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EAPB Comments on CEBS's Draft Implementation Guidelines on the Revised Large Exposure Regime

Core Content

The European Association of Public Banks (EAPB) has provided detailed feedback on the CEBS draft implementation guidelines for the revised large exposure regime. The EAPB represents 34 public banks, funding agencies, and associations across Europe, collectively managing a balance sheet of approximately EUR 3,500 billion and employing around 190,000 people. The main concerns of the EAPB relate to the practicality, clarity, and prudential appropriateness of the proposed guidelines, particularly in terms of implementation costs, flexibility, and the treatment of certain financial instruments.

Main Views and Key Points

A. Connected Clients

• Clarification on "Control": The EAPB welcomes further clarification on the concept of control but suggests that the guidelines should focus on the majority of voting rights rather than voting rights in shares. They also express concerns about the proposed indicators of control due to the diversity of EU company laws and the lack of prudential need for such indicators.

• Exemption for Government Entities: The EAPB supports the exemption for subsidiaries of central governments and regional/local authorities but argues that the exemption should apply to all such entities, not just those with a 0% risk weight. They also propose a grandfathering solution for existing credits to these authorities.

• Economic Interconnectedness: The EAPB is concerned about the practical implementation of one-way economic interconnectedness, as it could significantly restrict lending to SMEs and increase operational costs. They suggest that only mutual dependencies should be considered and that a mandatory list of criteria should be introduced to avoid legal uncertainty.

• Threshold for Large Exposures: The EAPB supports the introduction of a threshold but recommends a 5% threshold instead of the proposed 1%, to reduce administrative burden while maintaining the regime's effectiveness.

• Control and Management Procedures: No specific comments were provided on this section.

• Article 4(45) Interpretation: No specific comments were provided on this section.

B. Treatment of Exposures to Schemes with Underlying Assets

• Look-Through Principle: The EAPB believes that the look-through principle should apply only to positions originated on or after 31 December 2010. They also suggest that repeated look-throughs should only be required after an adequate period, such as quarterly, to avoid excessive administrative burden.

• Flexibility for Institutions: The EAPB argues that the current proposals lack the necessary flexibility and that institutions should not be forced to look through all schemes. They propose a de-minimis rule for granular portfolios and suggest that trading book positions and UCITS funds should be excluded from the look-through requirement.

• Fall-Back Solutions: The EAPB considers the proposed four-level hierarchy adequate but finds approach d) (unknown exposures) too conservative. They suggest that non-granular securitisation positions should be treated as independent clients with elevated weightings.

• Tranched Securitisation Positions: The EAPB supports the treatment of subordinated tranches as credit enhancement but believes the current approach is not suitable for all products. They recommend flexibility to deviate from the proposed treatment where appropriate.

• Exclusion of Schemes: The EAPB suggests that schemes with solvency-proof agreements should not require a look-through, as institutions have an entitlement to restitution of underlying assets in case of insolvency.

C. Reporting Requirements

• Reporting Timing: The EAPB urges CEBS to clarify that the transposition of reporting requirements is only possible after the COREP reporting framework is fully developed and implemented, which is expected by the end of 2012.

• Net Exposure and 10% Limit: No specific comments were provided on these aspects.

• Credit Linked Notes: The EAPB questions whether indirect exposures from Credit Linked Notes should be reported in column 8 or column 5, as they did not arise from substitution.

• Reporting Templates: The EAPB prefers the "2-Templates-Approach" for identifying clients or groups of connected clients.

• Collateral and Guarantee Information: The EAPB suggests that more detailed information on collateral and guarantees could be included in the reporting, provided it does not become overly burdensome.

• Counterparty Identification: No specific comments were provided on this section.

• References to COREP: No specific comments were provided on this section.

Conclusion

The EAPB emphasizes the need for clarity, flexibility, and practicality in the implementation of the large exposure regime. They stress the importance of providing sufficient implementation deadlines and grandfathering provisions to ease the transition for institutions. Additionally, they advocate for a more nuanced approach to identifying connected clients and the treatment of schemes with underlying assets, particularly in the context of securitisation and UCITS funds.