28 June 2013

ESBG response to the BCBS consultative document "Supervisory framework for measuring and controlling large exposures"

ESBG urges that the stricter large exposure limit between G-SIBs be eliminated from this proposal. Further sanctioning G-SIB transactions may give an incentive to increase exposures to institutions that are not subject to such stringent rules or more opaque counterparties, ultimately jeopardising financial stability.

The Committee welcomes views on the proposed definition of large exposures and on the proposal for reporting

Point 13 sets out that the Basel framework is geared towards internationally active banks. Notwithstanding the foregoing, member countries are entitled to set more stringent standards.

ESBG has concerns regarding this approach. Its reservations are based on two reasons. First, more often than not, at least in the European Union, it is common market practice that the requirements of the Committee will undergo a comprehensive implementation and that their scope of application will cover all banks, meaning that even small- and medium-sized institutions primarily focusing on domestic operations will be affected by the forthcoming provisions. The latter will have a strong impact especially on smaller banks resulting in more restrictive lending decisions by these banks, especially because of the aggregate impact of lowering the large exposures definition limit from 10 per cent to 5 per cent of eligible capital, the limitation of eligible capital to Tier 1 Capital, potentially even to CET1, as well as the fact that the use of real estate collateral would no longer be an option.

Secondly, the feasibility of a level playing field becomes highly unlikely if the stringency with which national supervisors implement the provisions varies between individual jurisdictions. Hence, ESBG would welcome it if the provisions for those financial institutions which are at the centre of the Basel Committee’s focus were understood as uniform standards featuring no discretion for national authorities to adopt a more restrictive regime.

The Committee welcomes views and quantitative information on whether the limit should be based on CET1 or Tier 1

BCBS asks for views on whether Tier 1 or CET1 should be the eligible capital base for the large exposures calculations. With this question, BCBS already eliminates the possibility of using the total regulatory capital currently used by most large exposures legislations, including in the EU. Considering that all the new large exposures measures will substantially increase the exposure value, ESBG can predict quite significant scissor effects already with Tier 1 capital. Tier 1 capital is loss absorbing and the quality of capital instruments is supposed to be improved under Basel III. ESBG strongly favours total regulatory capital as capital base for the large exposures calculation and, at a minimum, Tier 1 capital; CET 1 is too restrictive considering all other measures set out in the large exposures proposal. This would also be in line with the reference chosen by the BCBS for the calculation of the leverage ratio.

The Committee welcomes views on the proposal to generally apply a 100 per cent CCF for “traditional” off-balance sheet commitments

The BCBS consultative document proposes to generally apply a 100 per cent CCF. In ESBG's opinion, the treatment proposed by the BCBS should be in line with the European legislation mentioned above. For this reason ESBG considers that an exception should be included regarding the exposures with 0 per cent CCF in terms of capital requirements in line with the CRR. For example, this could be the case regarding certain products, such as a credit line subject to the approval of the institution on a case-by-case basis.

The Committee welcomes comments on the proposal regarding interbank exposures and in particular in which cases specific exemptions would be warranted

Currently the EU legislation provides exceptions for intraday and overnight exposures. It would however be preferable if also tomorrow next exposures were made exempt. The majority of upcoming payments are known a couple of days in advance. If there was an exemption for tomorrow next exposures, banks would have more room for planning their cash balances in advance, and thereby reduce operational risks.

Full response

© ESBG