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11 December 2009

CEBS publishes its guidelines on the revised large exposures regime – part of CRD II

They cover two areas: the definition of 'connected clients', referring to the concepts of 'control' and 'economic interconnection'. On large exposures of schemes with exposures to underlying assets, CEBS leaves the decision of the approach to the institution.

CESR has published its guidelines in relation to two specific aspects of the revised large exposures regime included in the amended Capital Requirements Directive (CRD). The amendments will have to be transposed into member states’ national law by 31 October 2010 and will be applied from 31 December 2010.

The guidelines published today build on
CEBS’s advice to the European Commission of April 2008.

CEBS developed the current guidelines to cover two areas requiring guidance, with a view to ensuring a harmonised application of the revised regime:

 i) Firstly, the definition of 'connected clients', in particular with reference to the concepts of 'control' and 'economic interconnection'; here, CEBS sees the identification of connected clients as an integral part of an institution’s credit granting and surveillance process, and accordingly calls for a robust process to be in place in order that this identification can be conducted. As CEBS recognises that this could be difficult in practice, a proportionate approach is proposed: that is, the intensive process should be applied only to all exposures that exceed 2% of an institution’s own funds on a solo or consolidated basis. 

ii) Secondly, in relation to the treatment for large exposure purposes of schemes with exposures to underlying assets; for such exposures, a look-through approach, as the most risk-sensitive, would be ideal. However, CEBS recognises that such an approach is not always possible or, indeed, feasible and proposes more conservative approaches as alternatives, leaving the decision on the most appropriate to the institution itself. Taking into account feedback from market participants, CEBS proposes that until 31 December 2015, institutions may treat schemes acquired before the 31 January 2010 according to the treatment of schemes that was required prior to the implementation of the guidelines. Further work will be conducted by CEBS in 2010 on the treatment of tranched products as regards the recognition of the mitigation effect of subordinated tranches.

In developing its guidelines, CEBS has benefited from views gathered from a wide range of market participants. Input was provided in the
industry’s responses to the consultation paper (CP26) published in June 2009 and in a public hearing organised in September 2009. CEBS has considered the feedback received and has revised its initial proposals in order to address the main issues raised by market participants. In addition, these guidelines are supported by a high-level cost/ benefit analysis.

CEBS expects its members to apply the present guidelines by 31 December 2010, at the same time as the revised large exposures regime will come into force. To ensure the harmonisation of practices across Member States, CEBS is considering conducting an implementation study one year after the recommended implementation date.

© CEBS - Committee of European Banking Supervisors

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