Alert April 22, 2014

Basel Committee Issues Final Rules on Measuring and Controlling Large Exposures

On April 15, 2013, the Basel Committee on Banking Supervision (the “Basel Committee”) issued final rules (the “Final Rules”) concerning the supervisory framework for measuring and controlling large exposures, setting tighter limits on single counterparty (or a group of connected counterparties) credit risk exposures for all banks.  The Final Rules set the general exposure limit to 25% of a bank’s Tier 1 capital, instead of the existing limit of 25% of a bank’s total capital, for all banks.   However, a stricter limit of 15% of Tier 1 capital is imposed on banks that have been designated as global systemically important banks (“G-SIBs”), the higher-end of the 10-15% range suggested in the proposed version of the Final Rules (the “Proposed Rules”) issued by the Basel Committee in March 2013.  A country may, of course, impose limits on its banks that are more stringent than those of the Basel Committee.

The Final Rules also incorporate changes to the Proposed Rules’ definition of a large exposure, such that large exposure is defined as the sum of all exposure values of a bank to a counterparty (or to a group of connected counterparties) equal to or above 10% of a bank’s eligible capital base, instead of the Proposed Rules’ 5% threshold.  Other changes in the Final Rules to the Proposed Rules include a replacement of the proposed 1% granularity threshold for exposures to securitization vehicles (which would have required banks to first assess whether any underlying exposure represented more than 1% of the transaction, and then, if so, look-through to the underlying exposures to counterparties and adding these to any direct exposures to the same counterparties), with a materiality threshold (which instead relates the underlying exposure value to the capital base of the bank, but still requires adding such exposures to the same counterparty) of 0.25%.

The new supervisory framework will take effect beginning January 1, 2019. 

The Basel Committee also stated that it plans to review setting a large exposure limit to qualifying central counterparties related to clearing activities, which are currently exempted under the Final Rules, following an observation period that will conclude in 2016.