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Summary of CEBS Public Hearing on Draft Revised Guidelines on Concentration Risk Management (CP31)

Core Content

The Committee of European Banking Supervisors (CEBS) held a public hearing on 12 March 2010 to present its draft revised Guidelines on aspects of the management of concentration risk under the supervisory review process (CP31). The meeting was chaired by Nick Lock, Chair of the CEBS Pillar 2 Convergence Network. Around 35 participants, including representatives from institutions, associations, consultancies, and journalists, attended the session, which featured constructive debate and broad support for the new guidelines.

The guidelines aim to update the previous version from 2006 and complement the principles in GL03. They reflect lessons learned from the financial crisis and introduce a holistic approach to concentration risk management, requiring institutions to identify and assess all aspects of concentration risk—not just credit risk, but also market, operational, and liquidity risks.

Main Points and Key Information

1. Integrated Approach to Concentration Risk

• The draft guidelines emphasize an integrated approach to managing concentration risk across different risk types.
• Institutions must consider both intra-risk and inter-risk concentrations.
• Inter-risk analysis is crucial as it can reveal hidden concentrations that may not be apparent within a single risk category.

2. Role of Guidelines in Regulatory Context

• Attendees raised concerns about the alignment of the guidelines with new regulatory frameworks, such as the BCBS liquidity regime and the EU CRD IV consultation paper.
• CEBS stated it is monitoring developments and will review the guidelines as needed to ensure consistency with any finalized regulatory changes.

3. Diversification and Concentration Risk

• Diversification is seen as a tool for managing concentration risk, but it is not always the best approach, especially for specialized institutions.
• Some concentrations may be inherent to the business model and not necessarily risky.
• The recent financial crisis highlighted that risk correlations can reach 1, reducing the effectiveness of diversification.

4. Governance and Risk Management Framework

• There was discussion on whether concentration risk should be treated as a separate category of risk.
• It was agreed that concentration risk management should be integrated into the overall risk management framework, not require a separate infrastructure or reporting lines.
• CEBS clarified that the guidelines do not advocate for specialized reporting formats or units.

5. Measurement and Capital Considerations

• Concerns were raised about the direct link between concentration and capital add-ons.
• CEBS emphasized that the guidelines are not about setting capital requirements but about improving risk management practices.
• Supervisors are responsible for determining capital adequacy, including any add-ons if necessary.
• Second-round effects were highlighted, where mitigating one risk type could create concentration in another (e.g., reliance on bond insurance).

6. Stress Testing and Identification of Concentration Risk

• Stress testing is recognized as a key tool for identifying hidden concentrations.
• CEBS clarified that supervisors should not conduct separate stress tests solely for concentration risk management.
• Concentration risk should be considered as part of firm-wide stress testing.

7. Cross-Border Banking Groups

• The guidelines are intended for both cross-border groups and stand-alone institutions.
• However, participants requested that the group perspective be more explicitly addressed in the final text.
• There was concern that capital allocations at entity level might conflict with group-level diversification strategies.
• CEBS emphasized the importance of ICAAP-SREP dialogue for cross-border groups and will address diversification in its forthcoming guidelines on joint assessments.

8. Proportionality for Smaller and Regionally Operating Institutions

• Participants acknowledged the proportionality addressed in the draft guidelines.
• They suggested that specialized institutions with concentrated exposure by customer type, product, or funding source should be assessed in a balanced manner.
• Geographical concentration in regional retail banks was noted to be less risky due to local knowledge and expertise.
• The principle of proportionality should be clearly explained in the final guidelines for such institutions.

Final Notes

• Written comments on the draft guidelines were requested by 31 March 2010.
• All comments will be published on the CEBS website unless otherwise requested.
• The final version of the guidelines, incorporating public feedback, was expected to be published by the end of Q2 2010.