EBA Guidelines on criteria for assessing exceptional cases where institutions exceed large exposure limits and on the timeframe and measures for return to compliance

EBA/GL/2021/09
15 September 2021

Guidelines on further specifying the criteria for the assessment of the exceptional cases in which institutions exceed the large exposure limits set out in Article 395(1) of Regulation (EU) No 575/2013 and on the timeframe and measures for return to compliance referred to in Article 396(3) of Regulation (EU) No 575/2013

1. Compliance and reporting obligations
   Status of these Guidelines

2. This document contains Guidelines issued under Article 16 of Regulation (EU) No 1093/2010. 1 In accordance with Article 16(3) of Regulation (EU) No 1093/2010, competent authorities and financial institutions must make every effort to comply with the Guidelines.

3. Guidelines represent the EBA's view of appropriate supervisory practices within the European System of Financial Supervision and of how Union law should be applied in a specific area. Competent authorities as defined in Article 4(2) of Regulation (EU) No 1093/2010 to whom the Guidelines apply should comply by embedding them into their supervisory practices (for example, by adapting their legal frameworks or their supervisory processes), even where Guidelines are primarily directed at institutions.

Reporting obligations

3. In accordance with Article 16(3) of Regulation (EU) No 1093/2010, competent authorities shall notify the EBA by (03.01.2022) whether they comply or intend to comply with these Guidelines, or, if not, the reasons for non-compliance. Competent authorities that do not respond by the deadline are deemed not to have complied with the Guidelines. Notifications shall be submitted by sending the form on the EBA website to compliance@eba.europa.eu, mentioning “EBA/GL/2021/09”. Notifications must be submitted by persons authorised to report on behalf of their competent authorities whether they comply with the Guidelines. Any change in the status of compliance must also be reported to the EBA.

4. Notifications shall be published on the EBA website in accordance with Article 16(3) of Regulation (EU) No 1093/2010.

1 Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, p. 12).

2. Subject matter, scope and definitions
   Subject matter

3. In accordance with Article 396(3) of Regulation (EU) No 575/2013, these Guidelines specify the criteria that competent authorities should use when assessing the exceptional cases referred to in Article 396(1) of Regulation (EU) No 575/2013 in which a competent authority allows an institution to exceed the limits set out in Article 395(1) of Regulation (EU) No 575/2013. Furthermore, these Guidelines set out the criteria that competent authorities should use when determining an appropriate timeframe within which an institution must return to compliance with the large exposure limits set out in Article 395(1) of Regulation (EU) No 575/2013 and when establishing the measures that must be taken to ensure the prompt return to compliance with those limits.

4. In addition, these Guidelines specify what additional information should be provided to the competent authority when reporting a breach of a large exposure limit in accordance with Article 396(1) of Regulation (EU) No 575/2013.

Scope

7. These Guidelines apply to the assessment of the exceptional cases referred to in Article 396(1) of Regulation (EU) No 575/2013 by competent authorities. They also apply to the way in which competent authorities can determine an appropriate timeframe for the re-compliance with those limits and establish the measures that must be taken to ensure the prompt return to compliance with the limits by the institution, including the submission of a plan for a prompt return to compliance.

8. These Guidelines do not apply to the cases referred to in Article 395(5) of Regulation (EU) No 575/2013, provided that the institution meets the conditions laid down in that provision.

Addressees

9. These Guidelines are addressed to competent authorities as defined in Article 4(2)(i) of Regulation (EU) No 1093/2010 and to financial institutions as defined in Article 4(1) of Regulation (EU) No 1093/2010.

Definitions

10. Unless otherwise specified, the terms used and defined in Regulation (EU) No 575/2013 and Directive 2013/36/EU have the same meaning in these Guidelines.

11. Implementation
    Date of application

12. These Guidelines apply from 1 January 2022.

13. Exceptional cases of breaches of the large exposure limits and the timeframe and measures for the return to compliance with those limits

14. Based on the information provided when reporting a breach of the limits set out in Article 395(1) of Regulation (EU) No 575/2013, and based on the information referred to in Chapter 4.2 of these Guidelines and other information available to the competent authority, the competent authority shall carry out an assessment using the criteria described in Chapter 4.1 of these Guidelines.

15. After the competent authority has assessed the appropriate timeframe in accordance with Chapter 4.3 of these Guidelines, it shall notify the institution of the timeframe allowed to end the breach of the limit set out in Article 395(1) of Regulation (EU) No 575/2013.

4.1 Criteria for the assessment of the exceptional cases referred to in Article 396(1) of Regulation (EU) No 575/2013

14. Breaches of the limits set out in Article 395(1) of Regulation (EU) No 575/2013 shall always be considered as exceptional cases.

