EBA published an opinion after the French macro-prudential authority, the Haut Conseil de Stabilité Financière, or HSCF, notified EBA about its intention to extend, for a second time, a measure introduced in 2018 to safeguard the resilience of systemic institutions from excessive risk-taking and to prevent the build-up of future vulnerabilities. The measure intends to tighten, for French global or other systemically important institutions (G-SIIs or O-SIIs), the large-exposure limits applicable to large and highly indebted non-financial corporations or groups of connected non-financial corporations that are assessed to be highly indebted. Based on the evidence submitted, EBA does not object to the extension of the proposed measure, which will be applied for two years from July 01, 2021 to June 30, 2023.
With the application of this measure, French systemically important institutions should not have individual exposures exceeding 5% of their tier 1 capital for non-financial corporations or for groups of connected non-financial corporations assessed to be highly indebted and resident in France. The 5% limit will act as a backstop to safeguard these institutions from excessive risk-taking and prevent the build-up of future vulnerabilities. In the opinion, EBA acknowledged that the measure helps promote financial stability and prevent future systemic shocks to the French and EU economies by shielding individual systemically important lenders from idiosyncratic corporate defaults. In light of the increase in corporate indebtedness following the COVID-19 pandemic, EBA encouraged the French authorities to closely monitor the developments during the application horizon of the measure and to be vigilant about any unintended consequences on credit supply. The proposed two-year extension of the period of application of the measure comes after an unprecedented shock following COVID-19 while uncertainty still surrounds the economic outlook.
During this time, total credit to the non-financial corporations sector increased substantially while leverage in the non-financial corporations sector remained elevated. Large non-financial corporations face a further deterioration of their relative equity position and interest coverage ratio as a continuation of the trend observed before the pandemic. Against this backdrop, the considerations regarding corporate indebtedness, which led the HCSF to enact the measure in 2018 and extend it in 2020, remain relevant. As mentioned already, EBA does not object to the two-year extension of the period of application of the current measure. However, according to the figures provided by the HCSF, the number of large firms breaching both net leverage and interest coverage ratio thresholds increased over 2019. These indicators of firms’ health, but also the number of firms breaching the thresholds for indebtedness, are expected to deteriorate further, as confirmed by an additional simulation provided by the HCSF. In light of the above, EBA encourages French authorities to closely monitor the developments during the application horizon of the measure and to be vigilant about any unintended consequences on credit supply.
Keywords: Europe, EU, France, Banking, Large Exposures, G-SII, O-SII, COVID-19, Systemic Risk, Credit Risk, Regulatory Capital, HSCF, Basel, Macro-Prudential Policy, EBA
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