01 August 2013

EBF publishes response to BCBS's consultative document, "Supervisory framework for measuring and controlling large exposures"

EBF welcomed the fact that the BCBS had based its proposal to revise the supervisory framework for measuring and controlling large exposures on proven methods under the existing capital and large exposures regimes.

The EBF fully supports the effort of the BCBS to reuse existing exposure measures as much as possible, and would recommend applying the same exposure for the Large Exposure Regime (LER) as for Pillar 1 purposes everywhere, including for off-balance sheet items. However, the Committee’s preference for simple methods of calculating exposures is not justified, in EBF’sview. This approach would lead to a divergence between the capital and large exposure regimes. Instead, banks should be able to apply the same methods for both purposes and should continue to have the option of using more sophisticated methods, i.e. internal models, to determine exposure values. The main reasons for this are:

• The LER should not be viewed as the only tool available to mitigate (single name) concentration, but rather one of many views that an institution provides to its supervisor. Instead of trying to quantify every single exception, the LER should stay a relatively simple backstop that will invite the supervisor to discuss situations in more detail with the institution.
• The models used for the capital calculations are extensively reviewed – both internally and by the supervisors – and back tested. They provide the best combination of sophistication and reliability that is available in the current regulatory framework. This will remain the case even after the introduction of the new Current Exposure Method (CEM).
• Although EBF understands that the LER is based on different assumptions (i.e. a sudden, worst-case situation), the specific adjustments to the LER exposure measure will have negative effects on its usability. For instance, the use of the CEM over the Internal Models Method (IMM) does not necessarily create a more conservative estimate, but a more simplified one that can cause misrepresentation of the underlying risks.

Furthermore, while the treatment of intra-group exposures is not covered in the consultation paper EBF would like to emphasise its position that the free flow of capital and liquidity must be guaranteed within a banking group. Any restriction would have an adverse effect on the group’s capital and liquidity management.

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