Basel Large Exposures Framework: Basel Committee Publishes Standards for the Supervisory Framework for Measuring and Controlling Large Exposures

Sullivan & Cromwell LLP - May 1, 2014

The Basel Committee on Banking Supervision (the “Basel Committee”) recently published final standards for the supervisory framework for measuring and controlling large exposures (“LE Framework”) of internationally active banking organizations.  The LE Framework, like loan-to-one-borrower limits for banks, is used to identify, measure, and limit, as a percentage of an institution’s capital, exposures to a counterparty. It also is designed in part to address interconnectedness among systemically important financial institutions.  The LE Framework is similar to the single counterparty credit limit (“SCCL”) under Section 165(e) of the Dodd-Frank Act, which requires the Board of Governors of the Federal Reserve System (“Federal Reserve”) to adopt rules imposing a limit on exposures to a single counterparty by banking organizations with $50 billion or more in consolidated assets and nonbank financial institutions designated by the Financial Stability Oversight Council (“covered companies”).  The Federal Reserve proposed rules to implement the SCCL (“Proposed SCCL Rule”) in December 2011 and December 2012 along with other enhanced prudential standards for covered companies, but the SCCL was not included with the final enhanced prudential standards recently issued by the Federal Reserve.  The Federal Reserve has indicated that it is coordinating the final SCCL with the LE Framework.  The annex to this memorandum provides a detailed comparison of the Proposed SCCL Rule and the LE Framework.

The LE Framework is to be fully implemented by January 1, 2019, but reporting may be required by national supervisors earlier.  By comparison, Section 165(e) of the Dodd-Frank Act contemplates that the SCCL requirement will be effective by July 21, 2015.  During an observation period that runs until 2016, the Basel Committee will review whether exposures to qualifying central counterparties (“QCCPs”), which are currently exempt under the LE Framework to the extent they relate to clearing activity, should be subject to the limit and the potential impact that subjecting certain interbank exposures to the LE Framework could have on the conduct of monetary policy.

The Basel Committee specifically encourages national supervisors to consider whether more stringent requirements should be applied in a particular jurisdiction, particularly with respect to domestic systemically important banks (“D-SIBs”).