In December 2009 the Committee of European Banking Supervisors (CEBS) published the Guidelines on the implementation of the revised large exposures regime, with the aim of ensuring harmonised implementation across the Member States. Those Guidelines focused on the definition of connected clients, in particular, control and economic interconnections.
Final Guidelines on connected clients
Furthermore, in 2013 the European Parliament and the Council published the Capital Requirements Regulation (CRR) which defined the group of connected clients with the objective of identifying clients so closely linked by idiosyncratic risk factors that it is prudent to treat them as a single risk.
In this context, in November 2017, the EBA published Final Guidelines (GL) on the treatment of connected clients, which replace the CEBS Guidelines, aiming at supporting institutions in identifying all possible connections among their clients, in particular when control relationships or economic dependency should lead to the grouping of clients because they constitute a single risk.
These GL focus exclusively on the issue of connected clients as defined in the CRR, and apply to all areas of the CRR where the concept of group of connected client is used (e.g. large exposures regime, the categorisation of clients in the retail exposure class for the purposes of credit risk), including the EBA technical standards and the EBA guidelines that refer to that concept.
This Technical Note summarises the EBA Final Guidelines on connected clients.
Executive Summary
These GL cover the groups of connected clients based on control, the approach for exposures to central governments, the interconnectedness based on economic dependency, the control and economic dependency interconnectedness, and the control and management procedures.
Scope of application
Competent authorities and financial institutions (i.e. credit institutions, investment firms, and financial conglomerates).
Main content
These GL cover the following aspects:
- Groups of connected clients based on control. The GL clarify the concept of ‘single risk’ and confirm that the burden of proof is on institutions to demonstrate that, despite the existence of a control relationship, the clients, by way of exception, do not constitute a single risk.
- Alternative approach for exposures to central governments. The GL clarify the use of an alternative approach, introduced by the CRR, for the assessment of the existence of groups of connected clients of entities directly controlled by or directly interconnected with central governments.
- Establishing interconnectedness based on economic dependency. The GL confirm the requirement to consider two or more clients a single risk when funding or repayment difficulties of one client are likely to affect other clients. However, institutions could demonstrate that the failure of a client would not affect another client.
- Relation between interconnectedness via control and economic dependency. The GL also provide guidance on the assessment of situations where control and economic dependency are interlinked and can therefore lead to the existence of one group of connected clients as opposed to two separate groups of connected clients.
- Control and management procedures for identifying connected clients. The GL expect institutions to identify all control relationships and also to take reasonable steps and use readily available information to investigate and identify economic dependencies among their clients.
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