highlight their comments to CEBS.