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BBA Summary on CEBS Consultation Paper CP16: Large Exposures

Core Content

The British Bankers Association (BBA) has submitted a response to the CEBS consultation paper on the second part of its technical advice on large exposures (CP16), specifically on behalf of its members with small capital bases. These banks typically use the standardised approach to credit risk and are concerned about the potential adverse effects of the proposed changes on their operations.

Main Concerns and Key Points

1. Interbank Exposures (IBE)

• Exemption for short-term IBE: The BBA argues that the current exemption for IBE with maturities less than 12 months should remain, as there is no practical evidence of market failure due to such exposures.
• Micro-level implications: The proposed changes could have a significant negative impact on smaller banks, increasing operational and credit risks, and potentially driving them out of business.
• Costs and operational challenges: Smaller banks would face high administrative and system costs to comply with new IBE limits. They would also be forced to engage with lower-rated counterparties, increasing credit risk.
• Liquidity management: A 25% limit on all IBE could severely affect liquidity management for smaller banks, especially given the minimum deposit requirements of creditworthy institutions.
• Need for review extension: The BBA urges the Authorities to extend the review period to allow for more detailed and micro-level analysis, ensuring that the regulatory response is proportionate and effective.

2. Intra Group Exposures (IGE)

• Scope of LE regime: BBA members believe that IGE should not fall under the LE regime, as it is not designed to address post-insolvency risks.
• Reputational and operational risks: Supporting a group member during stress is essential for maintaining the bank's reputation and avoiding more severe consequences.
• Regulatory burden: Imposing IGE limits could disproportionately affect smaller banks that rely on parental guarantees to remain competitive.
• Regulatory tools: The BBA suggests that other regulatory tools, such as the winding-up directive and deposit guarantee schemes, should be used to address post-insolvency issues rather than extending the LE regime.

3. Definition of Interconnectedness

• One-size-fits-all approach: The BBA emphasizes that a uniform definition of interconnectedness is not suitable for smaller banks, which often operate in niche sectors or specific geographical areas.
• Case-by-case analysis: They recommend that the definition and treatment of interconnectedness should be addressed through case-by-case discussions, as is already the case in Pillar 2 of CRD.
• Regulatory burden: The current CBA analysis is too macro-level and fails to consider the specific implications for smaller banks, which could lead to an ill-conceived regulatory outcome.

Concluding Remarks

• Proportionality and clarity: The BBA stresses the importance of proportionality in regulatory decisions and calls for a more nuanced and detailed analysis of the implications of the proposals.
• Need for extended review: They urge the CEBS and the Commission to reconsider the timeline for the review, allowing for a more comprehensive and considered regulatory response.
• Support for Better Regulation: The BBA supports the Commission's Better Regulation initiative, which aims to use the "right regulatory style" and minimize unnecessary burdens.
• Impact on the banking sector: The BBA warns that the proposed changes could lead to a contraction in the banking sector, particularly for smaller banks, and reduce the availability of specialist services for customers.

Key Recommendations

• Maintain IBE exemption for short maturities: Due to the lack of practical evidence of market failure and the high costs of compliance.
• Avoid one-size-fits-all regulations: Encourage case-by-case analysis, especially for interconnectedness and IGE.
• Extend review period: Allow for a more detailed and micro-level assessment of the implications of the proposals.
• Reconsider the role of creditworthiness: Ensure that credit quality remains a key factor in LE risk management.
• Include sunset and escape clauses: To provide flexibility in the event of adverse outcomes from the proposed changes.

Summary of Concerns

• Disproportionate impact: The proposed changes would disproportionately affect smaller banks, potentially leading to their closure and loss of specialist services.
• Inadequate analysis: The CBA analysis is too simplistic and fails to account for the unique challenges faced by smaller banks.
• Liquidity and operational risks: Increased IBE and IGE limits could lead to liquidity issues, higher operational costs, and reduced competitiveness.
• Need for dialogue and consultation: The BBA calls for more meaningful consultation with stakeholders, especially smaller banks, to ensure that regulatory changes are well-informed and proportionate.

Final Statement

The BBA emphasizes that the proposed changes to the large exposures regime, particularly those affecting IBE and IGE, have significant practical implications for smaller banks. They urge the CEBS and the Commission to take these concerns seriously and to delay the review period to allow for a more thorough and balanced analysis.