New Criteria Released for Large Exposure Breaches by Banks and Credit Institutions
Banks and credit institutions operating in the EU will need to adjust internals guidelines to take into account new pre-defined criteria issued by the European Banking Authority (EBA) to deal with situations when they exceed the exposure limits to particular clients.
The EBA has updated its guidance on the circumstances in which regulators must assess whether an institution should be granted further time to rectify a breach of the exposure limits set under the EU Capital Requirements Regulation (CRR). The guidelines also provide criteria to determine the appropriate period of time as well as the specific measures to be taken for an institution to comply with a breach of the large exposure limits.
The CRR regime helps to preserve the solvency of financial institutions, and the overall financial system, by attempting to control the degree to which they develop exposures to a single counterparty or connected counterparties. Such an exposure that is equal to or exceeds 25% of the firm’s Tier 1 capital, or €150 million, whichever is higher, constitutes a “large exposure” and is considered an unacceptable risk.
Institutions are required under Article 393 of the Regulation to have sound administrative and accounting procedures and adequate internal control mechanisms.
Such mechanisms should deal with identifying, managing, monitoring, reporting and recording such exposures. In the exceptional case that an institution breaches the large exposure limits, the CRR requires the institution to report the value of the exposure without delay to the competent authority. Where the circumstances warrant it, the institution is granted a limited period of time to comply with such limits.
The guidelines update requirements around reporting requirements to regulators, in the event of a breach of the exposure limit, and detail information to be provided to regulators. They also add criteria to determine the appropriate time to return to compliance and measures to be taken to ensure the timely return to compliance of the institution. The new guidelines, which can be found here, will apply from 1 January 2022.