The main objectives of the proposed requirements – which update the Basel Committee's 1991 guidelines on large exposures – are to:
The proposals echo the principles on data aggregation and reporting published by the Basel Committee in January this year. The Consultation Paper states that the main purpose of the proposals is to ensure greater consistency in the way banks and supervisors measure, aggregate and control exposures to single counterparties.
The proposals will add to firms' costs and potentially limit their business activities in five main areas:
The Basel Committee proposes that banks should report to their supervisor all their large exposures in excess of 5% of their CET1 capital base, or – if the number of large exposures is fewer than 20 – their largest 20 exposures, irrespective of their size. Large exposures should also be reported both before and after applying credit risk mitigation techniques. Large exposures to counterparties to which the "hard" large exposure limit does not apply (eg. sovereigns, central banks and public sector entities) should also be reported.
The Basel Committee proposes a tightening of its 1991 Guidelines by applying the 25% limit against CET1 capital rather than, as currently, against total capital. On average, this may represent a reduction of around one-third in eligible capital, although this will be offset to some extent by the capital raising undertaken by many banks during the financial crisis.
The Basel Committee proposes that the appropriate large exposure limit on a global SIB's exposure to another G-SIB should be between 10% and 15% of CET1 capital base. This tighter limit is proposed to reduce the risk of contagion occurring between banks whose failure would have the greatest global systemic impact.
In addition, national authorities are encouraged to apply these tighter limits to exposures between domestic SIBs, and to the exposures of smaller banks to G-SIBs and D-SIBs.
It is also noted in the Consultation Paper that the same should apply to exposures to non-bank G-SIFIs, and such a limit might be considered by the Basel Committee in the future.
The Consultation Paper sets out a detailed and conservative approach to the measurement of large exposures. This will also represent a tightening of the 25% limit, by increasing the measured size of some exposures.
The starting point is for banks to capture and measure:
Credit risk mitigation
For credit risk mitigation, the proposed approach is to apply the same minimum requirements and eligibility criteria for the recognition of unfunded credit protection and financial collateral as under the standardised approach for risk-based capital requirement purposes. This is proposed as the most prudent and the simplest and least burdensome option.
Within this approach to credit risk mitigation, the original exposure can be reduced by the post-haircut amount of collateral (where the collateral is of the type recognised for risk-based capital requirement purposes under the standardised approach). For the purpose of calculating large exposures, it is proposed that the haircuts used to reduce the collateral amount would be the supervisory haircuts used under the standardised approach, so internally modelled haircuts could not be used. In addition, banks would have to treat the amount by which the underlying exposure has been reduced due to the existence of collateral as an exposure to the issuer of the collateral in its own right (and add it to any other exposures the bank may have to that issuer for the purpose of large exposures).
The same reporting and "hard" limits would apply to interbank exposures. However, the Basel Committee recognises that banks may face potential constraints here given the different payment and settlement systems they operate in, or in relation to monetary policy implementation. The Basel Committee is therefore seeking evidence to determine whether some exemptions might be needed for (i) intraday interbank exposures and (ii) some overnight interbank exposures.
Investments in securitisations and funds
The Consultation Paper proposes that banks apply a look-through approach (LTA) to identify the underlying assets when they invest in securitisations or investment funds. However:
The Consultation Paper asks for comments on two options for exposures to central counterparties:
The Basel Committee recognises that banks and supervisors would require time to transition to the proposed new large exposures requirements, and therefore proposes that all aspects of its proposals should be implemented in full by 1 January 2019.