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Summary of LIBA, ISDA, and BBA Response to CEBS CP 26

Core Content

The London Investment Banking Association (LIBA), the International Swaps and Derivatives Association (ISDA), and the British Bankers’ Association (BBA) have submitted a detailed response to the CEBS Consultation Paper CP 26, which outlines draft implementation guidelines for the revised large exposures regime under the Capital Requirements Directive (CRD). The response reflects the views of a subset of their members, primarily large internationally active financial institutions, and also includes input from smaller banks in some areas.

The main concerns of the associations revolve around the interpretation and application of the concept of "connectedness" and the reporting requirements. They emphasize the need for clarity and proportionality in the guidelines, particularly in the context of asset-backed commercial paper (ABCP) conduits and economic interconnectedness.

Main Points and Key Issues

1. Definition of Connectedness

• ABCP Conduits: The associations support the idea that connectedness should be assessed on a case-by-case basis. However, they are concerned that the CEBS guidance may incorrectly generalize the IKB/Rhineland example as typical.
• Key distinguishing factors of well-managed conduits:
  • Diverse underlying assets
  • Disclosure of underlying assets
  • Staggered CP rollover
  • Appropriate credit enhancement and disclosure
  • Robust contractual provisions for asset deterioration
  • Opportunity for transaction restructuring
  • Limited maturity transformation

2. Economic Interconnectedness

• The current guidelines are not clear regarding the interpretation of economic interconnectedness.
• There are significant concerns that the assessment of interconnectedness is too burdensome and practically unachievable for many firms.
• Firms argue that aggregation should not be confused with risk management; instead, they should focus on identifying and mitigating dependencies.
• CEBS guidance should reflect the balance between regulatory soundness and the need for continued lending to corporates, SMEs, and consumers.

3. Reporting Requirements

• The associations question whether the level of detail requested for connected clients is necessary.
• They seek clarity on how supervisors intend to use this information.
• The requirement for a single national coding system is viewed as unnecessary and potentially inefficient.

CEBS Guidance on Article 106(2)(c) and (d)

• The consultation does not include guidance on exemptions from the large exposures regime under Article 106(2)(c) and (d).
• The associations request clarification on when CEBS intends to consult on this area.

Consultation Questions

III. Connected Clients

A. Definition of a group of connected clients

• The guidelines are generally clear, but there is a need for further clarification regarding the interpretation of control.
• Concerns are raised about the 'unless it is shown otherwise' wording in relation to private equity, suggesting that a single general partner does not necessarily imply control.

B. Interpretation of economic interconnectedness (single risk)

• The guidelines are not clear and may lead to an overly restrictive application of the connectedness criterion.
• The associations argue that the current interpretation could lead to a reduction in lending to entities where information is not readily available.
• They suggest that 'all reasonable efforts should be made' to assess interconnectedness.

C. Application of the funding criterion

• The funding criterion is not clear and may apply beyond its intended scope.
• The associations are concerned about the potential procyclicality introduced by the large exposures regime.
• They argue that the criterion should only apply when counterparties are reliant on a single funding source and cannot absorb higher costs of switching to alternatives.

5. Proposed 1% Threshold

• The 1% threshold is considered too low for both solo and consolidated levels.
• A higher threshold, such as 3% or 5%, is recommended.
• The associations suggest that 3% may be more acceptable, and a de-minimus threshold could be considered for look-through requirements.

IV. Treatment of Exposures to Schemes with Underlying Assets

• The associations are concerned that the fall-back solutions (approaches b) to d)) may be too conservative, particularly approach d), which treats all unknown exposures and schemes as a single connected group.
• They argue that this would have a disproportionate impact on smaller institutions.
• A de-minimus threshold (e.g., 5%) could be considered for look-through requirements to avoid unnecessary aggregation.
• The partial look-through approach is seen as a middle ground but is not widely adopted in practice due to the complexity involved.
• The mandate-based approach is not feasible in the current context and lacks clarity on how it would work for large exposures purposes.

Conclusion

The associations emphasize the need for practical, proportionate, and flexible guidelines that reflect the real risk and operational realities of financial institutions. They advocate for case-by-case assessment of connectedness, transparent disclosure, and reasonable effort requirements to avoid unnecessary burden on firms. The guidance should also align with risk management practices and support continued access to funding, especially for SMEs and other creditworthy entities.