15. When assessing situations in which an institution has exceeded the limits set out in Article 395(1) of Regulation (EU) No 575/2013, competent authorities shall in any case take into account the following aspects:

a. the number of breaches and their frequency; b. the predictability of the breach;
c. any circumstances beyond the control of the institution that led to the impossibility of preventing the breach.

Number of breaches and their frequency

16. The competent authority shall assess whether the breach of the limits set out in Article 395(1) of Regulation (EU) No 575/2013 by the institution is a rare event. The assessment shall take into account any previous breaches by the institution that had the same cause, were brought about by the same event, or concerned the same client or group of connected clients.

17. If an institution has reported a previous breach in the preceding twelve months that concerned the same client or group of connected clients as the current breach, the competent authority may decide that the event cannot be qualified as rare. If an institution has reported a previous breach in the preceding twelve months that had the same origin as the current breach, the competent authority may decide that the event cannot be qualified as rare.

18. If an institution has already reported two breaches of the large exposure limits in the preceding twelve months that concerned a different client or group of connected clients, had different causes, or were brought about by different events, the competent authority may decide that a subsequent breach (or breaches) unrelated to them cannot be qualified as rare.

Predictability of the breach

19. The competent authority shall assess whether the breach could have been foreseen had the institution applied sound and effective risk management in accordance with its obligations under Article 393 of Regulation (EU) No 575/2013 and the EBA Guidelines on internal governance.2

20. Furthermore, the competent authority shall verify whether the institution could have anticipated the breach using the available information.

21. In the case of identical or similar breaches by other institutions that can be attributed to the same cause, the competent authority may conclude that the breach was caused by an unforeseeable event.

Circumstances beyond the control of the institution that made it impossible to prevent the breach

22. The competent authority shall assess whether the breach was caused by circumstances beyond the control of the institution. At least in the following cases, it may be assumed that this is the case:

a. an unexpected and significant decrease in the institution's own funds, including due to the consequences of major operational risks, such as external fraud, natural disasters, or pandemics, which are not related to the failure of the institution's internal control mechanisms; b. cases where an exposure for which (wholly or partially) an exemption was granted no longer qualifies for such an exemption due to a decision taken by a third party that could not be foreseen or prevented by the institution;
c. cases where a court ruling or administrative decision leads to a changed interpretation of the applicable regulatory framework for large exposures and the institution has not had sufficient time to comply with it in order to prevent a breach of the limits set out in Article 395(1) of Regulation (EU) No 575/2013;
d. the merger of counterparties/clients or purchases between counterparties/clients, but only in cases where the institution could not have known of such a merger or purchase or could not have expected it, so that it could not have prevented the breach.

23. Breaches caused by incorrect application or misinterpretation of the regulatory framework for large exposures generally cannot be qualified as circumstances beyond the control of the institution.

24. If the competent authority concludes that the breach does not meet the criteria mentioned above, it shall in principle allow a maximum period of three months for the re-compliance with the large exposure limits.

4.2 Information that must be provided to the competent authority in case of a breach of the large exposure limits

25. When reporting an exposure value above the large exposure limits set out in Article 395(1) of Regulation (EU) No 575/2013 in accordance with Article 396(1) of that Regulation, and to facilitate the assessment by the competent authority, the institution shall immediately provide at least the following information:

a. the amount of the exceedance and the size of the breach in relation to its Tier 1 capital; b. the name of the client concerned, and, if applicable, the name of the group of connected clients concerned;
c. the date of the breach;
d. a description of any available collateral (even if it does not qualify for credit risk mitigation); e. a detailed explanation of the reasons for the breach; f. the remedial measures already taken or planned; and g. the time expected to be needed for a return to compliance with the large exposure limits.

26. The competent authority shall request further information and clarification if it considers that the information provided is not sufficiently detailed for a comprehensive assessment of the specific circumstances of the breach.

4.3 Criteria for determining an appropriate timeframe for the return to compliance with the limits set out in Article 395(1) of Regulation (EU) No 575/2013

27. After the competent authority has assessed the breach reported by the institution in accordance with Chapter 4.2 of these Guidelines, it shall determine an appropriate timeframe for the return to compliance with the limits set out in Article 395(1) of Regulation (EU) No 575/2013.

28. A competent authority shall allow the institution a period of up to three months to end a breach if it concludes that it is a repeated breach or if the size of the breach may have significant consequences for the financial situation of the institution.

29. If a competent authority decides to allow a period of more than three months to end a breach and return to compliance with the limits set out in Article 395(1) of Regulation (EU) No 575/2013, the appropriate timeframe determined by the competent authority shall be suitable for a rapid restoration of the limits.

