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Basel Committee issued Final standards to curb exposures of banks to customers

Apr 16, 2014 13:25 IST

The Basel Committee on Banking Supervision on 15 April 2014 issued Final standards for measuring and controlling large exposures of banks to customers. These standards will take effect from 1 January 2019.

The committee consisted of banking supervisors from nearly 30 countries. The committee framed a new rule limiting how much business a bank can undertake with a single customer.

image>Highlights of the guidelines

•    Guidelines were aimed to minimise the risk of fallout from a counterparty going default without imposing excessive burdens on financial firms.
•    The framework was designed so that the maximum possible loss a bank could incur if such a default were to occur would not endanger the bank's survival as a going concern.
•    In cases where the bank's counterparty is another bank, large exposure limits will directly contribute towards the reduction of system-wide contagion risk.
•    The framework will also contribute to strengthening the oversight and regulation of the shadow banking system by extending the scope of coverage to exposures to funds, securitisation structures and collective investment undertakings.
•    The existing rule leaves it to supervisors to impose a 25 percent cap on exposures, meaning each exposure cannot be more than a quarter of the bank's total regulatory capital holdings.
•    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.
•    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 committee planned to review whether a limit should be set on a bank's exposure to clearing houses, currently exempted, which meet new tougher operating standards by 2016.

Besides, the final standard has revised its initial proposals related to measuring and controlling large exposures of banks to customers. These are:

•    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 will recognised particular features of some covered bonds.

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