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EAPB Summary of Comments on CEBS CP14 Consultation Paper on Large Exposures

Core Content

The European Association of Public Banks (EAPB) has provided detailed comments on the CEBS consultation paper (CP14) regarding the first part of its advice to the European Commission on large exposures. The EAPB represents 25 public banks and financial institutions across Europe, with a combined balance sheet total of about EUR 3,500 billion and covering approximately 15% of the European market.

Main Views

General Remarks

• The importance of the large exposure regime varies significantly across institutions.
• Larger, more sophisticated banks have their own risk management systems, while smaller institutions rely on the regime as a guideline.
• A revised regime should be flexible, providing guidance for smaller institutions without creating a costly parallel system for larger ones.
• The EAPB supports CEBS' current "light touch" regulatory approach, which uses regulatory limits as a backstop.

Q1: Agreement with Prudential Objectives

• The EAPB agrees with CEBS' focus on limiting traumatic losses that could threaten solvency.
• They support the idea of a "light touch" regime under Pillar 2 of the CRD, which allows for more flexibility in managing concentration risk.

Q2: Market Failure Analysis

• The EAPB appreciates CEBS' analysis but believes it is not fully relevant to the issue of large exposures.
• They suggest a more differentiated approach based on the size and business model of institutions.

Q3: Additional Evidence for Market Failure

• The EAPB doubts the effectiveness of market discipline in managing large exposures, especially for smaller institutions.
• Rating agencies focus more on liability redemption than on concentration risk.
• Disclosure requirements are ineffective due to infrequency of updates.
• They believe market failures are not more pronounced in large exposures than in general credit risk.

Q4: EU vs. Non-EU Regimes

• The EAPB disagrees with CEBS' conclusion that there is no systematic competitive disadvantage.
• They point out that the US regime has lower capital requirements, giving US banks a competitive edge, especially in short-term M&A financing.
• They also note that Japan has a more favorable limit for exposures to affiliated companies (40% vs. 25%).
• They suggest revising the 25% limit for connected undertakings.

Q5: Credit Quality in Large Exposures

• The EAPB supports the idea of a simple regulatory backstop and opposes incorporating credit quality into large exposure limits.
• However, they support exceptions for regional governments, central banks, and intra-group exposures.
• They recommend the use of credit risk mitigation techniques and exemptions for short-maturity exposures.

Q6: Aggregate Limit of 800%

• The EAPB believes the 800% aggregate limit is necessary for smaller and medium-sized institutions.
• They support maintaining the 800% limit and oppose any reduction.

Q7: Principles for Risk Measurement and Management

• The EAPB supports principles aligned with Pillar 2, including:
  • Definition of concentration risk causes
  • Analysis of risk correlations
  • Internal regulations based on these principles
  • Adequacy of worst-case scenario analysis

Q8: Alignment with IRB and EPE Approaches

• The EAPB supports CEBS' efforts to align large exposure calculations with CRD.
• However, they oppose the proposed test in paragraph 195 (4) (a), as it adds unnecessary burden and lacks clarity.
• They suggest automatic authorization of recognized IRB and EPE methods for large exposures.

Q9: Conversion Factors for Off-Balance Sheet Items

• The EAPB supports a risk-sensitive approach to conversion factors.
• They support maintaining the current national conversion factors for low and medium risk items.

Q10: Internal Limits and Conversion Factors

• The EAPB supports the use of conversion factors for internal limits-setting.
• They believe the current national factors are effective and should be retained.

Q11: Structured Finance and Basket Products

• The EAPB supports the "light touch" approach and recommends using the methods in paragraphs 212 (a) and 213.
• They suggest differentiating baskets based on the number of transactions they contain.

Q12: Collective Investment Schemes and Structured Finance

• The EAPB supports the exclusion of Collective Investment Undertakings (CIU) from the analysis, as look-through treatment already exists.
• They question the necessity of daily information requirements.
• For structured finance, they support the principles in paragraphs 212 (d) to 215, but note that institutions may lack required information.
• They also suggest considering the Basel II slotting criteria for internal guidance.

Key Information

• The EAPB advocates for flexibility in the large exposure regime.
• They support Pillar 2 for managing concentration risk.
• They oppose incorporating credit quality into exposure limits unless exceptions are made.
• They question the effectiveness of market discipline and rating agency influence.
• They support maintaining the 800% aggregate limit.
• They suggest reviewing the 25% limit for connected undertakings.
• They recommend a risk-sensitive approach to conversion factors and differentiated treatment for basket products.