Shadow Banking Exposures

Regulation (EU) 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms ("CRR") establishes a regime with more stringent provisions as regards large exposures.

Large exposures are defined under Article 392 CRR as an institution's exposure to a client or group of connected clients where its value is equal to or exceeds 10% of its eligible capital (i.e. Tier 1 capital plus Tier 2 capital). Large exposures are subject to reporting requirements and quantitative limits.

Under Article 395(2) CRR, the European Banking Authority ("EBA") was mandated to issue guidelines setting appropriate limits to exposures to shadow banking entities.

The CSSF Circular 16/647 ("Circular") implements the EBA guidelines EBA/GL/2015/20 (Limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework) ("Guidelines") into Luxembourg law. Such implementation is done by updating Circular 12/552 on the central administration, internal governance and risk management.

The scope of the Guidelines and the new section of the Circular CSSF 12/552 implementing the Guidelines apply to credit institutions and investment firms (to the extent they are submitted to Part IV on Large Exposures of the CRR).

In the absence of a definition under the CRR, the Guidelines define "shadow banking entity" as an undertaking that carries out one or more credit intermediation activities (i.e. maturity transformation, liquidity transformation, leverage, credit risk transfer, etc.) and that is not an excluded undertaking (i.e. credit institutions, investment firms, central counterparties, payment institutions, entities which carry out intermediation activities on an intra-group basis only, etc.).

For the purposes of the Guidelines and the Circular, exposures to individual shadow banking entities are to be taken into consideration when they are equal to or in excess of 0.25% of the institution's eligible own funds (after taking into account credit risk mitigation and possible exemptions).

Where such threshold is exceeded, institutions shall, inter alia, identify their exposures to shadow banking entities; set out an internal framework to identify, manage, control and...