The Luxembourg financial sector supervisory authority (the CSSF) has implemented the EBA guidelines EBA/GL/2015/20 (Limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework) into Luxembourg law.
The new regime applicable to exposures to shadow banking entities can be summarised as follows:
Scope: credit institutions and, subject to certain exceptions, investment firms under CRR/CRD IV.
Definition of shadow banking entity (SBE): undertaking carrying out credit intermediation activities (i.e. maturity transformation, liquidity transformation, leverage, etc.) that is not an excluded undertaking (i.e. credit institutions, investment firms, central counterparties, payment institutions, entities which carry our intermediation activities on an intra-group basis only, etc.).
Threshold: exposures to a SBE are taken into consideration when they are equal to or in excess of 0.25% of the institution’s eligible capital (after credit risk mitigation).
Requirements: institutions must, inter alia, identify their individual exposures to SBEs; set out an internal framework to identify, manage, control and mitigate related risks; set its risk tolerance for exposures to SBEs; determine interconnectedness between the SBE and the institution.
Principal approach: institutions should set an aggregate limit to their exposures to SBEs and set tighter limits on their individual exposures to SBEs based on a set of criteria predefined in the Guidelines.
Fallback approach: if institutions cannot apply the principle approach, their aggregate exposures to SBEs should be subject to the general limits on large exposures (i.e. 25% of their eligible capital).
If institutions cannot meet the requirements as per item (iv) above, they should apply the fallback approach to all their exposures to SBEs (i.e. the sum of all their exposures to SBEs).
If they can meet said requirements but cannot gather sufficient information to apply the principal approach, institutions should only apply the fallback approach to the exposures to SBEs for which they are not able to gather sufficient information. The principal approach should be applied to the remaining exposures to SBEs.
The circular of the CSSF can be found here.