ESRB published an opinion on the notification of the French High Council for Financial Stability (HCSF) to extend application period of the macro-prudential measure regarding requirements for large exposures. The measure aims to limit concentration risk with regard to highly indebted large French non-financial corporations or NFCs. HCSF proposed to extend the period of application of the existing measure for one additional year, until June 30, 2021. ESRB opines that the extension of the proposed measure serves as a helpful backstop to ensure risk diversification and safeguard the resilience of the banking system in France.
The measure consists of a tightening of limits for large exposures of French systemically important credit institutions to highly indebted large NFCs that have their registered office in France. The tightened limit requires systemically important French credit institutions to ensure that exposures to highly indebted large NFCs are no greater than 5% of eligible capital. An NFC is to be classified as highly indebted if its ultimate parent company has both a net leverage ratio greater than 100% and its interest coverage ratio is below 3. A credit institution applies the measure to the exposures—where it has an original exposure to the highly indebted NFC or to the group of connected clients to which the highly indebted NFC belongs—equal to or larger than EUR 300 million. This measure had been in force since July 01, 2018, in line with Article 458 of the Capital Requirements Regulation or CRR, and expired at the end of June 2020.
ESRB opines that the proposed extension of the measure does not contradict the overall aim of guaranteeing lending to the real economy throughout the COVID-19 crisis. The extension of the measure does not per se set a limit to the overall borrowing of highly indebted large NFCs, but ensures that individual systemic credit institutions cannot have too large a concentration of their exposures toward any one individual NFC. ESRB, therefore, supports the intention of HCSF to extend the period of application of its stricter national measure. ESRB reiterates that the issues raised in its assessment of the original measure require continued follow-up, as described below, by the French authorities to ensure the effectiveness of the measure and avoid unwarranted consequences:
- ESRB states that close monitoring of the impact of the measure and the evolution of the risk must continue, particularly if the 5% threshold for large exposures were to be frequently breached as a consequence of the COVID-19 pandemic.
- ESRB continues to encourage French authorities to explore alternative options for addressing financial stability concerns, in particular if risks continue to develop unfavorably. These options include, but are not limited to, borrower-based measures and the systemic risk buffer after its sectoral use is permitted.
Keywords: Europe, EU, France, Banking, CRR, Large Exposures, Opinion, Systemic Risk, Basel, HCSF, Macro-Prudential Policy, ESRB
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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