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ESBG Summary of Comments on CEBS Consultation Paper on Revised Large Exposures Regime

I. General Remarks

The European Savings Banks Group (ESBG) welcomes the opportunity to comment on the CEBS consultation paper on the revised large exposures (LE) regime. ESBG emphasizes the need for sufficient transition periods and investor protection arrangements, as the proposed guidelines would impose significant administrative burdens on all Member States and credit institutions. Identifying, managing, and monitoring interconnections between borrowers will require substantial resources and costs.

II. Key Issues and Proposals

1. Definition of 'Connected Clients' and 'Interconnectedness'

• Control: ESBG supports the clarification of the control concept, which is central to determining interconnectedness. It believes that control should be based on voting rights, not just capital ownership. A 50% voting quota should generally be considered as control, and institutions should not be required to document the absence of control in such cases.
• Exemption for Government Entities: ESBG welcomes the exemption for subsidiaries of central governments, but suggests that all exposures to central governments (regardless of risk weighting) should be exempt. Also, the exemption for regional and local authorities may lead to issues if their ratings deteriorate.
• Economic Interconnectedness: ESBG believes that the current interpretation of economic interconnectedness is too broad and could result in a substantial reduction of loan granting discretion, especially for small and medium-sized companies and private individuals. It recommends focusing only on mutual dependencies and clarifying that the grouping of clients is based on economic calculations, not all-inclusive.
• 'Repayment Difficulties': ESBG suggests that this term should be interpreted narrowly, focusing on insolvency rather than general repayment issues.
• Sectoral and Geographic Risks: ESBG highlights the need for a clear demarcation between sectoral/geographic risks and idiosyncratic risks. It also questions the inclusion of retail activities in the large exposures regime, as they do not justify the application of such rules.

2. Main Source of Funding

• ESBG considers the interpretation of a common main source of funding ambiguous and confusing. It suggests that the guidelines should be confined to the specific example in paragraph 55 and not applied broadly.
• The current approach may lead to unnecessary administrative efforts and costs, especially for institutions dealing with complex investment structures.

3. Threshold for Large Exposures

• ESBG considers the proposed 1% threshold too low and disproportionately burdensome for institutions, even those with a conservative approach to concentration risk.
• It advocates for a 5% threshold and suggests that for small institutions, a monetary limit of up to €1.5 million could be considered, mirroring the CRD rules for inter-bank exposures.

4. Control and Management Procedures

• ESBG believes that the CEBS paper lacks specific guidelines on control and management procedures, leaving institutions with uncertainty on how to implement them.
• It emphasizes the need for proportionality in the identification process, taking into account the size, complexity, and risk policy of the institution.

5. Flexibility for Schemes

• ESBG argues that the current proposals do not provide sufficient flexibility for institutions to handle different types of schemes.
• It suggests introducing a de minimis limit (e.g., 5%) for granular portfolios, allowing institutions to forgo a look-through and treat the entire construct as an independent client.
• It also recommends the ability to exclude trading book items and regulated investment funds from the look-through process, as they are already subject to other risk management rules.

6. Fall-Back Solutions

• ESBG believes that Approach d) (treating all unknown exposures as a single group) is too conservative and could lead to a universal grouping of exposures, which is not realistic.
• It suggests a differentiated treatment of investment structures and recommends excluding exposures held by 2010 to avoid unnecessary burdens.

7. Treatment of Tranched Securitisation Positions

• ESBG finds the proposed treatment of tranched securitisation positions inappropriate and too restrictive.
• It suggests that all tranches should benefit from credit enhancement provided by junior tranches, regardless of their risk weighting. It also emphasizes the need for precise definitions of transitions between different tranches and uniform regulation of haircuts.

8. Reporting Requirements

• ESBG highlights that the implementation of reporting requirements will be possible only after the completion of the COREP reporting format, which is expected by 2012.
• This creates a gap of at least two years between the implementation of the new rules and the completion of reporting formats, which requires clarification.
• ESBG supports the net exposure calculation and the 10% limit based on equity, but suggests that national discretion should also be allowed.
• It prefers the two-template approach for identifying clients and connected groups and supports the differentiation of guarantees into "unfunded", "funded", and "real estate".

III. Conclusion

ESBG recommends that CEBS should focus on harmonizing the implementation of the revised large exposures regime, while ensuring practical feasibility and proportionality. It urges the introduction of flexibility mechanisms, such as de minimis limits and differentiated treatment of investment structures, to reduce administrative burdens and enhance the efficiency of the large exposures regime.