With respect to the definition, it should be clear that this covers entities whose main business is credit intermediation. The entity is only engaged in credit intermediation activities if it is acting in a bank-like capacity; if it is receiving rather than providing credit intermediation services, it should not be considered as acting in a bank-like capacity. This is consistent with the established definitions of shadow banking and the provisions of the CRR.
As regards what should be excluded from the definition, we support the exclusion of UCITs. We would also argue for the exclusion of exposures to entities which carry out treasury functions for corporate groups and securitisations and funds where the look through approach is used. Including securitisation SPVs under the EBA’s shadow banking limits potentially draws in a wide range of arrangements which does not appropriately identify a systemically risky shadow banking activity.
We are concerned that the consultation paper does not take into account the MMF regulation and SFT transparency regulations currently under negotiation. In particular, many MMFs operate under the rules of the UCITS Directive, the remainder of which are governed by AIFMD. This significantly reduces the risks of MMFs. Furthermore, the changes to stress testing and liquidity requirements will also play a role in substantially increasing the robustness of MMFs. The overall MMF framework of MMFs will be strengthened, and this should be taken into account by the EBA. We argue that MMFs should be excluded from scope.
The definition should also be clearer on third country equivalence. Specifically it is unclear which 3rd country equivalence the EBA intends to utilise for the purposes of ascertaining which entities are subject to prudential regulation on a solo or group basis. Currently there exists 3rd country equivalence for the treatment of credit risk provisions under the CRR. In particular, the European Commission decision in respect of Article 152 covers entities which would be considered ‘regulated financial sector entities” under the IRB approach. This however only covers investment firms and credit institutions on an individual basis.
It is therefore important to ensure that for the purposes of these guidelines, excluded undertakings includes all entities which are subject to prudential regulation on a consolidated basis by regulators in equivalent 3rd countries, and this is not limited to the equivalence decisions made by the EC. In terms of 3rd country insurance entities, it is important to note there have been very few equivalence decisions made under Solvency 2. We would therefore propose that excluded entities includes insurance entities which are subject to bank like regulation in 3rd countries e.g. subject to solvency requirements, risk management, control requirements etc.
As a more general point, firms will not always have absolute transparency as to a client’s investment and trading activities (e.g. if a client is conducting activities away from that firm, which may be confidential). As a result there will be occasions where they genuinely cannot make an absolute assessment as to a client’s full activities. In these cases firms should be able to make reasonable assessments based on relationship with the client and information reasonably available to them, and categorise as a shadow banking entity/non-shadow banking entity accordingly. The EBA should acknowledge in its final guidelines that firms are only required to make the assessment on a best efforts basis.
Could the EBA also describe its rationale for excluding the de minimis approach, and clarify what is meant by this threshold (e.g. activities that are incidental to an entity’s overall business)?
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.
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.
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.
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.
Please see our comments under the key messages in the attached response.