Response to consultation on Guidelines on limits on exposures to shadow banking

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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.

We broadly agree with EBA’s approach. However, we think that a reference to the principle of proportionality should be introduced because the shadow bank entities are very different in nature. Some exposures warrant very high levels of due diligence, whereas other exposures could easily be demonstrated to be less risky and less complex. The intensity and frequency of monitoring carried out should vary accordingly.

But again, we think that the definition of shadow banking entities is not yet accurate and practicable (cf. our answer to Q1). If unchanged, this would lead to too many exposures being subject to the control mechanisms under Title II point 2. of the draft Guidelines.

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.

Loans to shadow banking entities carry different degrees of shadow bank-specific risks. There is a difference between monitoring the management of exposures to, e.g., an unregulated SPV conduit on the one hand and a big retail AIF under EU and national legislation and supervision on the other hand.

So we would like to propose not to force credit institutions to use a “one size fits all”-approach, which could lead to underestimating risk for the risky and over-allocation of risk management resources to the less risky exposures, but to introduce a reference to proportionality as regards the size and nature of the exposures concerned, relative to the credit institution’s overall exposures and business model.

Furthermore, as long as the definition of shadow banking entities is too broad (cf. our answer to Q1), the oversight arrangements will cover too many exposures, distracting the risk management’s resources from the risky ones.

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.

We agree with the approaches to setting aggregate and individual limits on exposures to shadow banking entities. Especially, we welcome the principle of proportionality being reflected in this approach.

However, at the current stage the definition of shadow banking entities is too broad (cf. our answer to Q1). This results in unnecessary additional burden in establishing aggregate and individual limits for exposures which could more suitably and proportionately be treated within the regular risk management process.

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

Prior to discussing which of both options would be more conservative, it has to be made sure that both are in line with CRR. We think that this is not the case.

Option 1 does not reflect the basic presumption of the large exposure regime that limits can be set both on the aggregate level of all exposures concerned and/or on the individual level of each exposure. There is no way of interpreting the CRR as to allow for one exposure due to its characteristics “infect” another exposure so that the credit institution would be punished for having one “bad” exposure in the portfolio which then leads to a penalty for some or all other exposures.

This is also clearly not in line with the principle of proportionality, for a very small exposure could lead to a massive disadvantage with regard to large exposures which do not pose any problems.

Therefore, Option 1 has to be rejected and Option 2 chosen.

6. Taking into account, in particular, the fact that the 25% limit is consistent with the currentlimit in the large exposures framework, do you agree it is an adequate limit for the fallback approach? If not, why? What would the impact of such a limit be in the case of Option 1? And in the case of Option 2?

Unfortunately we are in doubt whether the 25% limit is consistent with the current large exposure framework. Under Art. 395 (1) CRR credit institutions are allowed to allocate exposures up to 25% of eligible capital to one client or a group of connected clients, irrespective of the client’s nature or business. This is an unalterable decision by the legislator. There is no way of setting a quantitative limit to exposures to shadow banking entities below that 25%-limit without infringing the CRR. As the limit of 25% for shadow banking exposures is planned to cover all relevant exposures altogether, this means that on a single exposure level the limit would be decreased below the threshold set forth in Art. 395 (1) CRR.

If the definition of shadow banking entities is not changed, the 25% limit does not take into account the current situation of foreign banks in the EU and their exposures to other group institutions located in non-EEA countries. Foreign banks in the EU (and especially in Germany) have an important role in e.g. trade financing and financing cross-border investment activities as well as in cross-border payments. Their activities are important for credit to the EU real economy. Any further limitation to their exposures to their respective parent and/or group entities will have a detrimental impact.

Furthermore, if the 25% limit was chosen, exposures to non-EEA banks would be subject to stricter limits than exposures to any other “real economy”-undertaking, albeit the non-EEA banks are regulated and supervised entities. This is inappropriate and not acceptable.

As a consequence, we propose to set a fallback limit for overall exposure to shadow banking entities of between 50 and 100 % of eligible capital, so as to respect Art. 395 (1) CRR.

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Name of organisation

Verband der Auslandsbanken in Deutschland e.V.