Supervisory framework for measuring and controlling large exposures.
Note: This standard has been integrated into the consolidated Basel Framework.
This Basel Committee on Banking Supervision standard sets out a supervisory framework for measuring and controlling large exposures. The framework is scheduled to take effect from 1 January 2019 and will supersede the Committee's 1991 standard on this topic. Since publication of the original standard, the financial system has changed dramatically. While many jurisdictions modelled their national rules after the Committee's 1991 guidance, there have been inconsistent results across jurisdictions due to differences in measures of exposure, measures of capital and numerical limits. The revised framework will help ensure a common minimum standard for measuring, aggregating and controlling single name concentration risk across jurisdictions.
The purpose of large exposure limits is to constrain the maximum loss a bank could face in the event of a sudden failure of a counterparty or a group of connected counterparties and to help ensure the bank remains a going concern. Especially where the bank's counterparty is another bank, large exposure limits can directly contribute towards the reduction of systemwide contagion risk.
The large exposure standard published today includes a general limit applied to all of a bank's exposures to a single counterparty, which is set at 25% of a bank's Tier 1 capital. This limit also applies to a bank's exposure to identified groups of connected counterparties (ie counterparties that are interdependent and likely to fail simultaneously). A tighter limit will apply to exposures between banks that have been designated as global systemically important banks (G-SIBs). This limit has been set at 15% of Tier 1 capital.
This final standard takes into account comments on the Committee's March 2013 proposals.The initial proposal has been revised as follows:
- the definition and the reporting thresholds are now 10% of the eligible capital base (instead of the 5% initially proposed);
- the treatment of a limited range of credit default swaps (CDS) used as hedges in the trading book has been modified so that it is more closely aligned with the risk-based capital framework;
- the initially proposed granularity threshold for exposures to securitisation vehicles has been replaced with a materiality threshold related to the capital base of the bank (calibrated at 0.25% of the capital base); and
- a treatment that recognises particular features of some covered bonds.
The Committee will by 2016 review the appropriateness of setting a large exposure limit for exposures to qualifying central counterparties (QCCPs) related to clearing activities, which are currently exempted. It will also review the impact of the large exposures framework on monetary policy implementation.
The Basel Committee wishes to thank all those who contributed time and effort to express their views during the consultation process.
- Publication Date: April 2014
- Publication Type: Standards
- Publication Status: Consolidated
- Publication Category: Banking Problems
- Number of Pages: 21
- Keywords: Concentration Risk, Risk Exposures, Large Exposures, Risk Concentrations, Connected Counterparties, Credit Risk
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