06 November 2007

CEBS first part of advice on large exposures

CEBS published the first part of its response to the Commission's Call for Advice on the review of the large exposures regime.

Chapter 3 and Annex II provide an overview of the approach to large exposures in a number of non-EU jurisdictions.

Chapter 4 considers the adequacy of the current large exposures limits. According to the Committee the introduction of counterparty credit quality so as to relax or remove the regulatory large exposures limits for highly rated counterparties does not fully address the identified market failures. CEBS believes that the 800% aggregate limit can be maintained.

Chapter 5 sets out CEBS’ current thinking on the calculation of exposure values.

- For off -balance sheet items CEBS proposes a set of principles on the basis of which advanced IRB institutions are permitted to use their own exposure calculations as used for regulatory capital requirements purposes.

- For institutions that have not been authorized to use their own estimates of conversion factors, CEBS recommends the assignment of a 100% conversion factor except for low risk items to which 0% will generally be applied. CEBS will analyse which transactions can/must be exempted from these flat conversion factors.

- For calculating exposure values for financial derivatives and securities financing transactions, it is proposed that institutions should be able to use the same approach for the LE regime as for regulatory capital requirements purposes.

- For Collective Investment Undertakings, structured transactions and other arrangements where there is exposure to underlying assets, it is considered that there is scope to achieve a degree of principles-based agreement, a set of principles is thus proposed bearing in mind that further work on how to implement the principles will still be necessary.

Finally, Chapter 6 puts forward CEBS’ initial thinking on the main issues to be considered in the second part of CEBS’ advice to the Commission.

First part of advice

Feedback statement

Press release

Chapter 1 sets out CEBS’ understanding of the objectives and purposes of a large exposures regime. CEBS believes that a market failure arises as a result of large single name exposures that give rise to the risk of traumatic losses due to “unforeseen events” and that this market failure is not fully addressed by any of Basel II’s three pillars. Therefore a remaining risk related to large exposures justifies some regulatory intervention.

Chapter 2 includes a discussion of the different policy options available. CEBS concludes that a limits-based “backstop” regime is the most appropriate regulatory tool and that the current regime has some shortcomings that need to be addressed.

© Graham Bishop