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CEBS published a final report on industry practices for the measurement and management of large exposures, including the use of credit risk mitigation (CRM) to manage large exposures. The report also provides feedback on the industry's views on the current regulatory environment. The report responds to a Call for Advice issued by the European Commission in December 2005, in which CEBS was invited to carry out a number of pieces of work to inform the Commission's review of the Large Exposures rules in the Capital Requirements Directive.
On the basis of information provided via an on-line questionnaire, CEBS reports on the methods of used by institutions in measuring, managing, and monitoring single-name concentration risk and other forms of concentration risk.
CEBS found a wide variety in the methods used by EU institutions to measure and manage concentration risk. Smaller institutions often rely largely on limits on the size of their large exposures, expressed as a fraction of the institution's capital, or (less often) of assets, and often closely linked to regulatory limits on large exposures. Larger, more sophisticated institutions also use internal limits, but their methods for calculating them are more varied, using economic capital models which capture the impact of large exposures on the riskiness of the institution's overall credit portfolio, and stress-testing or scenario analysis.
The information should contribute to the assessment of whether revisions in the current rules are warranted. CEBS is studying the fundamental prudential principles underlying a large exposures regime and the degree to which credit risk management techniques, including the use of credit risk mitigation, should be included in large exposures rules.