Response to consultation on Guidelines on limits on exposures to shadow banking
Go back
Moreover, to the extent the EBA adopts a broad definition of “shadow banking entities,” we are concerned that the proposed 25% aggregate limit could have unintended consequences for capital markets. Given the wide range of entities to which the EBA’s limit would apply, we believe imposing a bright line aggregate limit could adversely affect capital market liquidity, a result inconsistent with the EU’s CMU project. We also are concerned that reducing market liquidity could increase, rather than reduce systemic risks, by decreasing the existing resiliency and ability of capital markets to withstand stress because of the depth and variety of capital markets participants. As such, to the extent the EBA does adopt limits to shadow banking entities, we believe the limits should be based on a risk-based framework.
Banks and investment firms are already subject to robust prudential and risk management requirements, including risk-weighted capital requirements under CRD IV. They should also be sophisticated enough and have sufficient information available to make the relevant risk assessments in the vast majority of cases.
Imposing mandatory quantitative limits may have the unintended adverse consequence of leading some banks and investment firms to invest in riskier and less diversified asset classes simply on the basis that they feel more able to justify to regulators that they have collected the appropriate information on the relevant entities to comply with the conditions of the principal approach.
If the EBA does decide to implement the fallback approach in spite of these potential drawbacks, Option 2 would be a more proportionate approach than Option 1 as it at least permits risk assessment for entities. However, this is not an optimal solution as it may lead to some entities being arbitrarily subject to much higher limits than others.
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.
No comment.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.
No comment.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 discussed above, the definition of “shadow banking entities” should not include hedge funds or their managers. However, if the EBA formulates the definition in the manner it proposed, we submit that the criteria that institutions should take into account in setting individual limits on exposures to shadow banking entities should be more heavily weighted towards entities that have deposit-like funding structures or entities which require a public or private backstop to operate (see our response to Question 1 above).Moreover, to the extent the EBA adopts a broad definition of “shadow banking entities,” we are concerned that the proposed 25% aggregate limit could have unintended consequences for capital markets. Given the wide range of entities to which the EBA’s limit would apply, we believe imposing a bright line aggregate limit could adversely affect capital market liquidity, a result inconsistent with the EU’s CMU project. We also are concerned that reducing market liquidity could increase, rather than reduce systemic risks, by decreasing the existing resiliency and ability of capital markets to withstand stress because of the depth and variety of capital markets participants. As such, to the extent the EBA does adopt limits to shadow banking entities, we believe the limits should be based on a risk-based framework.
5. Do you agree with the fallback approach the EBA has proposed, including the cases in whichit should apply? If not, please explain why and present possible alternatives. Do you think that Option 2 is preferable to Option 1 for the fallback approach? If so, why? In particular: Do you believe that Option 2 provides more incentives to gather information about exposures than Option 1? Do you believe that Option 2 can be more conservative than Option 1? If so, when? Do you see some practical
We respectively submit that the fallback approach is unlikely to serve as an effective risk management tool. Our main concern with the approach is that it is a relatively blunt method of addressing the perceived risks.Banks and investment firms are already subject to robust prudential and risk management requirements, including risk-weighted capital requirements under CRD IV. They should also be sophisticated enough and have sufficient information available to make the relevant risk assessments in the vast majority of cases.
Imposing mandatory quantitative limits may have the unintended adverse consequence of leading some banks and investment firms to invest in riskier and less diversified asset classes simply on the basis that they feel more able to justify to regulators that they have collected the appropriate information on the relevant entities to comply with the conditions of the principal approach.
If the EBA does decide to implement the fallback approach in spite of these potential drawbacks, Option 2 would be a more proportionate approach than Option 1 as it at least permits risk assessment for entities. However, this is not an optimal solution as it may lead to some entities being arbitrarily subject to much higher limits than others.