On March 19, 2015, the EBA launched a consultation and published draft guidelines on setting limits on exposures to shadow banking entities which carry out activities outside of the regulated framework under the CRR. The guidelines set out the approaches that institutions should take to develop internal policies for monitoring and setting limits on individual and aggregate levels. The Principal Approach and the Fallback Approach for setting limits on exposures are set out in the guidelines. The Principal Approach proposes that institutions set an aggregate limit to exposures to the shadow banking sector in relation to the institution’s eligible capital. If an institution is not able to apply the Principal Approach, due to, for example, holding insufficient information about the activities of shadow banking entities, the Fallback Approach should be used which would mean that a limit of 25% of the institution’s eligible capital would be applied to its aggregate exposures to shadow banking entities. In addition, institutions would set tighter limits to individual exposures and should take into account matters such as the financial situation and regulatory status of the shadow banking entity, and whether the entity is vulnerable to asset price or credit quality volatility. 

The draft guidelines also set out the proposed definitions that are to be used for terms that have not been defined or sufficiently defined in the CRR, such as “shadow banking entities”, “exposures to shadow banking entities”, “excluded undertakings” and “credit intermediation activities.” Comments on the consultation may be submitted until June 19, 2015.

The consultation paper and guidelines are available at: http://www.eba.europa.eu/regulation-and-policy/largeexposures/guidelines-on-limits-on-exposures-to-shadow-banking.