EBA欧洲银行-EBA-CP-2016-09-CP-on-Guidelines-on-Connected-Clients_42页_1mb

Summary of EBA/CP/2016/09: Guidelines on Connected Clients under Article 4(1)(39) of Regulation (EU) No 575/2013

Core Content

The European Banking Authority (EBA) issued a consultation paper on updated guidelines for identifying connected clients under Article 4(1)(39) of Regulation (EU) No 575/2013 (CRR). These guidelines are intended to ensure consistency with the CRR and other EBA technical standards, while avoiding overlaps and ensuring prudential risk management for large exposures.

The updated guidelines focus on two types of interconnection:

1. Control relationships
2. Economic dependencies

They also incorporate developments in shadow banking and large exposures at Union and international levels, and are aligned with the Basel Committee's standards from April 2014, but include more detailed provisions.

Main Views and Key Information

1. Control Relationships

• Institutions should use clients' consolidated financial statements to assess control relationships.
• For clients not subject to EU accounting rules (e.g., natural persons, central governments), a non-exhaustive list of control indicators is provided, based on:
  • Accounting indicators
  • The 2009 CEBS guidelines
  • Informal feedback from institutions
• These indicators include:
  • Holding majority of voting rights
  • Ability to appoint/remove majority of administrative, management, or supervisory body members
• The burden of proof is on institutions to show that a control relationship does not imply a single risk.
• The EBA adopts a more prudent approach, recognizing that only in exceptional cases a control relationship does not lead to a single risk.

2. Alternative Approach for Central Governments

• Institutions may apply an alternative approach to assess connected clients for entities directly controlled by or interconnected with central governments.
• This approach is not mandatory, and the EBA provides guidance on its application.
• The central government should always be included in each group of connected clients identified separately for entities directly connected to it.
• The alternative approach is only applicable for natural or legal persons directly connected to the central government, not for further sub-structures.
• Economic dependencies among entities below the central government must still be considered in separate groups of connected clients, even if the central government is excluded.

3. Economic Dependencies

• Institutions must assess economic dependencies even if no control relationship exists.
• Economic dependency may be mutual or one-way.
• The definition of 'single risk' is central: if one client's failure leads to repayment difficulties in another, they are considered connected.
• The EBA reinforces the 2009 CEBS definition, removing the phrase 'substantial, existence-threatening' and retaining only 'repayment difficulties'.
• Common sources of funding are considered, but only if the failure of one client leads to financial contagion.
• The EBA acknowledges the difficulty in identifying economic connections and recommends institutions to increase efforts to identify and document such connections for exposures equal to or above 2% of eligible capital.

4. Grouping and Contagion Risk

• The overarching indicator for grouping is the domino effect, i.e., the contagion risk arising from a single risk.
• This applies regardless of the type of connection (control or economic dependency).
• Institutions must form a single group of connected clients if one client's failure could lead to repayment difficulties in another, even if the latter is not directly dependent on the former.
• Examples illustrate how entities are grouped based on interconnectedness and contagion risk.

5. Scope and Application

• The guidelines apply only to the large exposures regime under Article 4(1)(39) of the CRR.
• Geographical and sectoral concentration risks are outside the scope of the guidelines and are addressed through Pillar 2 of the CRD IV.
• The EBA encourages harmonization of practices and prudent risk assessment.

Key Changes from the 2009 CEBS Guidelines

• Removal of the 'substantial, existence-threatening' phrase, replacing it with 'repayment difficulties'.
• Introduction of a more detailed control indicators list for clients not under EU accounting rules.
• Clarification that control relationships imply single risk, unless proven otherwise.
• Emphasis on economic interdependencies and contagion risk, even in the absence of control.
• Partial application of the alternative approach is allowed for central governments.
• The threshold for considering economic dependencies is 2% of eligible capital, lower than the 5% threshold in the Basel Standards.

Submission and Confidentiality

• Comments must be submitted by 26 October 2016 via the consultation page.
• Institutions must clearly indicate if they want their comments disclosed or treated as confidential.
• Confidential responses may be requested by the EBA in accordance with its rules on public access to documents.
• Any decision not to disclose is reviewable by the EBA's Board of Appeal and the European Ombudsman.

Data Protection

• The EBA complies with Regulation (EC) No 45/2001 on data protection.
• Institutions should be aware of their data protection obligations when submitting comments.

Conclusion

The EBA's updated guidelines aim to ensure consistency, harmonization, and prudent risk management in identifying connected clients. They emphasize control relationships and economic dependencies as key factors for grouping, while introducing flexibility in the alternative approach for central governments. The guidelines also encourage increased documentation and risk assessment for exposures above 2% of eligible capital, and align with the Basel Committee's standards while adding more specific and detailed provisions.