EBA consults on the treatment of connected clients for large exposures

The European Banking Authority (EBA) launched today a consultation on its draft Guidelines on the treatment of connected clients for large exposures. These draft Guidelines review and update the ‘Guidelines on the implementation of the revised large exposures regime' issued by the Committee of European Banking Supervisors (CEBS) on 11 December 2009. Their focus is exclusively on the issue of connected clients as defined in the Capital Requirements Regulation (CRR) and they reflect the developments in the area of shadow banking and large exposures both at EU and international level. The consultation runs until 26 October 2016.

 

In these draft Guidelines, the EBA clarifies that institutions in the EU should make use of their clients' consolidated financial statements in order to assess connections based on control. The draft guidelines also provide a non-exhaustive list of indicators of control that should be used by institutions for assessing those clients to which EU accounting rules do not apply (e.g. natural persons, central governments, and clients which prepare consolidated financial statements in accordance with the accounting rules of a third country).

 

Guidance is also provided on the use of an alternative approach for assessing the existence of groups of connected clients of entities directly controlled by or directly interconnected with central governments.

 

Regarding the assessment of economic dependency, the draft guidelines develop further the non-exhaustive list of situations of economic dependency which was included in the 2009 CEBS Guidelines and reinforce this definition to make clear that if the failure of a client leads to ‘repayment difficulties' of another client, an institution is to consider these clients as connected.

Situations where control and economic dependency are interlinked are also clarified, as they can lead to the existence of one group of connected clients, as opposed to two separate groups of connected clients. The overarching indicator is the existence of a ‘single risk' between two or more clients (‘domino effect'), regardless of the type of connection the single risk is based upon. The chain of contagion leading to possible default of all entities concerned is the relevant factor for the grouping.

‎Comments to this consultation can be sent to the EBA by clicking on the "send your comments" button on the consultation page. All contributions received will be published following the close of the consultation, unless requested otherwise. Please note that the deadline for the submission of comments is 26 October 2016.

A public hearing will take place at the EBA premises on 5 September 2016 from 2pm to 4pm UK time.

In light of the new provisions laid down in the CRR as well as in the- EBA technical standards and guidelines in the area of large exposures, the EBA decided to review the 2009 CEBS ‘Guidelines on the implementation of the revised large exposures regime' and to focus exclusively on the issue of connected clients under Article 4(1)(39) of the CRR. In addition, these Guidelines take into account the developments in the area of shadow banking and large exposures at both EU and international level.