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BCBS finalises counterparty exposure limits
17 April 2014
New framework on banks' exposures to large counterparties to take effect from 2019
The Basel Committee on Banking Supervision (BCBS) has set
out a standard for a supervisory framework for measuring and
controlling large exposures.
The framework (scheduled to take effect from 1 January 2019)
will supersede the committee's 1991 standard on this topic.
While many jurisdictions modelled their national rules on the
committee's previous guidance, there have been inconsistent
results across jurisdictions due to differences in measures of
exposure, measures of capital and numerical limits.
The standard has obvious implications for banks accustomed to
using internal models to calculate capital across most of their
business as regulators seek a more straightforward mechanism
for comparing exposures.
The framework will form the basis of US Dodd Frank section
165(e) which also concerns counterparty exposures. As US banks
adopt Basel III, the Collins Amendment under Dodd-Frank will
require them to run both the standardised and advanced tests
and select the worst of the two on an enterprise-wide basis to
determine capital adequacy.
The BCBS believes the revised framework will help ensure a
common minimum standard for measuring, aggregating and
controlling single name concentration risk across
The purpose of large exposure limits is to constrain the
maximum loss a bank could face in the event of a sudden failure
of a counterparty or a group of connected counterparties and to
help ensure the bank remains a going concern. Especially where
the bank's counterparty is another bank, large exposure limits
can directly contribute towards the reduction of system-wide
The new large exposure standard 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 (counterparties that are interdependent and
likely to fail simultaneously). A tighter limit of 15% of Tier
1 capital will apply to exposures between banks that have been
designated as global systemically important.
The Committee has committed to reviewing the appropriateness of
setting a large exposure limit for exposures to qualifying
central counterparties (QCCPs) related to clearing activities -
which are currently exempted – by 2016. It will also
review the impact of the large exposures framework on monetary