30. The timeframe for return to compliance shall in principle not exceed one year. If this is justified on the basis of the specific circumstances of the breach and the measures of the compliance plan referred to in Chapter 4.4, the competent authority may exceptionally allow a period of more than one year to end the breach. Such cases, however, should not be the norm.

31. In its assessment to determine the appropriate timeframe for return to compliance, the competent authority shall take into account at least the following elements:

a. previous breaches by the institution; b. the timeliness with which the institution notifies the breach;
c. the reason(s) for the breach;
d. the systemic nature, complexity, and size of the breach; e. the possible consequences for the overall financial situation of the institution; f. the general distribution of risks in the institution's banking portfolio across different counterparties; g. the type of client or group of connected clients and their creditworthiness; h. the measures already taken to end the breach.

Previous breaches by the institution

32. The competent authority shall take into account any previous breaches by the institution and the scope of the measures taken in the relevant cases for return to compliance. In the case of repeated breaches, the competent authority shall in particular assess whether the new breach has the same cause as in previous cases.

The timeliness with which the institution notifies the breach or the remedial measures for return to compliance

33. If an institution unduly delays the notification of a breach, the competent authority may consider allowing the institution a shorter timeframe for return to compliance.

The reason(s) for or the repeated nature, complexity, and size of the breach

34. The competent authority shall assess the reasons for the breach as well as the current and future materiality of the possible consequences for the institution.

35. When the causes of the breach are complex, the competent authority may need additional information and shall request it.

The overall financial situation of the institution

36. The competent authority shall investigate whether the compliance with the institution's statutory capital requirements (Tier 1 common equity ratio, Tier 1 capital ratio, total capital ratio) is well above the minimum level.

The general distribution of risks in the institution's banking portfolio across different counterparties

37. The competent authority shall assess the adequacy of the institution's risk management and its diversification approach.

The type of client and its creditworthiness

38. The competent authority shall take into account the type of counterparty and its creditworthiness. It shall assess whether the statutory capital ratios might fall below the minimum due to possible default by the relevant client or group of connected clients, if available, and the resulting loss.

The measures already taken to end the breach

39. The competent authority shall take into account the measures the institution has already taken, in particular given that some of those measures may ultimately facilitate a rapid return to compliance.

4.4 Measures to be taken for the prompt return to compliance by the institution with the limits set out in Article 395(1) of Regulation (EU) No 575/2013

40. If a competent authority has allowed an institution a period of more than three months for the return to compliance with the limits set out in Article 395(1) of Regulation (EU) No 575/2013, the institution shall submit a compliance plan for the prompt return to compliance.

41. The compliance plan shall include at least the following points:

a. arrangements to reduce the relevant exposure(s); b. measures to increase the institution's own funds where necessary;
c. arrangements to improve internal risk management and control processes;
d. necessary changes to the institution's compliance policy; e. suitable procedures to ensure the prompt implementation of the measures; and f. a detailed schedule for the implementation of the measures, including the intended date of return to compliance.

42. The measures proposed by institutions shall include a description of any expected risks or obstacles to the effective and prompt implementation of the compliance plan.

43. The competent authority shall assess whether the measures are suitable, adequate, and feasible to ensure a prompt return to stable and constant compliance, and whether the detailed schedule is suitable and feasible.

44. If the competent authority has significant concerns about the measures, it shall notify the institution thereof without delay.

45. The institution shall inform the competent authority without delay if certain measures cannot be implemented according to plan. The competent authority shall closely monitor the implementation of the measures to guarantee effective and prompt return to compliance. It shall in particular verify whether the various milestones are fully achieved. If the institution fails to achieve one or more milestones, the competent authority shall request the institution to address this failure appropriately.

46. The frequency and intensity of the competent authority's supervision shall be appropriate and proportionate to the cause and size of the breach, its possible consequences for the institution, and the specifics of the compliance plan and the measures taken for less than three months. Furthermore, it shall take into account the development of the relevant exposure(s) based on information provided regularly by the institution. The competent authority shall request additional information where necessary.

47. The competent authority shall decide and inform the institution whether it should conduct an internal or external audit of the internal control and risk management processes, the results of which shall be provided to both the institution's management body and the competent authority.

48. The competent authority shall have a documented standard procedure with clear instructions on the steps required to verify that institutions have notified the prompt return to compliance.

49. Institutions shall ensure, in accordance with the EBA Guidelines on internal governance, that their management body supervises the implementation of the measures taken for the correct and timely return to compliance with the limits set out in Article 395(1) of Regulation (EU) No 575/2013.