EBA欧洲银行-CP16_SlaughterM_22页_183kb

Slaughter and May Submission Summary to CEBS on Large Exposures Rules

Core Content

Slaughter and May, an international law firm with offices in London, Paris, Brussels, and Hong Kong, has submitted a detailed response to the CEBS consultation paper on the review of large exposures rules. The submission outlines the firm's views on the implementation of these rules, emphasizing the importance of flexibility, clarity, and the alignment of supervisory techniques with the needs of individual markets and institutions.

Main Views and Key Points

National Discretions

• Position: Slaughter and May does not agree that CEBS should start with a presumption against the retention of national discretions in the implementation of the Banking Consolidation and Capital Adequacy Directives (recast).
• Reasoning: National discretions can reflect legitimate policy considerations, especially when addressing differences in the development stages of banking markets or when alternative approaches are justified for specific institutions.
• Clarification: They do not oppose the elimination of national discretions where they do not reflect different policy outcomes, particularly if they are based on historical practices.

Definitions of Control and Interconnectedness

• Position: The definitions of "control" and "interconnectedness" should be clear and based on objective criteria.
• Concerns: A subjective test is not suitable for Pillar 1 rules, as the 25% hard limit on large exposures is a regulatory rule, and firms need certainty to comply.
• Recommendation: The firm suggests that the definition of "connected party" should focus on directors, senior managers, auditors, and professional advisors, rather than a vague "network building" test.

Connected Clients

• Agreement: Exposures to connected clients should be aggregated where they constitute a single risk.
• Clarification: Firms should not be burdened with complex systems to comply with this rule, and the review of data collection policies should occur under Pillar 2.
• Concerns: The proposed "dependency or correlation" test is inappropriate and may lead to incorrect aggregation. The firm suggests that a list of connected clients should be deleted or revised to reflect factors that banks may consider, but not a presumption of single risk.

Exposure Value Calculation

• Position: Exposure values should be based on applicable accounting standards and net of accounting provisions and value adjustments.
• Reasoning: Recognizing impairment charges for large exposures purposes is equivalent to a capital charge, which could disincentivize prudent provisioning.

Conversion Factor for Off-Balance Sheet Items

• Position: A 100% conversion factor for off-balance sheet items is unduly conservative.
• Concerns: It could create incentives for banks to accept riskier commitments, and may disadvantage smaller institutions that are not able to apply their own internal estimates.
• Support: The firm supports the use of internal estimates for advanced IRB institutions but cautions against applying a uniform 100% factor for all.

Credit Risk Mitigation (CRM) Techniques

• Position: CRM techniques should be treated the same for large exposures and credit risk.
• Reasoning: Differentiating treatment could lead to material systems costs and may not be prudentially justified.
• Clarification: The firm agrees with Proposal 1 and Proposal 2 but questions the complexity of Proposal 3, which requires separate assessments for credit risk and large exposures.

Physical Collateral

• Position: The firm disagrees with the proposal to exclude physical collateral from large exposures rules.
• Reasoning: There is no clear justification for such exclusion. Criteria like liquidity and market price availability should apply equally to all collateral types.
• Examples: Aircraft, ships, and manufacturing plant are more liquid than commercial property and should be eligible.

Indirect Exposures and Unforeseen Event Risk

• Position: The firm agrees that quantitative criteria for indirect exposures are impractical.
• Recommendation: A stress testing approach is more appropriate for addressing unforeseen event risk.
• Clarification: CEBS should not seek to include reputational risk in the large exposures regime until an internationally agreed methodology is established.

Trading Book vs. Banking Book Exposures

• Position: The firm believes that different rules for trading and banking book exposures are necessary to reflect different risk profiles.
• Benefits: Soft limits for trading book exposures allow flexibility while maintaining prudential safeguards.
• Concerns: The removal of soft limits could have serious adverse effects on investment firms and banks with significant trading book activities.

Blurring of Trading and Banking Book Boundaries

• Position: The firm agrees that prior to Basel 2 and CRD, the blurring of boundaries created incentives to book business in the trading book.
• Recommendation: This issue should be addressed by reinforcing the requirement of trading intent, not by modifying the large exposures regime.
• Conclusion: The firm supports the new trading book definition introduced by the Basel Committee and does not see a need for further changes at this time.

Summary of Costs and Benefits

• Costs:
  • Systems costs for compliance with complex rules.
  • Potential disincentives for prudent provisioning or risk-taking.
• Benefits:
  • Clear and objective definitions for regulatory clarity.
  • Flexibility in risk management for different institutions and markets.
  • Alignment with existing capital adequacy frameworks.

Conclusion

Slaughter and May emphasizes the importance of prudential outcomes over process, and advocates for flexibility, clarity, and market-specific approaches in the implementation of large exposures rules. They support the retention of national discretions where justified, the use of internal estimates for advanced IRB institutions, and the need for objective criteria in defining connected parties and exposures.