Austrian Economic Chamber, Division Bank and Insurance
• The scope of application needs to be clarified. It is unclear whether all retail exposure classes or only certain parts of them are covered by the scope of application.
• The requirements for identification of potential GCCs are not commensurate to the retail segment where the number of potential counterparts is much higher, causing disproportionate efforts.
According to the document, the concept of connected clients applies in two different contexts, firstly for large exposure purposes and secondly for the categorisation of clients in the retail exposure class in credit risk. While the EBA has announced within the initial consultation paper, which was published in 2016, that their scope will be limited to the large exposure regime, the currently published guidelines intend to extend their scope to the remaining aspects of the CRR.
We understand the intention of the EBA to introduce one single definition for both regimes, credit risk and large exposure. Still, we have to underline that it is not appropriate to extend the scope of these guidelines.
The consultation paper on connected clients is intended to apply also to shadow banking entities (paragraph 28). The initial mandate of the EBA to develop guidelines for the limitation of exposures to shadow banking entities is restricted to the large exposure regime and therefore an extension of this definition for credit risk purposes is not legally justified.
According to Recital 55 of the CRR the objective of the large exposure regime is to deal with single name concentration risk without applying any risk weights or the degree of risks. The objectives of these two concepts differ significantly due to the approach of risk weights for credit risk purposes. Therefore, the appliance of definitions or provisions existing in one of these concepts to the other one has to be subject to a legal endorsement process and a careful impact assessment. The same applies to any extension of provisions within the large exposure concept to any other CRR areas.
In addition, the consultation paper intends to apply its definition of a group of connected clients to the complete CRR, though explicitly addressing some specific areas of the extended scope only. Ahead of any such extension, all considered areas should be properly evaluated and assessed and institutions should therefore be provided with an appropriate consultation period of three months.
Lastly, the initial and administrative burden for institutions caused by the implementation of and regular compliance with the proposed guidelines goes beyond any potential advantages for the financial sector or the economy. They stipulate a lot of individual and labour intensive steps required in the customer economic connections identification, credit exposure origination and the underwriting and regular monitoring process until the full repayment. For example as it is currently proposed in the draft, the guidelines on connected clients state:
“3.2.5 Control and management procedures in order to identify connected clients
34. Having information about connected clients is essential to limit the impact of unforeseen events. In this regard, institutions should use all available information to identify connections; this includes publicly available information. The data that needs to be collected may go beyond the institutions’ clients and include legal or natural persons connected to the client. The necessary inputs require utilising ‘soft information’ that typically exists at the level of individual loan officers and relationship managers. Institutions shall take reasonable steps to acquire this information.”
We agree that this is somehow feasible for a limited number of very big exposures to large GCCs. However, if transposed unmodified to the retail class, where the number of different GCC and potential individual deals is incomparably higher, in order to fully comply with it, it would lead to much more additional human and system resources needed for such extensive data gathering on a case by case basis. At the same time it refers to subjective and unclear 'reasonable steps' to acquire the information, leaving it open to various interpretations by the different institutions
“35. In relation to the identification of interconnected clients, every institution should have in place a robust process for determining connected clients, although practical difficulties may arise in determining interconnections for all the exposures of an institution, in particular regarding economic dependencies. Notwithstanding this, an institution must be in a position to demonstrate to its competent authority that its process is commensurate to its business. In addition, the process should be subject to periodic review by institutions to ensure its appropriateness. Furthermore, institutions should also monitor for changes to interconnections, at least in the context of their periodic loan reviews and when substantial expansions of the loan are planned.
36. It is important to note that institutions need to have information on all entities forming a ‘chain of contagion’ to be able to correctly identify groups of connected clients. If there are interconnections among group members the institution has no business relation with (and thus has not collected any information with regard to possible interconnections), the correct identification of a group of connected clients might not be possible. However, if an institution becomes aware of such interconnections via entities outside its clientele (e.g. by press statements), it needs to incorporate this information in its grouping practice.”
While this is partially feasible for a limited number of SME exposures and GCCs having annual loan review process, if transposed unmodified to the retail class it would affect also natural persons where such standard annual review process is not part of the current STD or IRB process accepted by the regulators. If the scope regarding the pure retail approach portfolios remains unclarified, the establishment of a regular annual review requirement on all retail exposures would lead to a massive increase of the necessary human and system resources, not fitting the scale and the retail process standards.
“37. It will rarely be possible to implement automated procedures for identifying economic interconnections; therefore, case by case analysis and judgement should be used.”
Such case by case analysis and judgement is inapplicable to the retail class and amount of individual cases; other reasonable and balanced potential solutions for retail customers are needed where the usage of relevant internal and external automated register data and internal algorithms to automatically establish GCC connections would be accepted as a process commensurate to its business.
The text of chapter 2.3.1 is unclear. The title referes to the general retail exposure class, whereas in the paragraph it is refered only to parts of it (Art. 123(c) and 147(5)(a)(ii) CRR). This scope needs to be clarified. As already mentioned above, the requirements are not commensurate to natural persons. Currently, an asset class rule specific for 'excluding exposures fully and completely secured on residential property collateral' (Art. 123(c) CRR) for the purpose of the asset class segmentation is only provided for the retail private individuals asset class and not for the other retail asset class micro SME. The requirements of the draft guidelines would make it necessary to introduce new asset segmentation rules.
The proposed guidelines would counteract the current efforts of the EU Commission to strengthen the SME-market through an extension of the SME privilege according to the CRR-Review proposals. The extension of the draft guideline would not change practices regarding the categorization of retail exposures. The total amount owed to the institution (acc. to CRR Art. 123(c)) is already calculated considering the group of connected clients.
We also assume that the impact of considering connected clients due to economic dependencies will be limited in the retail exposure class.
We fully agree.
The proposed guidelines would counteract the current efforts of the EU Commission to strengthen the SME-market through an extension of the SME privilege according to the CRR-Review proposals.
In our view, there are no changes in relation to current practices.