European Union: European Banking Authority Responds To Commission Call For Advice On Large Exposure Framework

On October 24, 2016, the EBA published a report outlining its response to the Commission's call for advice, published on April 26, 2016, on the review of the large exposures framework laid down in the CRR. The Commission is considering whether to implement the agreed Basel Committee's framework for measuring and controlling large exposures by modifying the CRR through a legislative proposal before the end of 2016. The EBA's Report analyzes the impact of aligning certain aspects of the large exposures framework pursuant to the CRR. The EBA states that it would be appropriate to strengthen the large exposures capital base by including only Tier 1 capital instead of also including a proportion of Tier 2 capital and to reduce the large exposures limit for exposures from Global Systemically Important Institutions to other G-SIIs to 15% of Tier 1 capital. The EBA considers that the existing EU rules on exposures to funds and securitizations is adequate and consistent with the Basel framework. For exposures to shadow banking entities, the EBA is proposing, once it has analyzed the position, to submit a report to the Commission on whether the existing guidelines are effective and whether any aspects of those guidelines should be changed into legislative requirements. The EBA recommends delaying extending the new standardized approach for measuring counterparty credit risk to the large exposures framework until after the SA-CCR has been fully implemented and its impact assessed.

The Report also assesses the use and potential impact of removing the following discretionary exemptions from the large exposures regime: (i) intra-group exposures within cooperative networks; (ii) inter-bank exposures in specific sectors; (iii) overnight interbank exposures in minor trading currencies; (iv) guarantees on mortgage loans financed by issuing mortgage bonds; and (v) exposures to recognized exchanges. The EBA recommends keeping exemptions (i) and (ii) and deleting (iii) to (v). The exemption for exposures to recognized exchanges was recently introduced and it was intended that the same treatment might be applied to clearing houses and clearing mechanisms in the future, however, the EBA does not comment on the impact of removing the last exemption on the potential extension. The EBA highlights the importance of reducing exemptions from the large exposures regime where appropriate to simplify the regime and further align it to the Basel Committee standards and for this purpose, the EBA recommends that a mandate for a report to assess all remaining exemptions to large exposures be added to the CRR.

The Report also outlines the EBA's views on aspects of the large exposures framework that could be aligned with the Basel Committee standards and has quantified their impact where possible. The Report analyzes the impact of removing the ability of institutions to reduce exposures by the value of immovable property used as collateral. The EBA also identifies other areas of the CRR that require clarification or where a mandate should be given to the EBA to conduct further analysis, with the aim of enhancing clarity and harmonization across jurisdictions, such as the treatment of breaches to large exposures limits.

The EBA's Report is available at:

http://www.eba.europa.eu/documents/10180/1632518/EBA+report+on+the+review+of+the+large+exposures+regime+%28EBA-Op-2016-17%29.pdf?_sm_au_=iVVHVWj7jP3TtnsN , the Call for Advice is available at:

http://www.eba.europa.eu/documents/10180/1632529/Call+for+Advice+on+Large+exposures+%28EBA-2016-E-675%29.pdf?_sm_au_=iVVHVWj7jP3TtnsN  and the Basel Committee framework is available at:

http://www.bis.org/publ/bcbs283.pdf?_sm_au_=iVVHVWj7jP3TtnsN .

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