NBB Circular NBB_2016_38: EBA Guidelines on limits for exposures to shadow banking entities outside a regulated framework under Article 395

NBB_2016_38 – 26 September 2016 Circular – Page 1/3 14 Berlaimont Boulevard – BE-1000 Brussels Tel. +32 2 221 38 12 – Fax +32 2 221 31 04 Company number: 0203.201.340 Brussels RPM www.bnb.be

Circular
Brussels, 26 September 2016
Reference: NBB_2016_38
Your contact:
Guy Van Den Eynde
Tel. +32 2 221 57 54 – Fax +32 2 221 31 04 guy.vandeneynde@nbb.be

EBA Guidelines on limits for exposures to entities of the shadow banking system carrying out banking activities outside a regulated framework under Article 395(2) of Regulation (EU) No 575/2013. (EBA/GL/2015/20 of 3 June 2016)

Scope
These guidelines apply to all Belgian credit institutions as well as Belgian investment firms to which Part Four of Regulation (EU) No 575/2013 (large exposures) 1 applies, in accordance with the level of application provided for in Part One, Title II of that Regulation.

Summary/Objectives
This circular integrates into the Belgian prudential framework the guidelines of the European Banking Authority (EBA) of 3 June 2016 concerning limits for exposures to entities of the shadow banking system. It reproduces in the annex the French version of the text drawn up by the EBA. This annex is also available on the websites of the National Bank of Belgium and the EBA.

Madam, Sir,

For the purposes of applying these guidelines, entities of the shadow banking system are defined as entities carrying out credit intermediation activities outside a satisfactory prudential control framework, the latter possibly being defined as non-banking activities involving the transformation of maturities and liquidity, financing of investments through leverage, transfer of credit risk or similar activities. At the same time, these guidelines draw up a list of companies excluded from this definition of entities of the shadow banking system.

These guidelines set a pragmatic threshold from which the amount of exposure to individual entities of the shadow banking system is considered significant, taking into account the effects of credit risk mitigation in accordance with Articles 399 to 403 and the exemptions provided for in Articles 400 and 493(3) of Regulation (EU) No 575/2013 (CRR). This significance threshold is set at 0.25% of the eligible own funds of the institution, as defined in Article 4(1), point 71, of Regulation (EU) No 575/2013. Concretely, this means that these guidelines do not apply to exposures to entities of the shadow banking system below this significance threshold.

1 Regulation (EU) No 575/2013, Article 388.

Circular – Page 2/3 NBB_2016_38 – 26 September 2016

These guidelines determine and specify the requirements and general principles regarding effective internal processes and procedures, control mechanisms, policies, limit frameworks and internal control to which institutions should comply in order to be able to analyse, respond to and manage the concentration risk resulting from exposures to entities of the shadow banking system.

Differentiated approach
Regarding the requirements concerning the establishment of a limit framework, these guidelines determine in particular the criteria for applying a basic approach (see below). When an institution is unable to fully comply with this basic approach, it should nevertheless adopt a stricter "fallback approach", according to which its aggregate exposures to entities of the shadow banking system should fully or partially comply with the existing concentration limits for large exposures.

This differentiated approach encourages institutions to put in place effective processes and control mechanisms enabling them, based on the information collected, on the one hand, in the context of defining their internal limit framework, to carry out a census and analysis of individual counterparties that are part of the entities of the shadow banking system, and, on the other hand, to carry out continuous internal assessment, supervision and control of risks on entities of the shadow banking system.

Basic approach concerning the setting of a limit framework:
Institutions wishing to adopt the basic approach are required to set an aggregate limit for all their exposures to entities of the shadow banking system, with respect to their eligible own funds. Regardless of the mandatory aggregate limit and in addition to it, institutions should set stricter individual limits for their exposures to entities of the shadow banking system.

Fallback approach:
An institution that is unable to apply the basic approach concerning the implementation of an internal limit framework and therefore has not set an adequate aggregate or individual limit for all its exposures to entities of the shadow banking system, should mandatorily apply the following fallback approach:

• furthermore, if an institution does not meet all the requirements concerning effective processes and control mechanisms or supervision by its management body, as provided for in section 4 of these guidelines, it should apply the fallback approach to all its exposures to entities of the shadow banking system. The aggregate amount, after taking into account the effects of credit risk mitigation, of its exposures to entities of the shadow banking system, must thus comply with the large exposure limits provided for in Article 395 of Regulation (EU) No 575/2013 (including the use of Article 395(5) of that Regulation) 2;

• when an institution fully complies with the requirements concerning effective processes and control mechanisms or supervision by its management body, as provided for in section 4 of these guidelines, it should only apply the fallback approach to exposures to entities of the shadow banking system for which the institution is unable to set individual limits. The total amount, after taking into account the effects of credit risk mitigation, of all exposures to entities of the shadow banking system for which the institution has not set individual limits, must thus comply with the large exposure limits provided for in Article 395 of Regulation (EU) No 575/2013 (including the use of Article 395(5) of that Regulation). 3

NBB_2016_38 – 26 September 2016 Circular – Page 3/3

In addition to the particular interest it attaches to credit risks, the Bank also attaches great importance to the monitoring and control of other risks arising from the relationship between banks and entities of the shadow banking system. If it deems it useful, and taking into account international developments in this area, the Bank will develop additional instruments and take measures to limit these risks.

The credit institutions and investment firms concerned should comply with the provisions of these guidelines as of 1 January 2017.

A copy of this circular is sent to the commissioner(s) and approved auditor(s) of your institution.

Please accept, Madam, Sir, the assurance of my distinguished consideration.

Jan Smets
Governor

Annex: 1

2 Concretely, this means that the sum of all exposures to entities of the shadow banking system falling under the non-trading portfolio and a common amount for any entity in question exceeding 0.25% of eligible own funds – after taking into account the effects of credit risk mitigation – cannot exceed 25% of eligible own funds.

3 Concretely, this means that the sum of only the exposures to entities of the shadow banking system falling under the non-trading portfolio for which the institution has not set an individual limit and a common amount for any entity in question exceeding 0.25% of eligible own funds – after taking into account the effects of credit risk mitigation – cannot exceed 25% of eligible own funds.