Global

Details

  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 4/22/2014

Tougher rules on large exposures 

Following a consultation paper in March 2013 (read our analysis on this paper), the Basel Committee on Banking Supervision has published its final standards (PDF 250 KB) on measuring and controlling banks' large exposures. These new standards will eventually (by 2019) replace the Basel Committee’s existing standards on large exposures, which date back to January 1991.

The main objectives of the new standards are to:


  • Tighten the reporting and "hard" limits on large exposures, by basing these limits in tier 1 capital rather than total regulatory capital;
  • Define more precisely how exposures should be measured, so the requirements can be applied more consistently across countries; and
  • Introduce tougher limits (15 percent rather than 25 percent) on large exposures between systemically important banks.

This is important for financial institutions because:

Banks may need to change or update their systems to apply the proposed methods for measuring exposures and for reporting large exposures to supervisory authorities.


The tighter limits may restrain the business that some banks can undertake, especially if – as anticipated by the Basel Committee – national authorities extend the 15 percent limit to exposures between a wider range of institutions, including domestic systemically important banks and non-bank SIFIs such as investment firms.


Intra-group exposures are excluded from the new framework, although some banks may face restrictions on such exposures as part of resolution planning and structural separation.

Possible implications for banks

The proposals will add to banks' costs and potentially limit their business activities in six main areas:


  • Banks will have to calculate their large exposures on a more conservative basis, which may differ significantly in some respects from current supervisory requirements, including the calculation of exposures to the providers of credit risk mitigation. This could have major implications for internal data capture and reporting systems – at the same time as firms face operational challenges around risk data aggregation and reporting more generally. The 2019 deadline could therefore prove more challenging than it first appears;
  • Banks will need to report all large exposures above 10 percent of their tier 1 capital base, which is likely to require the reporting of more exposures than under the current approach applied in most jurisdictions. Banks will also need to report large exposures on both a gross basis and net of credit mitigation techniques; and to report large exposures to counterparties to which the "hard" large exposure limit does not apply (including to sovereigns and their central banks);
  • The "hard" pillar 1 limit on large exposures will become a more binding constraint as a result of both the more conservative measurement requirements and a narrowing of the capital base to tier 1 capital;
  • The large exposures of a globally systemically important bank to another globally systemically important bank (and potentially to other SIFIs) will be limited to 15 percent of tier 1 capital. This could constrain the extent to which major investment banks and interdealer brokers can deal with each other, not least as these sectors become increasingly dominated by a small number of firms;
  • Some national authorities may apply more severe approaches than the Basel Committee minimum standards, in terms of both the reporting and “hard” limits, and the extension of the 15 percent “hard” limit to D-SIBs and non-bank SIFIs. For example, the US had earlier proposed a 10 percent upper limit on exposures between G-SIFIs; and
  • Some national authorities are likely to apply large exposure requirements at a solo level on the local subsidiaries of international banks, adding further "localisation" pressures on international banking groups.

Further insights

To discuss the implications further please contact:

Giles Williams

Clive Briault

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