EBF response to EBA consultation paper on guidelines on connected clients
26 October 2016
The principals described in these guidelines will significantly change the ones currently used by banks. Although some changes to current procedures may be required concerning the equity stake and control criteria, significant efforts will be needed on the “economic dependency” topic.
Key points:
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A broader application of the economic dependency criteria would involve a significant operational effort by banks as the number of groups of connected clients may increase substantially. Clear instructions and definitions which are operationally manageable are needed.
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In accordance with the purpose, when establishing a group of connected clients, only clients which are assessed to in fact constitute a single risk should form a group of connected clients. Thus, when assessing interconnectedness based on control relationship and/or economic dependency, actual substantiality and material impact on credit risk in the individual case is to be considered.
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European Banking Federation (EBF) does not support tying economic dependency to the existence of general financial difficulties irrespective of their duration and how serious their consequences are for the lending institution.
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The EBA’s proposal to reduce the threshold to 2% of the eligible capital which triggers the investigation of potential economic connections would override the Basel framework jeopardising the level playing field. The 5% level is already a conservative threshold as long as large exposures are defined as those which overcome the 10% of bank’s eligible capital. EBF does not see the rationale for applying any other level than the 5% ensuring alignment with the Basel framework.
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Moreover, such an important change, changing the threshold from 5% to 2%, should not be implemented via an EBA guideline but should rather be done through a revision of the level one regulation. The threshold is an essential element and should be interlinked with the European Commission potential revision of possible restrictions in the definition of eligible capital definitions.
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Interconnectedness through control differs fundamentally from interconnectedness through economic dependency. Any obligation to link these in a prescriptive and mechanical manner may lead to unintended outcomes and far-reaching requirements for the formation of groups of connected clients. EBF is opposed to such an approach as currently proposed, as this would go beyond the requirements set in Article 4 (1) (39) b) of the CRR, however EBF recognises that where there is a clear risk of a default of an obligor through their economic connection leading to high and material likelihood of default of the counterparty it should be recognised and included in a large exposure assessment, based on analysis of the individual case by the relevant analyst.
Full response
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