Final standard for measuring and controlling large exposures published by the Basel Committee

15 April 2014

The Basel Committee on Banking Supervision has today published a final standard that sets out a supervisory framework for measuring and controlling large exposures, which will take effect from 1 January 2019.

A large exposure framework protects banks from significant losses caused by the sudden default of an individual counterparty or a group of connected counterparties. The framework was designed so that the maximum possible loss a bank could incur if such a default were to occur would not endanger the bank's survival as a going concern. In cases where the bank's counterparty is another bank, large exposure limits will directly contribute towards the reduction of system-wide contagion risk. In addition, by extending the scope of coverage to exposures to funds, securitisation structures and collective investment undertakings, the framework is also a useful tool to contribute to strengthening the oversight and regulation of the shadow banking system.

The large exposure standard published today includes a general limit applied to all of a bank's exposures to a single counterparty, which is set at 25% of a bank's Tier 1 capital. This limit also applies to a bank's exposure to identified groups of connected counterparties (ie counterparties that are interdependent and likely to fail simultaneously). A tighter limit will apply to exposures between banks that have been designated as global systemically important banks (G-SIBs). This limit has been set at 15% of Tier 1 capital.

This final standard takes into account comments on the Committee's March 2013 proposals. The initial proposal has been revised as follows:

  • the definition and the reporting thresholds are now 10% of the eligible capital base (instead of the 5% initially proposed);
  • the treatment of a limited range of credit default swaps (CDS) used as hedges in the trading book has been modified so that it is more closely aligned with the risk-based capital framework;
  • the initially proposed granularity threshold for exposures to securitisation vehicles has been replaced with a materiality threshold related to the capital base of the bank (calibrated at 0.25% of the capital base); and
  • a treatment that recognises particular features of some covered bonds.

The Committee will by 2016 review the appropriateness of setting a large exposure limit for exposures to qualifying central counterparties (QCCPs) related to clearing activities, which are currently exempted. It will also review the impact of the large exposures framework on monetary policy implementation.

The Basel Committee wishes to thank all those who contributed time and effort to express their views during the consultation process.