Supervisory framework for measuring and controlling large exposures

The Basel Committee on Banking Supervision has today published a proposed supervisory framework for measuring and controlling large exposures. 

One of the key lessons from the financial crisis is that banks did not always consistently measure, aggregate and control exposures to single counterparties across their books and operations. And throughout history there have been instances of banks failing due to concentrated exposures to individual counterparties (eg Johnson Matthey Bankers in the UK in 1984, the Korean banking crisis in the late 1990s). Large exposures regulation has arisen as a tool for containing the maximum loss a bank could face in the event of a sudden counterparty failure to a level that does not endanger the bank's solvency.

A separate key lesson from the crisis is that material losses in one systemically important financial institution (SIFI) can trigger concerns about the solvency of other SIFIs, with potentially catastrophic consequences for global financial stability. The Committee is of the view that the large exposures framework is a tool that could be used to mitigate the risk of contagion between global systemically important banks, thus underpinning financial stability.

Finally, the consultation paper presents proposals to strengthen the oversight and regulation of the shadow banking system in relation to large exposures.  In particular, the proposals include policy measures designed to capture bank-like activities conducted by non-banks that are of concern to supervisors.

The proposed new standard aims to ensure greater consistency in the way banks and supervisors measure, aggregate and control exposures to single counterparties. Acting as a backstop to risk-based capital requirements, the standard would supplement the existing risk-based capital framework by protecting banks from substantive losses caused by the sudden default of a counterparty or group of connected counterparties. The consultative paper would replace the Basel Committee's 1991 guidance Measuring and controlling large credit exposures.

The Basel Committee welcomes comments on this consultative document. Comments on the proposals should be submitted by Friday 28 June 2013 by e-mail to: baselcommittee@bis.org. Alternatively, comments may be sent by post to: Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments may be published on the website of the Bank for International Settlements unless a comment contributor explicitly requests confidential treatment.

• Instructions for the Large Exposures QIS (PDF)
• Questionnaire for the Large Exposures QIS (XLS)
• Frequently asked questions (June 2013)