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    EBA Consults on Guidelines to Assess Breaches of Large Exposure Limits

    February 17, 2021

    EBA proposed the guidelines that set out criteria to assess the breaches of large exposure limits specified under the Capital Requirements Regulation (CRR). The guidelines contain criteria to determine the exceptional cases, information to be provided to the competent authority in case of a breach of the large exposure limits, criteria to determine the appropriate time to return to compliance with the limits, and measures to be taken to ensure the timely return to compliance of the institution with the limits. The comment period on the proposed guidelines ends on May 17, 2021 and the guidelines are expected to apply from March 01, 2022.

    The proposed guidelines clarify that any breach of the large exposure limits of Article 395(1) of CRR should always be considered as an exceptional case. The guidelines specify that competent authorities should consider whether the breach was a rare event,  whether the institution could foresee the event when it had applied a proper and effective risk management, and whether it was caused by reasons beyond the control of an institution. If the breach does not fulfil these criteria, the competent authority should not grant the institution more than three months to restore compliance with the large exposure limit. The guidelines include a number of criteria that should help a competent authority make a decision regarding the time given to restore compliance:

    • Institution’s record of breaches and its promptness in notifying the breach or the remedial actions to return to compliance
    • Reasons, complexity, and magnitude of the breach
    • Overall financial situation of the institution and the overall risk concentration in the banking book
    • Type of counterparty and its creditworthiness
    • Measures already taken to address the breach

    The proposed guidelines specify that, when an institution is granted more than three months to comply with the limits, it should present a compliance plan to the competent authority with a number of measures as listed in the guidelines. As a general rule, the compliance plan should include arrangements to reduce the exposure, measures to increase the institution’s own funds, arrangements to reinforce internal risk management and control processes, procedures to ensure the timely implementation of the measures, and a detailed timetable to implement the planned measures. The proposal provides guidance from a going-concern perspective. Gone-concern situations in which an institution is in the process of restructuring or undergoes a similar crisis-induced scenario are consequently outside the scope of these guidelines. In such situations, measures are needed that go well beyond restoring compliance with the large exposures framework of the CRR. 

     

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    Comment Due Date: May 17, 2021

    Keywords: Europe, EU, Banking, Large Exposures, CRR, Basel, Competent Authorities, Concentration Risk, Credit Risk, EBA

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