Austrian Federal Economic Chamber, Division Bank and Insurance

We consider the definition for shadow banking entities as described in Point 6 (Definitions) of the Draft Guidelines as too imprecise which will result in inconsistency in the interpretation and not comparable results by the institutions. Furthermore the IT-implementation to identify these entities will be a complex task.

The proposed threshold for the definition of exposures to shadow banking entities with 0.25% of a bank's eligible capital is far too low, as the intended purpose of the guideline is to introduce limits for large exposures according to Art. 395 CRR. Moreover it is not defined if this threshold refers to the exposure of a client or of a group of connected clients.

As regards excluded undertakings, it is unclear how they have to be excluded - as single entity or group of connected clients (GCC)? Imagine for instance a GCC consisting of a third country and a bank owned/controlled by that third country (assuming the third country is not equivalent).

For the treatment of entities within the scope of prudential consolidation, we prefer Option 3 as described under 5. Accompanying documents point 5.1.3 (Options Considered) on page 28. With regards to entities which are not within the scope of prudential consolidation we prefer Option 2 (the intermediate approach) on page 29. As regards credit institutions of equivalent third countries, it is not clear if these countries are limited to countries listed in the COM Implementing Act dated Dec. 2014 which would be too narrow.

Under Point 6 (Definitions, page 18) point (3) (g) should be expanded. Not only sovereigns and local governments in EU Member States should be excluded from the term of shadow banking entity but every sovereign or local government without geographical restriction.

We do not support that UCITS Money market funds (MMFs) are not excluded from Shadow Banking Entities - all UCITS funds (MMF and non-MMF) should be excluded.
We are opposed to the idea of introducing additional Pillar 2 qualitative requirements, like the ones in Title II paras 1 and 2, explicitly for shadow banking entities. The qualitative Pillar 2 requirements set by CRD IV have already been implemented in full in national law. It is not clear why these guidelines should set requirements aimed specifically at shadow banks when the same requirements already apply to all borrowers anyway and are already included in various other EBA guidelines (e.g. those on internal governance, SREP). The requirements in Title II, paras 1 and 2 would create unnecessary additional administrative work since separate frameworks, policies and reporting systems would need to be developed specifically for shadow banking entities and these would be subject to separate verification by supervisors and auditors. We do not see any corresponding benefit.
As outlined in our comments to question two, we do oppose the idea of introducing special qualitative requirements for SBEs only that are usually part of other regulation for Pillar II. Risk management processes are reviewed by the management body on a regular basis. But this assessment covers the entire risk portfolio. In addition we would like to draw again the attention on the fact that SBEs should not be considered as a single risk category.
We do not believe it makes good sense to set special aggregate and/or individual limits on exposures to shadow banking entities under Pillar 2 since the shadow banking sector is highly heterogeneous and no risk management benefits would ensue, which should always be a prerequisite for setting a limit. In any event, individual limits are already set for every client and group of connected clients as a result of routine lending processes or banks’ strategies for managing credit risk.
We prefer a fallback approach based on option 2. SBE are a very heterogeneous group with different business models, levels of disclosure and with different risk levels within their portfolios. Based on this heterogeneity, it does not seem appropriate that, if a credit institution gathers all required information for the majority of those entities but, for a small group of SBE, cannot obtain the information required to set a meaningful limits framework, all the bank’s exposures to all SBE (regardless of the information obtained) should be perceived as an exposure to the “same client” and, as such, will be subject to a 25% aggregate limit.

Option 1 does not provide incentives to develop a robust assessment process as the non-compliance with a principal approach for just one SBE exposure will lead to an overall limit to all SBE exposures. Even if, in these situations, banks decide to run off the portfolios to the specific SBEs to which they cannot obtain the required information, this will lead to an increase of exposures to “principal approach compliant” SBE, which, on the other hand, will result in concentration risk challenges. Furthermore, option 1 could lead, on the short term, to swift systemic events resulting from the insolvency/fire sale of assets from the SBE that cannot provide the necessary information of the banking sector.

In summary, SBEs are different and will be at different stages of evolution, both features that are not controlled by banks. As such, the potential absence of information from specific SBE groups should not lead to restricted limits to other sophisticated SBE groups, as proposed under option 1.
Under fall-back Option 1, an aggregate 25% limit for all exposures to SBE would be overly conservative and spark fire sales thereby destabilising markets and affecting credit mediation. EBA should reconsider this potentially heavy cost of incentivising" banks to use the principal approach.

We do not agree with the assumption mentioned on page 13 which states that “in the absence of sufficient information, all exposures to shadow banking entities could be connected” and so indicates that they should be understood as the same client. As such, although the information gathered could not allow the compliance with all specific rules of the principal approach under Title II, this does not mean that, based on the information collected, there is an inability to evaluate the interconnection between SBE and so, concluding that they are all connected. Moreover, this example also illustrates that the framework does not appropriately capture the risk of the exposure to the SBE thus calling for a different, simpler approach."
Austrian Federal Economic Chamber, Division Bank and Insurance