Response to consultation on Guidelines on limits on exposures to shadow banking
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In terms of assessment of risks arising from shadow banking entities, it is important that the principle of materiality is introduced here; “all potential risks” and “potential impact of those risks” is too broad. This will not only make it difficult for firms to identify all potential risks arising from those exposures, there would not be a consistent application across the industry.
It is also important that the requirement for establishing effective process and effective mechanisms should be applied on a consolidated basis only, so as to be consistent with firms’ approaches to systems and control more generally and to ensure that the requirement is not disproportionately burdensome.
We would also note that the EBA mandate for developing these guidelines as set out in CRR explicitly notes refers to setting either aggregate or individual limits; in proposing both aggregate and individual limits, in our view, the draft Guidelines go significantly beyond the CRR mandate. We strongly believe that aggregate limits should not be introduced and urge the EBA to reverse its proposal in this respect.
2. Do you agree with the approach the EBA has proposed for the purposes of establishing effective processes and control mechanisms? If not, please explain why and present possible alternatives.
Although we support the approach taken to allow firms to rely on their own internal framework and risk appetite to set internal limits we do not in general support aggregate limits as we do not consider this a sectoral risk. This could be better addressed via ICAAP/Pillar 2, which specifically covers concentration risk rather than the large exposure regime which is intended to address default of single/groups of connected counterparties.In terms of assessment of risks arising from shadow banking entities, it is important that the principle of materiality is introduced here; “all potential risks” and “potential impact of those risks” is too broad. This will not only make it difficult for firms to identify all potential risks arising from those exposures, there would not be a consistent application across the industry.
It is also important that the requirement for establishing effective process and effective mechanisms should be applied on a consolidated basis only, so as to be consistent with firms’ approaches to systems and control more generally and to ensure that the requirement is not disproportionately burdensome.
3. Do you agree with the approach the EBA has proposed for the purposes of establishing appropriate oversight arrangements? If not, please explain why and present possible alternatives.
While we broadly agree with the principles established in Title II section 2, the guidelines should adopt a phased implementation approach to avoid potential macro systemic risks if banks are not in a position to use the principle approach on 1st January 2016. This would give banks time to undertake an internal assessment for data enrichment in order to meet the principle approach.4.Do you agree with the approaches the EBA has proposed for the purposes of establishing aggregate and individual limits? If not, please explain why and present possible alternatives.
As per our comments above, we question the need for a ‘fall back’ approach, and ask the EBA to conduct an impact study.We would also note that the EBA mandate for developing these guidelines as set out in CRR explicitly notes refers to setting either aggregate or individual limits; in proposing both aggregate and individual limits, in our view, the draft Guidelines go significantly beyond the CRR mandate. We strongly believe that aggregate limits should not be introduced and urge the EBA to reverse its proposal in this respect.