Response to consultation on Guidelines on limits on exposures to shadow banking

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2. Do you agree with the approach the EBA has proposed for the purposes of establishing effective processes and control mechanisms? If not, please explain why and present possible alternatives.

Although we support the approach taken to allow firms to rely on their own internal framework and risk appetite to set internal limits we do not in general support aggregate limits as we do not consider this a sectoral risk. This could be better addressed via ICAAP/Pillar 2, which specifically covers concentration risk rather than the large exposure regime which is intended to address default of single/groups of connected counterparties.

In terms of assessment of risks arising from shadow banking entities, it is important that the principle of materiality is introduced here; “all potential risks” and “potential impact of those risks” is too broad. This will not only make it difficult for firms to identify all potential risks arising from those exposures, there would not be a consistent application across the industry.

It is also important that the requirement for establishing effective process and effective mechanisms should be applied on a consolidated basis only, so as to be consistent with firms’ approaches to systems and control more generally and to ensure that the requirement is not disproportionately burdensome.

3. Do you agree with the approach the EBA has proposed for the purposes of establishing appropriate oversight arrangements? If not, please explain why and present possible alternatives.

While we broadly agree with the principles established in Title II section 2, the guidelines should adopt a phased implementation approach to avoid potential macro systemic risks if banks are not in a position to use the principle approach on 1st January 2016. This would give banks time to undertake an internal assessment for data enrichment in order to meet the principle approach.

4.Do you agree with the approaches the EBA has proposed for the purposes of establishing aggregate and individual limits? If not, please explain why and present possible alternatives.

As per our comments above, we question the need for a ‘fall back’ approach, and ask the EBA to conduct an impact study.

We would also note that the EBA mandate for developing these guidelines as set out in CRR explicitly notes refers to setting either aggregate or individual limits; in proposing both aggregate and individual limits, in our view, the draft Guidelines go significantly beyond the CRR mandate. We strongly believe that aggregate limits should not be introduced and urge the EBA to reverse its proposal in this respect.

5. Do you agree with the fallback approach the EBA has proposed, including the cases in whichit should apply? If not, please explain why and present possible alternatives. Do you think that Option 2 is preferable to Option 1 for the fallback approach? If so, why? In particular: Do you believe that Option 2 provides more incentives to gather information about exposures than Option 1? Do you believe that Option 2 can be more conservative than Option 1? If so, when? Do you see some practical

As per comments above we do not think it is necessary to have a fall back approach. If the EBA insists on introducing a fall back approach, option 2 is preferable. Option 1 is unnecessarily restrictive as it does not recognise that firms will have information on some of their exposures to shadow banking entities. As per comments above, under option 1 the limit would need to be considerably higher than 25%. Option 2 allows firms to use the principal approach and therefore provides incentives for firms to collect information on their exposures to shadow banking entities.

6. Taking into account, in particular, the fact that the 25% limit is consistent with the currentlimit in the large exposures framework, do you agree it is an adequate limit for the fallback approach? If not, why? What would the impact of such a limit be in the case of Option 1? And in the case of Option 2?

Please see our comments under the key messages in the attached response.

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Name of organisation

British Bankers Association