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CEBS Consultation Paper on Large Exposures – Summary

Core Content

The Austrian Federal Economic Chamber (WKO) has provided detailed comments on the CEBS consultation paper regarding the Large Exposures (LE) regime, emphasizing the need for alignment with the Capital Requirements Directive (CRD) while considering the practical implications for institutions.

Main Views and Key Information

General Remarks

• The WKO appreciates the detailed analysis and alternative options presented in the consultation paper.
• They consider the LE regime as a limit-based backstop regime to address unforeseen credit risk events.
• The comments are preliminary and based on the need for further analysis of costs and benefits.

Responses to Specific Questions

Q1

• The WKO supports an amended limit-based backstop regime as the most effective supervisory tool.
• They emphasize the importance of aligning the LE regime with capital requirements and internal risk management, especially for complex banks.
• Proportionality aspects should be considered for non-complex banks.

Q2

• The definitions of "control" and "interconnectedness" are considered appropriate.
• However, the lack of objective criteria for "interconnectedness" remains a concern.
• Clear alignment between the CRD and LE regime is necessary to avoid inconsistencies.

Q3

• On- and off-balance sheet items should be calculated net of accounting provisions and value adjustments.
• Internal approval guidelines may still consider gross exposure, but credit equivalents should be used for derivatives if justified.

Q4

• The WKO supports the use of current conversion factors (CCF) used by member states.
• A 100% conversion factor for all off-balance sheet items is deemed too conservative.

Q5

• A 0% conversion factor for low-risk items is considered adequate and aligned with the CRD.
• Harmonizing conversion factors across the EU would reduce costs for institutions.

Q6

• Conversion factors for undrawn credit facilities should depend on maturity.
• The existing Article 113(3)(t) of Directive 2006/48/EC could be eliminated.

Q7

• Institutions should use their own exposure calculations for LE regulation, in line with their capital requirements and internal steering.
• Advanced IRB institutions should have the same limits and exposure calculations as ordinary institutions.

Q9

• The current treatment of credit risk mitigation is considered appropriate.
• Alignment with the CRD is recommended to avoid disproportionate costs.

Q10

• Some credit institutions support proposal 2 for liquidity reporting.
• Others argue that proposal 1 is more suitable due to lower implementation costs.

Q11

• The WKO shares CEBS' view on the cost-benefit analysis of the three alternatives.

Q12

• The substitution approach could be used by institutions applying the simple method.
• This would help harmonize the LE regime with the CRD.

Q13

• Physical collaterals should be treated in the same way as under the CRD.
• This would reduce costs and not increase unforeseen risk events.

Q14

• Indirect exposures should be treated under Pillar 2 of the CRD, not in the LE regime.
• Stress tests are considered a more appropriate method than limits and reports.

Q15 & Q16

• Smaller credit institutions should treat the banking and trading books differently.
• Larger institutions can apply a single rule for both books.

Q25 & Q26

• The WKO agrees with the proposal to remove national discretion and exempt sovereigns and international organizations from the LE regime.
• This is already implemented in Austria.

Q31

• The current treatment of interbank exposures is considered sufficient.
• Harmonization of risk-weightings across EU member states is recommended.

Q32

• A 25% limit on interbank exposures is acceptable as long as the existing discretions and risk weights are maintained.
• Maturity should not influence the limit.

Q34

• Breach of LE limits should not result in charges, but the excess should lead to a deduction of own funds.
• Option 3 or a combination of option 2 and 3 is recommended.

Q35

• Reporting based on internal reports is acceptable if it does not increase administrative burden.
• Quarterly reporting is preferred.
• A predefined report by supervisors is also acceptable, provided it does not add to the workload.

Q36

• The WKO accepts predefined reporting as long as it does not increase administrative burden.

Q37

• The existing reporting regime is considered sound and appropriate.
• It has already been implemented in Austria.

Q38

• Investment firms in line with the UCITS framework should not necessarily change their own funds requirements.
• If changes are needed, they should be aligned with the UCITS framework.
• Investment management firms are not seen as significant contagion risks due to their structure and risk profile.

Conclusion

The WKO advocates for a harmonized and proportionate approach to the LE regime, emphasizing alignment with the CRD, reduction of national discretions, and the use of internal best practices. They highlight the need for clarity, practical feasibility, and cost efficiency in regulatory design.