Large exposures standard – Executive Summary

Largeexposuresstandard–ExecutiveSummary In2014,theBaselCommitteeonBankingSupervision(BCBS)issuedthelargeexposures(LEX)standard,whichseekstomonitorandlimitthelossthataninternationallyactivebankcanfacefromasingleclientorfromagroupofconnectedcounterparties.Thestandardcameintoforceon1January2019. ObjectivesoftheLEXstandard TheLEXstandardispartoftheBaselIIIreformpackagethatcomplementstheBCBS’srisk-basedcapitalframeworktoachievethe: microprudentialobjectiveofservingasabackstoptotherisk-basedcapitalregimebyprotectingbanksfromincurringlargelossesfromthedefaultofasinglecounterpartyorgroupofconnectedcounterparties macroprudentialobjectiveofsupportingeffortstomanagesystemicrisksbyreducingtheinterconnectednessbetweensystemicallyimportantbanks Minimumrequirements–thelargeexposurelimit Alargeexposureisdefinedasthesumofallexposurevaluesofabanktoasinglecounterpartyortoagroupofconnectedcounterpartiesthatareequaltoorabove10%ofitsTier1capital. Theminimumrequirements,iethe“largeexposurelimits”oftheLEXstandard,areasfollows: Thesumofallexposurevaluesofabanktoasinglecounterpartyortoagroupofconnectedcounterpartiesmustnotbehigherthan25%ofthebank’sTier1capitalatalltimes. Foraglobalsystemicallyimportantbank(G-SIB),amorestringentlimitisimposed–aG-SIB’sexposuretoanotherG-SIBmustnotexceed15%ofitsTier1capital. Ifthelimitsarebreached,immediatereportingtothesupervisorandrapidrectificationare required. Levelofapplicationandscopeofcounterparties TheLEXstandardisapplicableateverytierwithinabankinggroup.Abankmustconsiderallexposurestothirdpartiesacrosstherelevantregulatoryconsolidationgroupandcomparetheaggregateofthoseexposureswiththegroup’sTier1capital. SomecounterpartiesareexemptedfromtheLEXstandard: sovereignsandentitiesconnectedwithsovereigns,includingtheircentralbanks exposurestoqualifyingcentralcounterpartiesrelatedtoclearingactivities intradayinterbankexposures(toavoiddisruptingpaymentandsettlementprocesses) Banksmustconsiderexposuresforlargeexposurespurposesevenwhenthereisastructure(afundorsecuritisation)betweenthebankandtheexposures. Connectedcounterparties UndertheLEXstandard,whenanumberofcounterpartieshavespecificrelationshipsanddependenciessuchthatafailureofoneofthecounterpartiescouldleadtocascadingfailuresoftherest,thelargeexposurelimitappliestothecumulativeexposurestothegroupofconnectedcounterparties. TheLEXstandardspecifiesthattwopartiesareconnectedifatleastoneofthefollowingcriteriaissatisfied: acontrolrelationship,whereoneofthecounterpartieshasdirectorindirectcontrolovertheother economicinterdependence,where,ifoneofthecounterpartiesweretoexperiencefinancialproblems,suchasfundingorrepaymentdifficulties,theotherwouldalsoencounterfinancialdifficulties Exposuremeasurement Allexposuresasdefinedundertherisk-basedcapitalframeworkaresubjecttotheLEXstandard.Theseincludeon-andoff-balancesheetexposuresinboththebankingandtradingbooks,andinstrumentswithcounterpartycreditriskundertherisk-basedframework.Toreducecomplexity,theLEXstandarduses,wherepracticable,thesamevalueofexposuresastherisk-basedcapitalframework.Ingeneral,theexposurevaluesarebasedontheaccountingvalueoftheexposure. Inthebankingbook,on-balancesheetexposurevaluesarebasedonaccountingvalues.Off-balancesheetexposuresareconvertedtocreditexposureequivalentsusingcreditconversionfactorsasdefinedinthestandardisedapproachforcreditrisk. Inthetradingbook,exposurevaluesaremeasuredconsistentwiththemarketriskframeworkwithanexceptionforoptions.Foroptions,theexposurevaluesarebasedonchangesinoptionpricesthatwouldresultfromadefaultoftherespectiveunderlyinginstrument. Examplesofspecificexposuremeasurementsinclude: coveredbonds–lowerexposurevalue(butnolessthan20%ofnominalbondholding)ifthebondssatisfycertainconditions over-the-counterderivativessubjecttocounterpartycreditrisk–valuedastheexposureatdefaultaccordingtothestandardisedapproachforcounterpartycreditrisk securitiesfinancingtransactions(SFTs)–accordingtothemethodimplementedforcalculatingrisk-basedcapitalrequirementsforSFTexposuresbefore2019oraccordingtotherevisedcomprehensiveapproachandsupervisoryhaircutswithminimumfloors(ifthesewereintroducedbefore2022) Eligiblecreditriskmitigation Creditriskmitigationtechniquesthatmeettheminimumrequirementsandeligibilitycriteriaasdefinedunderthestandardisedapproachforcreditriskcanalsobeusedtoreduceexposurevaluesforlargeexposurespurposes.Forexample: forbothunfundedcreditprotection(ieguaranteesandcreditderivatives)andfinancialcollateral,abankmustreducetheexposurevaluebythevalueoftheprotectedorcollateralisedportionoftheexposure,subjecttoapplicablehaircuts abankcanoffsetlongandshortpositionsinthetradingbookiftheissuer,coupon,currencyandmaturityareidentical.However,nettingacrossthebankingandtradingbooksisnotpermitted hedgedexposureswithamaturitymismatch–recognisedonlywhentheoriginalmaturityisgreaterthanoneyearandtheresidualmaturityisgreaterthanthreemonths Regulatoryreporting Banksmustreporttothesupervisoryauthority: allexposureswithvaluesequaltoorabove10%ofthebank’sTier1capital all