Out of the Shadows Limits on Exposures to Shadow Banking Entities

Transcription

1 Out of the Shadows Limits on Exposures to Shadow Banking Entities Jochen Kindermann Pascal di Prima London, 22 June 2016

2 Agenda Introduction Background Definition range Exemptions Consequences 1 / L_LIVE_EMEA2: v1

3 Introduction In December 2015, EBA has published guidelines to set limits on exposures to shadow banking entities applying from 1 January Notification of EBA by competent authorities if they comply or intend to comply with these guidelines, or reason for non-compliance latest 2 months after publication of translation on EBA homepage. The global financial crisis has revealed unrecognised deficiencies concerning the shadow banking system. 2 / L_LIVE_EMEA2: v1

4 Introduction From a micro prudential perspective, shadow banking entities are generally not subject to the same standards of prudential regulation as core regulated entities such as institutions, do not provide protection to investors investment from these entities failures, and do not have access to central banks liquidity facilities. Macro prudentially, institutions exposures to shadow banking entities could be of concern for different reasons. Institutions exposures to such entities undertaking bank-like activity may lead to regulatory arbitrage concerns, and worries that core banking activity may migrate systematically away from the regulated sector into the shadows. Shadow banks tend to be highly correlated and interconnected with the banking sector, which leads to financial stability concerns by regulators. 3 / L_LIVE_EMEA2: v1

5 Introduction Main legislative content of the Guideline To minimise risks arising from institutions exposures to shadow banking entities, the guidelines require from institutions to set limits (as part of their internal processes), on their individual exposures to shadow banking entities (alleviating primarily the micro prudential concerns) and on their aggregate exposure to shadow banking entities (alleviating macro prudential concerns). In absence of a definition of the term shadow banking entities to develop such a definition which is in line with parallel running regulations and discussions. 4 / L_LIVE_EMEA2: v1

6 Background Rationale for limiting exposures Shadow banking can complement traditional banking by expanding valuable access to credit (also supporting growth in the real economy). Recent data shows that lending by shadow banks as a proportion of total lending is rising. Global financial crises has revealed unrecognised fault lines in the shadow banking system which put the stability of the financial system at risk. 5 / L_LIVE_EMEA2: v1

7 Background Concerns regarding shadow banking entities Run risk and/or liquidity problems Interconnectivity and spillovers Excessive leverage and procyclicality Opacity and complexity 6 / L_LIVE_EMEA2: v1

8 Definition range shadow banking entities Undertakings that carry out one or more credit intermediation activities (defined as bank like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities) and that are not excluded undertakings. Shadow banking entities Examples (not exhaustive): Money market funds (MMFs), Hedge Funds, Private Equity funds, Conduits / specialpurpose vehicles/entities (SPVs/SPEs) engaged in securities transactions, securities and derivatives dealers, companies engaged in factoring/leasing/hire purchase, entities offering services/activities 1, 2, 3, 6, 7, 8 and 10 according Annex 1 of CRD IV 7 / L_LIVE_EMEA2: v1

9 Definition range exposure Exposures to shadow banking entities Exposures with an exposure value, after taking into account the effect of the credit risk mitigation and exemptions, equal to or in excess of 0.25% of the institution s eligible capital as defined in the CRR. Materiality threshold should reduce the burden of application of the guidelines (disregard of immaterial exposures) 8 / L_LIVE_EMEA2: v1

10 Exemptions Excluded undertakings which are: subject to EU legislation (stand alone or consolidated), or equivalent third country legal frameworks. Exemptions from the EBA Guideline¹ Examples (not exhaustive): credit institutions, investment firms, third country credit institutions or investment firms; financial institutions, (re-) insurance holding companies and undertakings, institutions for occupational retirement provision, UCITS, alternative investment funds (AIFs), CCPs, electronic money issuers, payment institutions, resolution authorities, asset management vehicles, bridge institutions and entities wholly or partially owned by one or more public authorities. 9 / L_LIVE_EMEA2: v1 ¹ e.g. entities according to Article 2 (5) and Article 9 (2) CRD IV

11 Consequences Effective processes and control mechanisms Institutions should: identify their exposures, potential risks and impacts; set out an internal framework for the identification, management, control and mitigation of the risks; ensure that risks are adequately taken into account within the institution s ICAAP and capital planning; set the institution s risk tolerance/risk appetite; implement a process for determining interconnectedness; have effective procedures and reporting processes to the management body implement appropriate action plans in the event of a breach of the limits. 10 / L_LIVE_EMEA2: v1

12 Consequences Oversight by the management body of the institutions The institution s management body should, on a regular predetermined basis: review and approve the institution s risk appetite and the aggregate and individual limits set; review and approve the risk management process to manage exposures; review the institution s exposures as a percentage of total exposures and expected and incurred losses; ensure the setting of the limits is documented, including any changes to them. The institution s management body may delegate the reviews set out above to senior management. 11 / L_LIVE_EMEA2: v1

13 Consequences Setting an aggregate limit principal approach Taking into account: Business model, risk management framework and risk appetite Size of the current exposures to shadow banking entities Interconnectedness 12 / L_LIVE_EMEA2: v1

14 Consequences Setting individual limits principal approach Taking into account: Regulatory status of the shadow banking entity Financial situation of the shadow banking entity Information available about the portfolio Available evidence about the adequacy of the credit analysis Vulnerability to asset price or credit quality volatility Concentration of credit intermediation activities Interconnectedness Any other relevant factors identified by the institution 13 / L_LIVE_EMEA2: v1

15 Consequences Fallback approach If institutions are not able to apply the principal approach, their aggregate exposures should be subject to the limits on large exposures in accordance with the CRR ( fallback approach ): If they cannot meet the requirements regarding effective processes and control mechanisms or oversight by their management body, they should apply the fallback approach to all their exposures. If they only cannot gather sufficient information to set out appropriate limits, they should only apply the fallback approach to the exposures for which they are not able to gather sufficient information and the principal approach should be applied to the remaining exposures. 14 / L_LIVE_EMEA2: v1

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17 Pascal di Prima, LL.M. (UNSW, Sydney) Partner, Rechtsanwalt Simmons & Simmons LLP Frankfurt am Main DD M pascal.diprima@simmons-simmons.com Jochen Kindermann Partner, Rechtsanwalt Simmons & Simmons LLP Frankfurt am Main DD M Jochen.kindermann@simmons-simmons.com simmons-simmons.com elexica.com This document is for general guidance only. It does not contain definitive advice. SIMMONS & SIMMONS and S&S are registered trade marks of Simmons & Simmons LLP. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated practices. Accordingly, references to Simmons & Simmons mean Simmons & Simmons LLP and the other partnerships and other entities or practices authorised to use the name Simmons & Simmons or one or more of those practices as the context requires. The word partner refers to a member of Simmons & Simmons LLP or an employee or consultant with equivalent standing and qualifications or to an individual with equivalent status in one of Simmons & Simmons LLP s affiliated practices. For further information on the international entities and practices, refer to simmonssimmons.com/legalresp. Simmons & Simmons LLP is a limited liability partnership registered in England & Wales with number OC and with its registered office at CityPoint, One Ropemaker Street, London EC2Y 9SS. It is authorised and regulated by the Solicitors Regulation Authority. A list of members and other partners together with their professional qualifications is available for inspection at the above address. 16 / L_LIVE_EMEA2: v1