07 April 2008

CEBS proposes limit-based “back-stop” regime on large exposures regimes

CEBS believes that large single name exposures can lead to traumatic losses due to “unforeseen events”. As market failure is not adequately addressed by the Basel’s three pillars, CEBS concludes that a limit-based “back-stop” regime is the most appropriate regulatory tool and proposes to improve several of the features of the current regime.

CEBS proposes to limit interbank exposures to 25% of own funds, except for smaller credit institutions for which CEBS proposes to limit the exposures to the higher of a Euro threshold amount or 25% of their own funds. The Euro threshold amount would be € 50 million (€ 150 million provided that the maturity of the exposures would be less than 3 months).

CEBS’s also discusses the cost and benefits of imposing limits on intra-group exposures and concludes that, at this stage, the better way to address this issue is to retain the current national discretion set out in Article 113.2 of the CRD that allows for the exemption of intra-group exposures from the large exposures limits. This is because of the significant differences in the impact of limiting these exposures on the functioning of Member States’ banking systems.

CEBS is proposing that credit risk mitigation techniques should be accorded the same treatment for large exposures purposes as for solvency purposes, but only if the associated instruments are considered sufficiently liquid. Physical collateral other than real estate collateral will not be considered eligible for large exposures purposes.
CEBS proposes exempting investment firms with limited licence and limited activity from the regime as the market failure analysis does not, in CEBS’ view, justify continued regulation in this area.

CEBS’s Advice also addresses a number of other issues like the scope of application of the large exposures rules with a continued differentiated approach for trading book exposures, the exemption from the limits of exposures to certain sovereigns, the appropriate supervisory reaction to breaches of limits in the banking and trading books, and harmonized reporting across Member States based on reports defined by the supervisors.

Press release

Cover letter

2nd Advice

2nd LE feedback

© Graham Bishop