Remarks of the Hungarian Banking Association on the Potential Changes in Large Exposures

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Secretary General

Remarks of the Hungarian Banking Association on the Potential Changes in Large Exposures Regulation

The Hungarian Banking Association (HBA) appreciates to have the opportunity to make its comment on the European Commission’s working document related to the proposals to introduce some changes in the Directive 2006/48/EC and the Directive 2006/49/EC. We think it is very important that the Commission would be informed about the different views of the market participants in the various Member States. We hope that our remarks can contribute to find the best solution for the issues released for consultation.

The HBA is a member of the European Banking Federation and has participated in the works preparing of the EBF contribution to the potential CRD changes. Generally the HBA shares and supports the detailed opinion of the EBF, therefore here we highlight only some points on large exposure regime, which are particularly important for the Hungarian banking industry.

General remarks

In the Directive 2006/48/EC the large exposure regime regulating the single-name exposures have already become more restrictive by relating the exempted exposures to central governments, central banks, PSEs and regional governments/local authorities to 0% risk weighting. This has been specifically a disadvantage in Member States which country rating is below AA-. Another relevant change was the negligation of the credit risk mitigation for counterparty credit risk in the trading book.

The new proposal of the Commission for the large exposures regime is targeted to eliminate several national discretions, in our opinion is far stricter than would be justified by the market developments. The main reasons are the following:

the elimination of the exemptions for inter-bank exposures;

the elimination of the preferential treatment for off-balance sheet items with 0% and 20% CCF;

As Hungary is one of the Member States, which implemented the option to exempt from the large exposure regime the intra-bank exposures below one year, we are afraid that the proposed new rules limiting the intra-bank exposures could re-shape considerably the inter-bank market. Effects would be very severe for small institutions, which from time to time place relatively large sums on the inter-bank market. Due to the limited number of counterparties, for the small institutions would be very difficult to diversify their placements. In our opinion this could be a problem in other Member States, too. This is why we propose that exposures to or guaranteed by credit institutions in Member States with an original maturity not more than one year should be exempted from the large exposure limits as a general rule.

The elimination of preferential treatment for off-balance sheet items with 0% CCF may have a negative effect on liquidity facilities that are cancellable at any time without prior notice.

As far as credit risk mitigation is concerned we think that guarantees of central governments, central banks and PSEs which are not prompt should also be taken into account, as these kind of guarantees also protect institutions against the final loss.

We think that any kind of significant change in the large exposure regime should be preceded by dynamic quantitative impact studies in Member States in order to test the effects on the market structures, with special regard to small institutions. Such impact studies have not been performed in Hungary and for this reason the real impact on the market and market participants is hard to assess.

Finally, in our opinion depending on the extent of the changes a reasonable transition period is needed, in order to minimise the negative effects of changes in the large exposure regulation.

Remarks in detail

Directive 2006/48/EC

Article 106. 1.

Annex III provides for different methods of exposure calculation. While the original exposure and the marked-to-market method does not take into account the effects of credit risk mitigation, the exposure values by standardised method and the internal model method are calculated including the collateral position, as well. We think that collaterals should be recognised as credit risk mitigation positions for LE purposes both in the original exposure method and the marked-to-market method.

Article 106. 3. - Look-through approach for exposures in securitisation, CIUs and other assets.

Securitisation positions - We suggest to exempt from the look-through approach those exposures, where there are numerous underlying assets and also those ones where the underlying assets are not material for the large exposure calculation.

We think that for many securitisation exposures the look through approach and the identification of indirect exposures would have significant costs, without benefits, especially in those cases where a large number of retail claims have been securitised. Even if in the securitised transaction the number of underlying exposures is limited, in case of the default of one underlying issuer, the loss from indirect exposure would depend on the seniority of the tranche. The proposal make no distinction between the junior and senior tranches.

CIUs – we suggest to abandon the look through approach for CIUs or to restrict is to a few cases, e.g. when the policy of the CIU permits high concentration on single-name issuers.

Even if the credit institution is aware of the underlying portfolio of the CIU by instruments to aggregate indirect exposures with the direct ones would involve significant costs for the banks. Moreover, the portfolio of the CIU is changing day by day. Since the banks get the information on the portfolio of the CIU on the day T+1, when aggregated, the CIU has already another portfolio structure and the indirect exposure for LW purposes may have been already eliminated. We think this kind of indirect risk should be treated under the 2nd Pillar and only if it is material.

Other assets – we suggest to reduce either to abandon or to restrict the looki through approach for specific holdings.

We think most of the items cannot be aggregated for LE purposes either because they do not have credit risk (e.g. other assets, cash), or because they cannot be technically tied to customers. For holdings the look through approach sometimes is viable, sometimes not.

Article 111. 1.

The introduction of an absolute limit of EUR 150mn under which inter-bank exposures should be exempted from the large exposure limit would represent a solution for most of the small and medium sized Hungarian banks, as up to the size of own funds of EUR 600 millions the sum is higher than 25 per cent of own funds. We think, if inter-bank exposures within on year are not exempted entirely from the large exposures limit for small and medium-sized institutions an absolute limit should be considered. However, it is difficult to assess the necessary size of the limit, whether it should be EUR 150 mn or 200 mn or another number. This should be decided on the basis of an impact study. In any case the absolute limit should be indexed and it should be a general rule for all Member States and there should be no national discretion to use different limits.

Article 113. 3. a-d

Exposures to and guaranteed by the Member State’s central government, central bank and PSEs risk-weighted as the central government, in the Member State, where the credit institution is licensed, should be exempted from the large exposures limits even if they are not 0% risk weighted, but the risk weight is lower than 100%.

Article 113. 3. i.

This exemption from the large exposure limits is a general rule in Hungary from the mid-90s. There is a consensus among the Hungarian credit institutions that this exemption should be maintained as it is now, in the text. Our approach is that this rule should be a general one and applied in all Member States.

Article 113. 3. h

We suggest to include in the text the exposures collateralised by the non-subordinated debt securities of the credit institution in question, too. If an exposure is secured by a debt security issued by the credit institution it should be treated in the same way as the exposures collateralized certificates of deposit issued by the same institution, because they are both credit risk-free assets for the issuer credit institution.

Article 113. 3. n

The exemption relates to the exposures on banks, which operate cash-clearing systems for smaller credit institutions. In Hungary this is mainly an issue for saving co-operatives. In our experience the present exemption is not questioned by other banks, and we think this exemption could be maintained as a general rule.

Article 113. 3. t.

We think that off-balance sheet items with 0% conversion factor can be cancelled at any time without prior notice. In case of unforeseen events the credit institution can cancel the facility and hinder the further draw down. Therefore these items do not represent a credit risk, and should not be taken into account when calculating large exposures. We suggest to maintain the present exemption as a general rule.

Directive 2006/49/EC

Article 30. 2.

It is not clear why credit risk mitigation cannot be recognised in the trading book for large exposure purposes, with the exception of the transactions mention in the paragraph. The counterparty risk in the trading book must be calculated using one of the methods of Annex III. in the Directive 2006/48. For OTC derivatives the marked-to-market method (Annex III. Part 3 ) does not take into account the effect of the collaterals, while the standardised method (Annex III. Part 5 ) and the internal model method account for them (Annex III. Part 6 ). The paragraph is discriminative for the majority of the banks registered in Hungary, as they use the marked-to-market method. We suggest that apart from the transactions mentioned in the paragraph, institutions using the marked-to-market method for measuring counterparty risk of OTC derivatives in the trading book, could also take into account the effect of credit risk mitigation for reporting large exposures in the trading book.