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19 June 2015

EBF: EBA consultation paper on Limits on exposures to shadow banking entities

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European Banking Federation supports the idea of minimising uncertainty in the area and mitigating any specific risk arising from significant exposures to shadow banks. However, the EBF would like to highlight some areas of concern in the EBA’s proposed approach.

Definition of Shadow Banking

The proposal and the definition of shadow banking entities is still too wide and nebulous and therefore not only run the risk of creating uncertainty and inconsistency but also putting administrative burden on  financial  institutions  without any proven  added  value.

Furthermore, with the proposed wide definition there might be large companies or group of connected clients with insignificant activity in the shadow banking sector, but still captured by the new requirements due to a total exposure, where the predominant amount is lending to e.g. manufacturing, exceeding the threshold. There ought to be a certain magnitude of sizable bank-like activities for the requirements in the guidelines to apply to.

EBF  considers  that  securitisations  by  non-banks  should  be  excluded  from  large  exposures  to  shadow banking entities.  The level of regulation around securitisation makes this a highly regulated financial product and should therefore be out of scope here.

Large Exposures is not a risk based regime – Pillar 2 is the right place to assess additional risks

Furthermore,  the  EBF  notes  that  the  large  exposures  framework  under  the  CRR  is  not  a  risk-based regime as it does not depend on the client’s risk (the exposure value compared to the 25% limit is not risk weighted). As such, introducing limits on individual exposures based on the client’s risk hampers the “non-risk” principle.

Direct focus on Shadow Banking Risk

Although  EBF  supports  the  need  to  restrict  exposures  to  some  entities,  due  to  the  systemic  risk associated, EBF does not agree with an approach based on stricter limits. In its opinion, the limitation of  exposures  could  reduce,  at  some  extent,  the  systemic  risk,  but  will  not  address or  mitigate  the  true weaknesses of those entities. This can only be achieved through the development of a fundamental and robust regulation designed for shadow banking entities. In this work existing and planned regulatory regimes need to be accounted for. Moreover, attempts to improve transparency of SBE already planned should be acknowledged.

Potential Duplication of Pillar 2 Assessment

In the context of the overall large exposure regime under Part Four of the CRR, Article 395(2) states that the purpose of the guidelines is to set appropriate aggregate limits on large exposures or lower limits on individual exposures to shadow banking entities. However, the draft guidelines plan to set special Pillar 2 requirements which will apply exclusively to exposures to shadow banks. These additional requirements in paras 1 and 2 in Title II are not necessary, in our  view, since they are either  already legally enshrined in the implementation  of the CRD IV rules relating to Pillar 2 or are covered by the EBA’s new SREP guidelines. Moreover, the use of Pillar 2 measures in such a complex context will most probably result in very heterogeneous implementation, thus endangering level playing field among banks operating cross-border.

Need to balance financial stability concerns with financial growth agenda

At  the  same  time,  the  draft  guidelines  in  their  present  form  fail  to  fulfil  a  substantial  aspect  of  the mandate set out in Article 395(2). This tasks the EBA with examining possible adverse implications for the risk profile of European institutions, the provision of credit to the real economy or the stability and orderly functioning of financial markets. This aspect of the mandate, though of key importance, has hardly been reflected in the guidelines.

Individual vs aggregate limits

Furthermore, Article 395(2) of the CRR does not say that different individual limits have to be introduced for each exposure to shadow banking entity; it only mandates EBA to set individual limits.  The mandate neither says that both individual and aggregate limits have to be set. It would be perfectly possible to introduce only one or the other.

Need for higher materiality threshold

Overall the draft guidelines presently do not adequately reflect the fact that the intention of lawmakers in introducing limits to large exposures in Article 395 CRR was to address exposures to clients or groups of clients which exceed 10% of a bank’s eligible capital. With this in mind, the proposed materiality threshold of 0.25% should be substantially raised. In addition it is to say that Article 395 CRR, where the mandate to the EBA is given, is about limits and not about procedures how to treat certain exposures. Procedures like the look through approach are described in Art. 390 CRR.

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