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Summary of EACB Comments on CEBS's Draft Implementation Guidelines on the Revised Large Exposures Regime (CP 26)

Core Content

The European Association of Co-operative Banks (EACB) has provided detailed comments on the CEBS draft implementation guidelines for the revised Large Exposures (LE) regime. The main focus is on the clarity, practicality, and proportionality of the guidelines, particularly concerning the identification of connected clients, the look-through approach, and the application of thresholds and exemptions.

Main Views and Key Points

1. Transition and Grandfathering

• The EACB believes that the implementation of the new regime will require significant changes in internal procedures, IT systems, and the identification of connected parties.
• A smooth transition should include both transition and grandfathering clauses to ease the burden on banks.
• The implementation date is set at 31 December 2010, and the EACB requests confirmation that the first reporting under the new rules is in 2011.

2. Interpretation of Control

• The concept of control should be based more on factual influence rather than just voting rights.
• A majority of voting rights should establish a presumption of control, unless there is specific evidence to the contrary.
• The EACB disagrees with the presumption that 50% voting rights (especially in equal partnerships) imply control.
• They emphasize that control should only be recognized if the majority of governing or supervisory bodies consists of the same persons, as this would ensure influence over decision-making.

3. Exemption from Grouping Clients

• The EACB supports the exemption for subsidiaries of central governments and exposures to central governments.
• However, they advocate for dropping the reference to 0% risk weight for central governments due to the potential for prudential effects if ratings worsen.
• They argue that public sector enterprises (PSEs) should not be considered connected clients if exposures do not qualify for favorable treatment under the capital adequacy regime.

4. Economic Interconnectedness

• The EACB believes that the concept of economic interconnectedness should be limited to avoid excessive burden on banks.
• They suggest that interconnectedness should only apply to exposures above a certain threshold (e.g., 5%).
• They recommend a minimum exposure amount of €1.5 million for interconnectedness assessments to ensure proportionality.
• Retail portfolios should be excluded from interconnectedness analysis due to their granular nature.
• They propose clarification of what constitutes "substantial difficulties" and suggest the inclusion of both positive and negative examples in the guidelines.

5. Main Source of Funding

• The EACB finds the illustration of a common main source of funding clear.
• They suggest that short-term trading book positions and highly granular portfolios should be excluded from the look-through process to reduce complexity and encourage diversification.

6. Thresholds

• The EACB questions the 1% threshold for large exposures, arguing it is too low and could lead to excessive assessments.
• They propose increasing the threshold to 5% and suggest a minimum of €1.5 million for interconnectedness assessments to prevent overburdening smaller institutions.

7. Control and Management Procedures

• The EACB believes that the current guidance on control and management procedures is limited and should be further elaborated.
• They suggest that connected client identification should only apply to direct or indirect relationships with the bank and that non-customer information should not be accessed without legal basis.

8. Uncertainty in Exposures and Schemes

• The EACB doubts the practical feasibility of the 4-step fall-back approach due to the difficulty in accessing all relevant information.
• They argue that partial look-through could lead to quickly reaching LE limits for unknown client groups.

9. Tranched Securitisation

• The EACB supports the proposed treatment for tranched securitisation, but considers it too conservative and burdensome.
• They suggest excluding ABS with retail underlying from the regime due to their low systemic relevance.
• They also highlight concerns about ignoring protection mechanisms in certain tranches, such as the first loss tranche.

10. Reporting and Templates

• The EACB supports reporting net exposure as proposed.
• They recommend reporting indirect exposures in column 8, as it is fundamentally correct.
• They prefer the 2-Template Approach over the 1-Template Approach due to its lighter reporting burden.
• They question the clarity of reporting instructions, particularly regarding risk typology differentiation and the definition of 'value' in real estate exposure.

11. Additional Recommendations

• The EACB suggests including more detailed information in reporting, but doubts its usefulness.
• They identify a missing code in Template 1 of Annex 4 for intra-group non-credit institutions.
• They advocate for flexibility in handling schemes and exclude UCITS from the LE regime due to their low credit risk.

Conclusion

The EACB emphasizes the need for clarity, proportionality, and practicality in the implementation of the revised large exposures regime. They suggest adjusting thresholds, limiting the scope of interconnectedness, and improving reporting clarity to ensure the regime is both effective and manageable for banks.