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CEBS Paper CP 14 - Large Exposures (LE) Summary

Core Content

The Austrian Federal Economic Chamber (WKO), specifically its Bank and Insurance Division, has provided feedback on the CEBS consultation paper CP 14, which deals with Large Exposures (LE) in the banking and insurance sectors. The comments focus on the regulatory implications, the balance between risk management and operational efficiency, and the need for a level playing field among market participants.

Main Views and Recommendations

1. General Support for the Consultation Paper

• The WKO appreciates the detailed analysis in the consultation paper and the opportunity for the industry to express its views.
• They expect CEBS to continue the dialogue to reach a final outcome that is acceptable to the industry.

2. Concentration Risk and Pillar I

• The WKO agrees with the classification of concentration risk into three categories: undiversified idiosyncratic risk, sectoral and geographic concentration risk, and unforeseen event risk.
• They support the inclusion of the first two aspects in Pillar II (ICAAP/SREP process), but believe that changes in Pillar I are not necessary.

3. Unforeseen Event Risks

• The WKO partially agrees with CEBS's opinion that unforeseen event risks are often due to poor management practices.
• They suggest that market failure could also be a contributing factor, and thus, this should be considered a Pillar II topic.

4. Data Consistency and Competitive Advantage

• The WKO highlights the potential competitive disadvantage for EU institutions if U.S. banks are not required to report all their assets, particularly derivatives.
• They recommend verifying this issue to ensure a level playing field across all market participants.

5. Exemptions and Risk Weighting

• The WKO agrees in principle with the idea of not considering the credit quality of highly rated counterparties in LE limits.
• They suggest maintaining existing exemptions, such as for sovereigns.
• A specific risk weighting for banks is proposed, and further reflection on exemptions for very short-term exposures is recommended.

6. LE Limit of 800%

• The WKO opposes tightening the 800% LE limit, as it would create an unjustified competitive disadvantage for smaller institutions.
• They believe the current limit is well-introduced and should remain unchanged.
• As an alternative, they suggest shifting this limit to Pillar II, especially for larger institutions where it is not significant.

7. Pillar II Consideration

• The WKO recommends that certain topics, such as the use of internal calculation methods, should be addressed under Pillar II to maintain flexibility in risk management.

8. Harmonisation and Risk Weightings

• A harmonisation of the LE regime is seen as a positive step, but only if it does not lead to higher risk weightings for institutions in countries where national discretion is exercised.
• They suggest applying the same conversion factors (CF) across all market participants to ensure consistency.

9. CIU and Purchased Receivables

• The WKO recommends that Central Investment Undertakings (CIUs) and Purchased Receivables should be treated as own LE.
• They suggest that no look-through is necessary if the granularity of the exposure is maintained, such as a 5% limit for a single customer or unit within a CIU or Purchased Receivable.

Key Information

• Commenter: Austrian Federal Economic Chamber (WKO), Bank and Insurance Division
• Date of Comment: 14th of August, 2007
• Contact: Dr. Herbert Pichler, Managing Director, WKO
• Document ID: BSBV 115/Dr.Ru/Dr.Pr/Br
• Relevant Sections: 1–12 of the consultation paper

Conclusion

The WKO emphasizes the importance of maintaining the current LE limit of 800% and ensuring that new regulations do not impose unnecessary administrative burdens on institutions. They advocate for a flexible approach in Pillar II, the preservation of existing exemptions, and a harmonized regime that avoids discrimination based on national discretion. The division also supports the idea of consistent data reporting and internal risk management practices across all institutions.