Basel IV: Large exposures

Already in April 2014, the Basel Committee published a final framework for the treatment and supervision of large exposures. In addition to the lack of an internationally harmonised framework, the background to this was that the banks' eligible capital was not high enough in certain cases to cover the losses of one or more borrowers and that the strong interdependencies between globally systemically important institutions had been insufficiently taken into account.

Therefore, the new regulations also initially address these two points. In future, a large loan will be deemed to exist if a risk position vis-à-vis a customer or a group amounts to at least 10% of a bank's core capital. This means that any supplementary capital is no longer taken into account, as previously it was based on the eligible own funds. The large exposure definition as well as the upper limit are thus lowered and have a more restrictive effect for the institutions. The upper limit remains at 25 % of core capital. However, stricter regulations apply to globally systemically important institutions, whose large exposure limit for positions among each other may only amount to 15 % of core capital.

It should also be noted that risk exposure values for derivative positions must be calculated in the future according to the new standardised approach for counterparty risks (SA-CCR), which may lead to a change in the utilisation of the large exposure limits (see our comments on SA-CCR). Further adjustments exist, for example, with regard to the netting of long and short positions in trading book instruments and the applicability of further credit risk mitigation techniques, such as the recognition of real estate collateral and financial collateral.

At the European level, the Basel Committee's proposed amendments have already been largely incorporated into the Commission's draft CRR II. In principle, this will have to be applied two years after entry into force (for example, on 01.01.2020 if it enters into force on 01.01.2018).

The banks are recommended to determine the new definition and upper limit and to analyse the effects, in particular of the new treatment of derivatives as well as the changed possibilities of credit risk mitigation techniques on the individual large loan positions, in order to be able to take control measures with regard to credit risk concentrations at an early stage.