26 July 2016

EBA consults on the treatment of connected clients for large exposures

In these draft Guidelines, the European Banking Authority (EBA) clarifies that institutions in the EU should make use of their clients' consolidated financial statements in order to assess connections based on control. The draft guidelines also provide a non-exhaustive list of indicators of control that should be used by institutions for assessing those clients to which EU accounting rules do not apply (e.g. natural persons, central governments, and clients which prepare consolidated financial statements in accordance with the accounting rules of a third country).

Guidance is also provided on the use of an alternative approach for assessing the existence of groups of connected clients of entities directly controlled by or directly interconnected with central governments.

Regarding the assessment of economic dependency, the draft guidelines develop further the non-exhaustive list of situations of economic dependency which was included in the 2009 CEBS Guidelines and reinforce this definition to make clear that if the failure of a client leads to ‘repayment difficulties' of another client, an institution is to consider these clients as connected.

Situations where control and economic dependency are interlinked are also clarified, as they can lead to the existence of one group of connected clients, as opposed to two separate groups of connected clients. The overarching indicator is the existence of a ‘single risk' between two or more clients (‘domino effect'), regardless of the type of connection the single risk is based upon. The chain of contagion leading to possible default of all entities concerned is the relevant factor for the grouping.

‎Comments to this consultation can be sent to the EBA by 26 October 2016. A public hearing will take place at the EBA premises on 5 September 2016 from 2pm to 4pm UK time.

Press release

Guidelines

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