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IBF Comments Summary on CEBS' Second Consultation Paper on Large Exposure Rules

Core Content

The Irish Banking Federation (IBF) has provided detailed comments on the CEBS' second Consultation Paper (CP16) regarding the review of the Large Exposures Rules. The IBF generally supports the CEBS' efforts to align the rules with the credit risk component of the Capital Requirements Directive (CRD), but raises significant concerns about certain proposed changes, particularly those affecting intra-group and interbank exposures.

Main Concerns and Key Points

1. Intra-Group Exposures

• Support for Exemption: The IBF supports the proposal to exempt intra-group exposures between entities in the same Member State from large exposure limits.
• Clarification Needed: There is a need for clarity on the criteria that must be met for such exemptions, as the conditions in Article 69 and 80.7 do not directly overlap, leading to potential inconsistencies in application.
• Impact on Business Models: The proposed restrictions may impact the viability of business models, especially in Ireland, where some subsidiaries act as funding vehicles for their parent and subsidiaries of the parent.
• Parental Guarantees: The IBF notes that parental guarantees are crucial for smaller wholesale banks and warns that the proposed amendments may restrict their ability to use such guarantees, thereby endangering their operations.
• Non-EEA Jurisdictions: The IBF advocates for the same exemption for intra-group exposures between entities in non-EEA jurisdictions, provided they are subject to the same consolidated supervision. A commitment from the parent to provide funding if required is suggested as a safeguard.

2. Interbank Exposures

• Strong Opposition: The IBF is totally opposed to the proposed restrictions on interbank lending.
• Importance of Interbank Lending: They argue that interbank lending is essential for liquidity and that the distinction between interbank and non-interbank lending remains valid due to the transparency and monitoring of banks.
• Liquidity Concerns: Any restrictions on interbank lending could have severe liquidity consequences, especially when combined with intra-group restrictions. The IBF suggests that such concerns should be addressed under Pillar 2 rather than the large exposure rules.
• Maturity Profile Misalignment: The IBF believes that the proposed changes aim to influence the maturity profile of cash flows, which should be addressed in a liquidity framework, not the large exposure rules.

3. Off-Balance Sheet Items

• Wider Exposure Calculation: The IBF supports allowing institutions using the Advanced-IRB approach to use their own exposure calculations for off-balance sheet items.
• Conservative CCF Increase: They oppose the proposed increase of the Credit Conversion Factor (CCF) from 50% to 100% for medium/low risk off-balance sheet items, arguing it is overly conservative and misaligns the credit risk and large exposure rules.

4. Definition of Large Exposure (Connected Clients)

• Clarification of Control and Interconnectedness: The IBF welcomes CEBS' efforts to clarify the definitions of 'control' and 'interconnectedness' but believes the proposed interpretation of 'interconnectedness' is too strict and difficult to apply.
• Mutual Recognition Principle: They emphasize the importance of mutual recognition among regulators to avoid inconsistent treatment of the same counterparty across different jurisdictions.
• Recommendation: The IBF suggests that 'interconnectedness' should remain a principle rather than a strict rule, allowing institutions to determine the connection status of clients.

5. Reporting Issues

• Support for Harmonized Templates: The IBF supports the proposal for a harmonized reporting template across Europe to reduce the reporting burden on institutions.
• Avoiding COREP Approach: They caution against using the most detailed reporting requirements as a starting point, as seen in the COREP package, and suggest some integration with COREP would be beneficial.

Summary of Support

• Trading Book Rules: The IBF supports maintaining the current trading book large exposure rules and opposes the proposal to deduct excess exposures from capital.
• Sovereign Exposures: They support the exclusion of exposures to sovereigns, international organizations, multilateral development banks, and public sector entities from large exposure limits.
• Breach of Limits: The IBF supports the proposal that allows institutions and authorities to agree on an adjustment period for breaches in the banking book.

Conclusion

The IBF's comments reflect a balanced view of the CEBS proposals, supporting some elements while expressing strong concerns over the potential negative impacts of intra-group and interbank exposure restrictions on liquidity, business models, and regulatory consistency. They advocate for a more flexible and institution-specific approach to large exposure management.